As I said at the beginning of November, I have abandoned the P2 count as my preferred count (See Thoughts on the Large Count for the New Year and The Large Count). Instead I think the count is far more of a complex correction, somewhat like Japan's bear market.
So here is my take on a few basic questions:
- Are we close to a top here? Yes. Bullishness is far too high. Technicals are overextended and showing divergence on the daily timeframe.
- Is this 'the' top? No. I think we will be making another nominal high in 2011.
Things I will be looking for in 2011 to signify a more significant top
1) Overenthusiastic earnings estimates. The past few months I have been observing the unhealthiness in earnings growth (margin expansion) and I still stand by the fact that this is unhealthy. But the market is as much psychology as it is fundamentals. And analyst estimates have largely been in line with actual earnings for the past few quarters (regardless of how those earnings have been generated). At the beginning of 2009 we saw earnings estimates that were even lower than actual earnings. For market tops we want to see analyst estimates that are much higher than actual earnings.
2) Pronounced divergences on weekly indicators
3) Divergence on the New Highs / New Lows (we have only a very small divergence right now) and on the Advance / Decline Line
4) A number of smaller ones, but these are the main ones
I think a correction now (in January) and the early months of 2011, and then a slower rally up into July of 2011 would be a perfect setup so that these divergences can manifest.
Also consider all of the good news (and being honest, there has been positive macro data in the last couple of quarters) that has been priced into this peak. This means that the next few quarters need to exceed expectations (which is by most analyst estimates that I read something like 4.0-5.5% GDP growth) in order for this cyclical bull market to continue.
So unless the economy really starts taking off, then we have the stage set for some macro disappointments. But equity analysts are by and large behind the curve and they should still be raising earnings estimates as the macro slows down and the earnings environment is also slowing down.
This is the macro scenario that I would like to see play out that would coincide with a more significant top. And being honest, I don't think it is here yet.
I also have a crazy idea for a 2007 top type fractal that could support this move:
