I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List
Crazy up and down market the last few weeks. 60-min system back on a sell. The short-term VIX divergence observed in the last post is met with even more divergence recently. (Chart below has the inverse in the main panel as well as SPX)
I think we are in the midst of a decent correction. One of the reasons why I think so is that we have an approximately month long short-term VIX divergence. This has tended to signal a decent correction in the past.
However, this same chart is yet another reason why I don't think this is a major top / end of the current cyclical bull. The last recovery high happened in conjunction with a new VIX recovery low. We are still not seeing the several month / year VIX divergence that occurred with the 2000 and 2007 peaks. Does this have to happen? No. But I think the odds that we do have a major top without a major VIX divergence is low. And so this is one reason (among many others) why my expectations are for a continuation of the cyclical bull.
Apologies, but I was unavailable yesterday and am still swamped today. 60-min buy signal was triggered at yesterday's open but I could not execute until now, and that is reflected in the newest signal.
My 60-minute system issued a sell signal this morning just after 10 am. I also think this is the end of the current up wave and that we are in store for a decent correction. And no, I don't think this is the 'top'. I think this is just a correction and the cyclical bull market will continue.
Cullen Roche has a good post up discussing the lack of bearish sentiment in the market right now: Where Did All the Bears Go?. And I think this is right on track. This recent wave up has been a real bear killer combined with the fact that the Dow Industrials are at a new all time high.
This is yet another reason why I don't think the end of this wave will be 'the top'.
So this chart caught my attention and is telling the same story that I have been saying. If you indulge me in some interpretation, which I lay out below:
I think we are still somewhere in 'Phase 2': sentiment has shifted and the investor community is seeing this bull market as a bull market.
Now we could be at the end of Phase 2. But even if that were the case we should still expect another leg up to make a higher high after the next correction to show a divergence in sentiment. We would also need to see confirming divergences in a number of other internal indicators.
So in short, I am still not expecting the market to have peaked with this peak.
No posts recently because there is not much to say. We had a very sharp volatile sell off at the end of Feb followed by an even sharper rally out of that low. This spike low and the subsequent rally out of it looks and feels something like the March 2011 correction going into the Apr-May 2011 rally and the March 2012 correction going into the Apr 2012 rally. I have no clue how it this plays out, but the seasonality plus the fact that this was a relatively small correction relative to a 3+ month surge makes me suspicious of a more severe correction in the near term (next several weeks).
However, I still maintain that we are not near the end of this cyclical bull market and that we have further to go. I am still not looking for 'the top' here.
Crazy busy day, could not watch the market in real time. The 60-minute system issued a sell signal on 2/20 and that has stayed intact (and re-confirmed today ... boy howdy). But the Daily System also issued a sell signal today. However, since I could not send the signal out in real time, I will enter the signal at the open tomorrow. Just letting you know the situation.
I have watched and posted on long term VIX divergences (and the fact that there has not been any in this cyclical bull market) many times. [See here, and here, and here, etc.] This continues to be one of the reasons why I think this cyclical bull market is not over, nor are we near the top of it. Once we start seeing a VIX divergence of >several months (combined with other internal indicator divergences that I have discussed previously), then I think we would have a setup for a major top. But we have nothing even remotely of the sort now.
I have also posted about the fact that short term VIX divergences very often accompany the short term (Minor and Intermediate degree) pullbacks in this cyclical bull. Well, today the potential short term VIX divergence that had been building since the end of January has evaporated. See below. This rally still wants to continue. My guess has been to 1530, but maybe that should now be qualified with 'at least'. The prevailing sentiment seems to be 'we are going to get a pullback any day now' and rallies love to grind higher in that kind of short term sentiment. We'll see how the next couple of weeks play out, but I am certainly not going to be surprised by a slow drift higher.
This move looks like it was consolidation after all. My target of 1530 from last week is still in effect. We'll see if the market can muster a rally much beyond that on this wave (of which I have my doubts).
I am seeing an interesting setup take place, which is the 'broadening top' (which is highly distorted and stylized at this point). The reason why I think this is a possible valid setup is because of some very interesting similarities to the short term peak in early 2010.
The early 2010 peak displayed a 'broadening top' for about a week in mid January 2010. The current churn and potential broadening top here has happened the last week of Jan/first week of Feb 2013. So the seasonal phasing is pretty good. We had a strong and very pronounced 3-wave move up from the previous November lows in both instances. And we have extremely similar long and short duration PPO movements on the 60-minute timeframe.
This is making me question if this could be a reversal pattern instead of consolidation which is what I had been thinking. However, we have a pretty good defined level now (see second chart below), and if we stay above that level then I still think the 1530 target is appropriate before the next significant correction. However, if we close below it, then I think the chances of a significant correction being in progress now becomes greatly increased.
My last several posts have dealt with sentiment either directly or indirectly. Josh Brown (The Reformed Broker) has a post up that is sort of tangential to sentiment, but it is extremely relevant to the subject of market perception. Please give it a read: Upside Risks
I would definitely add this to the list of reasons why a major top is not at hand and that we are still somewhere in the middle of this cyclical bull market, not at the end of it.
[Edit 1:25 p.m.]
One thing that Josh brings up in the article is a renaissance in American manufacturing, and I think this is an exceptionally good point and I am in total agreement with. In my Caps blog I focus on two major aspects: highlighting good/relevant macroeconomic analysis and scientific/technological advancements. This second category is what I want to discuss right now.
Many of my recent posts have been focused on scientific advancements (click the link above to see what I am talking about). But these advancements are part of a much larger Materials Science revolution. This is truly a very exciting time and I think we will have major technological breakthroughs that will be life/society changing coming in the next decade and American science and manufacturing will be at the forefront of it (and other world economies also, this will by no means be an isolated trend). This will be the biggest driver of the next great secular bull market.
From a timing point of view, I don't think we are there yet, I continue to think that we have one more cyclical bear to finish out the secular bear (for reasons I outline here: Long Term Technicals and Macro and elsewhere). But beyond that I am extremely bullish on the long term prospects of the US economy.
I have talked about longer term sentiment measures many times. See my last large post (Update on Long Term Projection (01/19/13)) which links back to several other posts discussing this topic. And I still maintain that we are likely not nearing a major top based on those and several other factors.
But bringing the focus on to this wave: How close are we to being done with the wave since Nov 2012? It has been a violent explosion up, so how close is it to running its course? I think the answer is: not very close at all. See my post yesterday ('Minor' Cycle Chart) for a very unorthodox take on that. But here is a more compelling case: the AAII sentiment survey trends.
This Long Term Update will take a slightly different flavor than the last one (Update on Long Term Projection (08/17/12)) since I will be adjusting my count from the 2011 correction based on how the waves have been unfolding. I will show my rationale for that adjustment. But first I want to set the stage for the reason why I still think we are in the middle of this cyclical bull market, and not near the end of it.
The are a large number of market internals that still saying very strongly that this bull market is intact. I have discussed all of these several times, please see Long Term Projection, Macro, and an Analysis Retrospective for a detailed discussion and links to previous analysis and charts going back to a couple of years now.
Corporate Profit Margins still have not peaked and are making new recovery highs alongside the market. And as I have pointed out before, even if they peak this quarter the stock market will likely not be at a peak. This divergence takes several quarters/years to play out as the profit margins peak and the fundamentals start deteriorating long before the analyst community is able to confirm it.
The VIX continues to make new recovery lows as the market makes new recovery highs. If a peak in the market were to happen in conjunction with a VIX recovery low, then it would be completely counter to the 2000 and 2007 peaks which saw very pronounced VIX divergences for over a year.
The NYSE Advance/Decline Line as well as the NYSE New High/New Low Line is still making new highs alongside the NYSE Composite. Both of these displayed significant divergence for several months at the 2007 top. Now there is an issue that I have brought up before using the NYSE internals (see: NYSE Common Stock Only Indicators) and an analysis with them is less compelling due to the proliferation of fixed instrument / bond funds on the NYSE thus making less of a solid proxy for the stock market. But I still think it is still more useful than not useful.
When looking at the strength of these internal measures (fundamental, volatility, and technical) I continue to be convinced that we are still in the middle of this cyclical bull market and not near the top of it.
In November/December I was thinking that we were in the middle of an Intermediate term correction. By mid-December it was quite obvious that was the wrong call and all we had experienced was a Minor Degree pullback on no divergence. You can see the count from my last Update on Long Term Projection (08/17/12) and why I was thinking that, which was obviously the incorrect count.
So I have been thinking a lot about the long count over the last few weeks. I was waiting for a new recovery high to cinch my theory and that has now been confirmed. The crux is that the wave behavior since the major 2011 correction is markedly different in character than the wave behavior before the 2011 correction. I outline the differences on the next chart:
I had been previously thinking that lack of Daily divergence at the early 2012 pullback meant that it was likely only a Minor Degree correction. Based on seeing three confirmed and completed pullbacks since the major 2011 correction and we can now compare sizes and durations, I am no longer of that opinion. I think the early 2012 pullback was an Intermediate correction, and that the form is different than the pre-2011 pullbacks.
The depth and severity of the mid-2011 correction and the fact that it did not end the cyclical bull market has changed the outlook of market participants. I think they are much more convinced of the viability of this cyclical bull and are more willing to 'buy the dip' on any sharp pullback (whereas prior to 2011, people were nervous and would wait for 'one more leg down' before buying the dip). This is making for corrections with spike bottoms on no divergence.
There is a loose analogy with the 2002-2007 cyclical bull market where the corrections before 2005 have a somewhat different flavor than the corrections after 2005. It is not as pronounced as what we are seeing now, but I think the precedent is there.
So with that observation made regarding the wave behavior and the observations made in the first section that show internal measures still confirming that the cyclical bull is intact, here is my updated long term projection.
Long Term Projection History and the Current Projection
I have a long track record of being consistent with my projection. It has obviously adjusted based on how events actually unfolded (absolutely *nobody* can predict the future), but this long term projection which serves as my preferred count has been quite good in general directionality and intermediate timing.
-- Nov 2010: Abandoned the Primary 2 count and adapted my leading alternate count which was a Cycle X count - The Large Count
-- Jan 2011: Rethought the size of Cycle X with some historical analysis and comparisons. I lay out my thoughts for March 2009 - June 2011 (projection at the time) being only Primary W of Cycle X - The Large Count with Historical Perspective
As noted above in the Wave Interpretation section, the early 2012 pullback is now assumed to be an Intermediate Degree correction, and the flavor of the wave behavior after mid-2011 is very different to the wave behavior before mid-2011.
Secular Bear Market Projection / Long Term Count
For the SPX:
And NASDAQ Composite for good measure:
4-year Cycle Chart
This chart comes from this study (A Look at 4-year Cycles) and fits pretty nicely with my long term projection. I think the next pullback would fit timing wise with the next 4-year cycle bottom (which as I show on my chart can simply be a mid-range correction).
Here are a few quick thoughts. I still don't have much to say on the markets right now. Like I said on December 18 the time to be bearish was over, and it was now time to be generally bullish.
We had a spike bottom in November on no daily divergence at all. But instead of that being part of a first leg down, it looks like that was all of the correction we were going to get. My 60-minute, Daily and now Weekly systems are all back on a buy signal. On top of that the Russell 2000 and Wilshire 5000 are back to recovery highs, S&P 500 is a point away, Dow Industrials not far behind, and the Nasdaq is still lagging a bit.
So whatever pullback comes in the near term, my feeling at this point is that it will not be the start of some significant downtrend. I think we have more upside before the next possible Intermediate term pullback (I will discuss my thoughts on that in a different post).
But for right now, here is my rough guess as to what the next several weeks could look like. I really do not think we will get a major pullback, and I do think the SPX wants to challenge 1500.
No updates recently because of the break, and because there hasn't been much to say. My 'analysis' from December 18 is still valid: No bearish setup has worked, no opinion on the short term, other than things being generally bullish.
The fiscal cliff nervousness resolved to the upside (simply because there was a decision) and we are back to new recovery highs (SPX a few points shy, Russell at new high, Nasdaq is not). My 60-minute and Daily Systems are on buy signals, and unless we have a major pullback this week (which I certainly am not anticipating) then the Weekly System will move back to a buy as well.
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