Something terrifying happened this weekend. Something that no wealth manager, financial advisor, or anyone who manages Other People's Money wants to see. The image of a stock market bull on the cover of a major news periodical. For those who are not aware of the significance, when major non-financial publications start focusing on the stock market, it is one of the signs that the major Wall Street players are starting to unload their shares on to the unsuspecting public, and a sign of a market top.
The latest issue of Barron's points this out, and followed up with a phone call to Paul Macrae Montgomery, who writes the Universal Economics letter. After being notified of the revelation he notes: "If historic probabilities reliably forecast the future, there's an 80% chance the market will top in a month and will be lower a year from now."
I have gotten away from making market predictions, my research now focuses on where the market is at any given time and whether to be in or out. Through my research and that of others, I have identified 19 other signs of a market top. I will outline a few in this article, and more in future articles.
First, almost all market peaks are preceded by a trend in rising short-term interest rates. The chart below shows 2 data series from the Federal Reserve FRED database, 3 month-AA Financial Commercial Paper Yield and Non-financial Commercial Paper Yield. As you can see this proved true prior to the 2000 market peak, and the 2007 market peak. Currently this dataset is not reflecting any signs of stress in the financial markets.
Sticking with the introduction of the article regarding news sentiment, there is another dataset from the FRED database that I monitor. The "Equity Market Related Economic Uncertainty Index" scans major news periodicals for articles referring to general economic uncertainty. They scan over 4300 news sources. Their index has spiked around the Lehman Brothers collapse, tight presidential elections, and the 9/11 attack. Currently the index is also not registering any distress.
One potential area of caution. The Utility Index shown below has indeed peaked and turned down. There is currently a divergence between the S&P 500 ETF (NYSEARCA:SPY) and the SPYDER ETF Utilities Index (NYSEARCA:XLU). Each peak in the XLU is shown with a downward blue arrow, the subsequent downturn in the S&P 500 is shown with a blue diagonal arrow. We will be watching this relationship closely.
Finally let's look at the Weekly New Highs in the S&P 500. Spikes in the Weekly New Highs tend to predict weakness ahead. I prefer market breadth indicators to analyze the market because while economic and sentiment indicators show you what should be happening, it is the market breadth indicators that show you what is happening. Weekly New Highs on the iShares Russell 3000 ETF (NYSEARCA:IWV). The Russell 3000 captures 98% of the investable U.S. stock market.
As the Weekly New Highs in the top panel begin to weaken (shown by a downward sloping trendline), you can see the weakness is often followed by a decline in the index itself. Currently the index is making higher new highs as the index makes new highs giving a confirming signal of underlying strength in the market.
Back to the title of the article, is this the end of the bull? As I have been saying since late August (when there were many articles from others warning of a crash in September), no, not just yet.
Disclosure: I am long SPY, MDY, MVV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.