10-18-14 Comments

9-19-2014 is beginning to look like a major top. If so the bull market lasted 5 1/2 years, about as long as they get.
The small cap indexes diverged in that they did not make a new high when the NASDAQ hit its 9-19 high. The October 2007 top came the same way. The 9/19 high looks like a double top. On the same day we had 128 new NYSE 52-week highs and 102 new 52-week lows giving us a Hindenburg Omen. On the same day the Ali Baba IPO kind of flopped; markets often top right when a big deal is made after a long run. On the 9/19 market high the percent of NASDAQ stocks above their 200-day moving averages had fallen to 45%, a sever divergence with over half the market in their own private bear market.

In addition margin debt has been running at an all time-high, a sign of massive speculation. Margin debt rose to a peak at the 2000 and 2007 tops, this time we are much higher.

Markets often top when the leading issues become narrow, we essentially came down to two stocks that were performing well: MBLY and GPRO, this is extremely narrow. The 2007 top got narrow also but not this narrow. Finally volatility has been running high with a cluster of big up and down days. Volatility belongs to the realm of the bear.

If 9/19 was a major top it may have a long way to go down. The last two bear markets retraced 91% and 93% of their prior bull market advances. A similar drop would take us down to NASDAQ 1530 or so. This is not a prediction but a recognition that history can repeat. NASDAQ 1530 would give us a Shiller cyclically adjusted P/E under 10 which seems to be the key to unlock a new secular bull market. Maybe this time or some bear market in the future will take us there. The excesses of the 5 1/2 year bull are so great that one wonders if this is the time.

So the shift in thinking now becomes selling rallies until proven wrong. My watch lists have been updated. I have GME, HIMX, HLF, INVN, SBGI and TASR on a potential shorting list. I don't worry at major tops about missing the shorting season, if we have topped the opportunities will be there for a while. The prime shorting opportunity following the March 2000 top came six months later in September 2000. The prime shorting opportunity after the October 2007 top came 11 months later in September 2008. We are only one month into a possible major correction so the prime shorting season may be next year.

I have also prepared a long-side watch list in case the long side comes back to life. Stocks breaking out of sound bases and following up with an additional rise is the hallmark of a successful rally. In my studies successful rallies do not begin when a large fraction of the IBD6000 index is showing heavy distribution. Currently 24.6% of the IBD6000 is showing heavy distribution with an E rating. This needs to come down to the range of 7.4%-16%, the realm of successful follow-through days.

If we are starting a bear market I don't expect a new bull market until at least next summer or later. This is how long it would take the Monthly Coppock curve to set up in a new buy position. We could have trade-able bear market rallies though such as March-April 2008.

One final note about Germany, the European hope is that they will pull Europe through their economic troubles. Their demographics are reminiscent of Japan in 1989. In 1989 everyone thought Japan was going into economic supremacy. The Japanese demographics however were against them and 1989 marked the top. The key productive 40-50 year old cadre started into decline toward an aging population. Japan got sucked into two decades and counting economic malaise. Germany is at the same point now as Japan was in 1989 with an even worse set up. I expect that eventually this head wind will block progress and perhaps we are seeing the leading edge of this now. It is this at the back of my mind that suggests that NASDAQ 1530 is not impossible, some day. It is just impossible to forecast demographic timing effects with precision.