Are Stocks Making a Major Top? 42 comments
-
Font Size:
-
Print
- TweetThis
Every time a major stock index approaches a new high, invariably we can find calls that "a major top has already been made". We have seen several such articles in recent weeks. While these incessant calls for a major top may be 100% accurate at the present time, a review of historical major tops gives little support for such a claim. A short-term top within a major bull market can occur at any time, but major tops do not occur very often.
Fundamentals Are Improving: We also have to consider improving fundamentals when constructing a case for a major top in stocks or the lack thereof. Thursday’s unemployment report came in better than expected, but more importantly the four-week moving average of jobless claims dropped to its lowest level in almost a year. Third quarter earnings that came in above expectations, beat those below expectations by a ratio of 6-to-1. Admittedly, earnings estimates in Q3 were conservative, and employment will remain weak for a time, but recent data does suggest some economic improvement.
Historical Market Tops: Below we show six major tops that occurred in the Dow, S&P 500, and NASDAQ, one in each index in 2000, and one in each index in 2007. At a major top, buyers are tired and sellers are gaining strength. Consequently, after a major top, markets do not come within an eyelash of the previous highest closing high.
click to enlarge
The concept of a discernible lower high is illustrated in the six charts that follow. They show what a major top looks like. Obviously, the future can bring anything in the form of a top, but understanding how human greed and fear interacted at major tops in the past may give us some valuable insight.
If we use recent October 2009 highs in the three major stock indexes, then we can estimate, based on history, how high current rallies could go and still leave the door open for a major top. The estimated 2009 levels to historically exclude a major top are shown in the far right side of the charts below. On Wednesday, the S&P 500 closed at 1,098.51, the Dow at 10,291.26, and the NASDAQ at 2,166.90. All three indexes have already exceeded levels which, from a historical perspective, say the 2009 markets currently look little like a major top.
Below are the 2009 charts (as of Wednesday's close) of the Dow, S&P 500, and NASDAQ. If you compare them to the charts of major tops above, you will see very few similarities. Many will point out divergences (the Dow has made a new high and the NASDAQ has not) as being bearish. A divergence that lasts a few days means little. A divergence that lasts a few weeks or a few months is a negative divergence of significance. For example in 2000, the Dow made its highest high in January. The S&P 500 and NASDAQ kept making new highs for three more months with the Dow serving as a non-confirmation or negative divergence. If the NASDAQ continues to lag behind for an extended period in 2009 without making a new high, it will become more meaningful.
Compare and contrast the slopes of the green lines in these three charts (one above and two below) to the slopes of the green lines in the major top charts above - they do not look similar.
The comments and historical information above should not be interpreted as any forecast that a major top is not imminent. However, the historical odds do not seem to favor one occurring at this time. Experience also tells us that calling tops and bottoms is a form of forecasting, something we do not advocate. We believe technical analysis should be used to monitor the health of the markets rather than produce headline grabbing forecasts. If we see evidence that supports a major or intermediate top, we are open to such an outcome. The November Asset Class Outlook covers corrections (a form of a market top) in terms of red flags to keep an eye out for. It is available for download via this page.
Shorts Are Ready: Many traders have been waiting to break out the short ETFs, like PSQ, DOG, SH, QID, DXD, SDS, and RSW. They may get an opportunity, but we would like to see more before giving up on the bull.
Recent new highs in the Dow and the S&P 500 suggest the bulls are not weak enough yet, nor the bears strong enough yet, for the market’s tide to turn. We will monitor things closely, with an open mind, continuing to give the bullish trends the benefit of the doubt. Yesterday's Seeking Alpha post, Breadth Trying To Make Bullish Turn, may help readers monitor the health of the bull market.
Disclosure: The author and CCM clients have numerous positions, including exposure to U.S. tech stocks, foreign currencies (long and short), emerging market stocks, foreign bonds, and commodities.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 42 comments:
In the US the key datapoints are unemployment and the budget deficit. The former is much worse than the adminstration forecast which means the latter will be worse in turn. To get budget deficits back on track requires primary budget surpluses for decades to come. The inevitable result is economic stagnation as seen in Japan.
A major top may indeed not be imminent. But the market will re-attach to fundamentals at some point. The result will not be pretty.
But I think your reference to tops back to 2000 might be a bit short sighted, what just happened was a massive reversal (last September all the way up to March ), that was driven by a massive re-think of valuations.
My view as you probably know is that the US stock market is under-priced now, and the dynamics of reversals there are different from when it was over-priced (i.e. in 2000 and 2007); historically the potential for large reversals is much less in such circumstances (although don't rule out 20% peak to trough). By my calculation there is ONE of those due over the next two years.
seekingalpha.com/insta...
The market is nothing more than a FED liquidity driven market.
S&P 500 should be at 750 or so which would be at its 25 year continuation trend line. I have no idea when it gets there, but knowing that it should be there, is what counts. Average Americans have no clue about anything, that is why they continue to lose in the markets over long periods of time. Just ask the average American who's portfolio is at 1999 levels when it should be at 2009 levels.
compdivplan.com
On Nov 13 05:31 AM Denis Gould wrote:
> A liquidity driven market can go anywhere, but the foundations for
> the market continue to crumble. For the first time in a while we
> are seeing economic data significantly disappointing. GDP in HK rose
> just 0.4% in q3 (1.9% expected). This is important because HK - as
> a port - is a good barometer for trade. GDP in France and Italy was
> also weaker than expected. Retail sales in Singapore fell 7.9% in
> September alone (a rise of 0.4% was expected).
>
> In the US the key datapoints are unemployment and the budget deficit.
> The former is much worse than the adminstration forecast which means
> the latter will be worse in turn. To get budget deficits back on
> track requires primary budget surpluses for decades to come. The
> inevitable result is economic stagnation as seen in Japan.
>
> A major top may indeed not be imminent. But the market will re-attach
> to fundamentals at some point. The result will not be pretty.
You are absolutely right.
Markets detached from fundamentals in the mid-90's due to excessive liquidity from Fed. As time went by, investors lost sight of basics like dividend yields which have to be high enough above risk-free yields by a premium. Shills started justifying overvaluations by using "Earnings Yield", ignoring the fact that earnings are based on creative accounting (such as not deducting cost of executive options, etc...). The notion took hold that you can buy any stock at any absurd price and just hold it for a while, and a nice guy will then pay you more for it. This is not investing, but a Ponzi scheme, and many who bought into it have started to see the consequences
Over the next decade, market participants will slowly re-learn old fashioned investing fundamentals, and yes, they imply an S&P in the vicinity of 750 about now, or its inflation-adjusted equivalent in a couple of years.
On Nov 13 06:45 AM Archman Investor wrote:
> Absolutely.
> The market is nothing more than a FED liquidity driven market.<br/>S&P
> 500 should be at 750 or so which would be at its 25 year continuation
> trend line. I have no idea when it gets there, but knowing that it
> should be there, is what counts. Average Americans have no clue about
> anything, that is why they continue to lose in the markets over long
> periods of time. Just ask the average American who's portfolio is
> at 1999 levels when it should be at 2009 levels.
>
> www.compdivplan.com
DavidC
I'm not buying this inverse dollar value/market value relationship. Other underlying fundamentals such as housing (and related debt) and unemployment (oh yeah, I forgot, it's a lagging indicator...) make the situation that much more disconcerting.
I feel like so many people are just whistling past the graveyard and have no idea as to what's about to hit them.
On Nov 13 06:45 AM Archman Investor wrote:
> Absolutely.
> The market is nothing more than a FED liquidity driven market.<br/>S&am...
> 500 should be at 750 or so which would be at its 25 year continuation
> trend line. I have no idea when it gets there, but knowing that it
> should be there, is what counts. Average Americans have no clue about
> anything, that is why they continue to lose in the markets over long
> periods of time. Just ask the average American who's portfolio is
> at 1999 levels when it should be at 2009 levels.
>
> www.compdivplan.com
Although you construct a great historical chartist argument, it's flawed from the start in your "Fundamentals are improving" paragraph. Using "fundamental data" that's Fed manipulated, propped and driven, in cohorts with "banks" like Goldman-Sachs conducting false market pumps with irrational agenda and profit driven speculation (see: ICE), then what you have is nothing more than a fake "movie set" held up in the back by wooden 2x4's.
Lest we forget to mention the media "pump machine" that spews out its "buy, buy, buy" mantra with the support of "market experts". (see: CNBC).
However, liquidity is ample in the system and that can drive markets higher in the long term...So, in my opinion, we are not making any major top...We can still go much higher in nominal terms...
Also, if the markets fall 15-20%, then the Government and the Fed are sure to take some more aggressive measures and engage in some more money printing...So sharp downsides would be triggers to higher upsides as more money would flood the financial system...
The author had a good article as far as it went, but without mentioning the relationship that negative technical divergences have to market tops it is very incomplete, because these divergences in my opinion are some of the best early warning signals that trouble lies ahead. He speaks of being a technician, yet leaves out one of the most important technical tools one can use to help determine a market top.
Lots of comments on SA during this 8-month rally suggest that lots of people are on tilt. There is a cluster of them right here: "The result will not be pretty." "Averge Americans have no clue about anything." "The notion took hold that you can buy any stock at any absurd price." "People are just whistling past the graveyard and have no idea as to what's about to hit them." And of course the conspiracy theories, the government is lying, CNBC is lying, etc.
The author isn't lying, he has presented facts. He constructed a dry, emotionless, technical article, offering decent historical comparisons, and he gets ripped for not understanding what's really going on. He did make the "mistake" of offering a mild opinion on fundamentals, and he got ripped for that. Nobody actually disputed his arguments on a technical level; they just ignored them. Too bad, he did a good job. Doesn't mean he's right, but he did a good job.
Major, minor, spongebob top, whatever you want to call it, it's time to protect your investments.
On Nov 13 08:19 AM ain't no fortunate son wrote:
> Most major tops like the ones in Fall, 2007, were marked by major
> technical divergences in key stocks and the indices. Technical divergences
> occur when stocks are still going up but the major momentum oscillators
> have already topped out and are falling... key ones to follow are
> MACD, Stochastics, RSI. These divergences can last for several months
> at a major top. This indicates that buying momentum has ended while
> the last of the late to the party buyers are still pushing up prices.
> Running a view of the longer term charts for the 2007 period should
> illustrate these divergences quite effectively.
>
> The author had a good article, but without mentioning the relationship
> that negative technical divergences have to market tops it is very
> incomplete, because these divergences in my opinion are some of the
> best early warning signals that trouble lies ahead. He speaks of
> being a technician, yet leaves out some of the most important technical
> tools one can use at a market top.
No one's saying he didn't do a good job. He did indeed construct a clear and organized position. However, it's one small tree in the forest. For example, his data only goes back to 2000, whereas unemployment data is the worst in decades beyond that. The same argument can be made for US and personal debt, bank failures, state bankruptcies, foreclosures, etc. ALL of these, and more, are far worse than the historical depth the author provides.
Not slamming the author, just merely trying to present the macro lack of "apples to apples".
However, as the author states "A divergence that lasts a few weeks or a few months is a negative divergence of significance." There are quite a few of these divergences. As well, there are many aspects of the fundamentals that are deteriorating.
I have recently written a blog series that examines the markets from a technical perspective. There are important divergences and other signs of danger. Here is the link for those interested:
www.economicgreenfield.../
J. P. Morgan
"Fundamentals Are Improving" - Fundamentals will never improve until the structure is changed and Ben and Tim will never admit that the structure is flawed, so this will go on and on until we hit a brick wall (dead ahead).
Next, you ignore the fact of market and statistical manipulations on everything from equities, to bonds, to commodities, to currencies, etc., etc. by the G-20.
Chris, let me ask you this: If fundamentals are improving to the degree you say they are, why is the Fed's position the same as it was months ago? Why is the G-20 making the same old statement they were a year ago for "more economic stimulus"? Why has unemployment already exceeded the Fed's projections in both time and severity?
The only thing "historical" about the economic crisis we are in is the degree data is being manipulated and the massive intervention by the governments of the world. All, I might add, without significant effect.
My 10300/1100 target is in so next week S&P could hit 1060.
Forecasting is never easy-just a guide for walking in the forest of trees.
On Nov 13 08:28 AM David Van Knapp wrote:
> I thought technical analysis was supposed to be a way to analyze
> markets unemotionally...to discern what is happening, what is reality...without
> going "on tilt" about it.
>
> Lots of comments on SA during this 8-month rally suggest that lots
> of people are on tilt. There is a cluster of them right here: "The
> result will not be pretty." "Averge Americans have no clue about
> anything." "The notion took hold that you can buy any stock at any
> absurd price." "People are just whistling past the graveyard and
> have no idea as to what's about to hit them." And of course the conspiracy
> theories, the government is lying, CNBC is lying, etc.
>
> The author isn't lying, he has presented facts. He constructed a
> dry, emotionless, technical article, offering decent historical comparisons,
> and he gets ripped for not understanding what's really going on.
> He did make the "mistake" of offering a mild opinion on fundamentals,
> and he got ripped for that. Nobody actually disputed his arguments
> on a technical level; they just ignored them. Too bad, he did a good
> job. Doesn't mean he's right, but he did a good job.
1) why sell now and not push gains back another 12 months and play with the"float"
2) many investors have gains from stocks they bought in feb and march and want to hold them for ayear when the volitality increases that means they feel its time to sell puts that hasnt happened
3) government knows holiday season needs alarge stock market inflation so peopel with money spend more no offense to most of the unemployed but they generally own very little
On Nov 13 08:28 AM David Van Knapp wrote:
> I thought technical analysis was supposed to be a way to analyze
> markets unemotionally...to discern what is happening, what is reality...without
> going "on tilt" about it.
>
> Lots of comments on SA during this 8-month rally suggest that lots
> of people are on tilt. There is a cluster of them right here: "The
> result will not be pretty." "Averge Americans have no clue about
> anything." "The notion took hold that you can buy any stock at any
> absurd price." "People are just whistling past the graveyard and
> have no idea as to what's about to hit them." And of course the conspiracy
> theories, the government is lying, CNBC is lying, etc.
>
> The author isn't lying, he has presented facts. He constructed a
> dry, emotionless, technical article, offering decent historical comparisons,
> and he gets ripped for not understanding what's really going on.
> He did make the "mistake" of offering a mild opinion on fundamentals,
> and he got ripped for that. Nobody actually disputed his arguments
> on a technical level; they just ignored them. Too bad, he did a good
> job. Doesn't mean he's right, but he did a good job.
I believe the simplest solution is shown in the graphs that show the inverse correlation between the value of the $$ and the value of "stocks".
As long as the $$ continues to decrease, many other asset classes will increase.
At the same time, we are living in a house of cards.
So, I believe the best solution is to choose an asset class, invest and monitor it closely. Now is not the time to be invested all over the board.
Following this reasoning for the last year, I've been in PMs, GDX, ABX (I understand the overlap), SLV, RTP, BHP, and several other favorites that just go up and up like APPL, Intuitive Surgical, and X. X can be played like a yo-yo.
To be on the sidelines during this debacle is to miss great blood sport. So, all of you adrenaline junkies are in. And, may-be out, and in and out. Just remember to pull out before the climax.
On Nov 13 08:06 AM Faisal Humayun wrote:
> I would agree with the fact that the markets are overbought in the
> near term....So some correction can't be ruled out...
>
> However, liquidity is ample in the system and that can drive markets
> higher in the long term...So, in my opinion, we are not making any
> major top...We can still go much higher in nominal terms...
>
> Also, if the markets fall 15-20%, then the Government and the Fed
> are sure to take some more aggressive measures and engage in some
> more money printing...So sharp downsides would be triggers to higher
> upsides as more money would flood the financial system...
The Nasdaq has gone above that level, however, tech stocks have rallied more for two reasons; speculation that they will be big gainers in a recovery and they have benefited directly from stimulus money being spent by states to buy in the current budget cycle.
I would also caution that the very small dip in unemployment - which is perceived as good news because it is - "less bad" than expected - could very well be due to seasonal hiring for the holiday shopping season by retail outlets and shippers (UPS, etc.).
It will be a cold Winter: credit card bills from holiday shopping will come in, ARM resets will continue, retailers that didn't do well will claim bankruptcy and fire more people, state and federal taxes will be raised on everything, including gas and perhaps a VAT tax will further constrict discretionary spending.
We should have had a major top a long time ago - back in July at DOW 8,500 when the 50 day SMA crossed the 200 day SMA - or slightly above that.
However, trillions of dollars in liquidity and 0% of yet to be earned taxpayer money given to the banks to buy stocks and do M & A, along with massive debt spending on unemployment and stimulus money literally thrown at the states, have done a fine job of reflating the asset bubble and building more houses of cards.
Gold continues on a tear because many see the bubble and realize it is more hot air than substance; and has far reaching implications for inflation and currency valuations.
If we are lucky, the charts will resemble the Jimmy Carter years- down, staying down but not getting worse, and then up when it started looking like Reagan would win the election.
Or, they just continue to trend down like 1930-1932 until we can get Obama out of office.
In either case, the party ends in January. I think we hit a new low of around 550 in March of 2010. Hard to say what happens after that, but it's gonna get ugly when our taxes go up. And that is change you can believe in.
arabianmoney.net/2009/.../
The market downturn will happen, Cazenove partners want to be in cash when that happens. Do they know the markets better than most of us? Of course!
2010 will be a stockpickers market more than ever
On Nov 13 08:19 AM ain't no fortunate son wrote:
> Most major tops like the ones in Fall, 2007, were marked by major
> technical divergences in key stocks and the indices. Technical divergences occur when stocks are still going up but the major momentum oscillators have already topped out and are falling... key ones to follow are MACD, Stochastics, RSI. These divergences can last for several months at a major top. This indicates that buying momentum has ended while the last of the late to the party buyers are still pushing up prices. Running a view of the longer term charts for the 2007 period should illustrate these divergences quite effectively.>
> The author had a good article as far as it went, but without mentioning the relationship that negative technical divergences have to market tops it is very incomplete, because these divergences in my opinion are some of the best early warning signals that trouble lies ahead.
> He speaks of being a technician, yet leaves out one of the most important technical tools one can use to help determine a market top.
Bull market tops are formed gradually as investors are lulled into complacency and there is a slow degradation of market breadth. I agree that we are nowhere near the top of this cyclical bull market (there is just too much fear in the market, as attested too by the tone of the comments posted above). The time to worry would be when the amateur - bears start capitulating.
You said" The time to worry would be when the amateur - bears start capitulating." Yes true but before capitulation can occur wouldn't they first have to be fully invested and complacent which is not the case at this time, IE, markets light volume rally
I recall in 1999 correction the dumb money remained almost fully invested throughout the sell off while the smart money was quietly doing their selling, the dumb money was holding the exit door wide open so the big WS MM could leave with their portfolio profits intact, first in first out, dumb money last in last out.
On Nov 15 11:28 AM E Nuff Sed wrote:
> Chris, Overall I think it is an excellent article. I look forward
> to reading more of your thoughts on identifying major tops and bottoms
> - which is the holy grail for the technical analyst.
>
> Bull market tops are formed gradually as investors are lulled into
> complacency and there is a slow degradation of market breadth. I
> agree that we are nowhere near the top of this cyclical bull market
> (there is just too much fear in the market, as attested too by the
> tone of the comments posted above). The time to worry would be when
> the amateur - bears start capitulating.
stockcharts.com/h-sc/u...
Look at an index that led the way up, the Russell 2000. It has your same rolling top formation, with a double top and what appears to be a right shoulder forming. Note that the MACD also peaked out in early August although prices kept rising. So here are two good example of leaders that are apparently rolling over.
stockcharts.com/h-sc/u...
On Nov 15 11:13 AM E Nuff Sed wrote:
> Good post - but what is your outlook on the market? I agree watching
> for divergences is important but the key is distinguishing between
> false positives and the real deal. You have to watch multiple indicators.
> It is much easier to identify a major bottom (which forms a characteristic
> and sharp "V" , than a major top which is an elongated - inverted
> "U")
>
> On Nov 13 08:19 AM ain't no fortunate son wrote:
This is because the market can only go higher when there is cash on the sidelines (dry powder). When this powder starts depleting then its time to turn cautious.
On Nov 15 12:06 PM E Nuff Sed wrote:
> By "Amateur-Bear capitulation" I meant non-professional investors
> who finally throw caution to the wind and get fully invested in equity.
> They are the investors who are late to the party. I think you will
> get a sense of this from reading comments in seeking alpha as well
> as looking at fund flow data i.e when more mutual fund investment
> starts flowing into equities than bonds.
>
> This is because the market can only go higher when there is cash
> on the sidelines (dry powder). When this powder starts depleting
> then its time to turn cautious.
On Nov 13 08:15 AM bartpr wrote:
> a blogger recently displayed the yield spread between the 2yr and
> 10 yr notes. its the widest its been in many years. the writer
> stated that the 2007 market topped after the spread inverted in 2006.
> went negative. this was in 2006. looking back at the history of
> the spreads the market never topped before the yield spread went
> negative. we may have a correction to come, but i am waiting for
> the negative spread before completely exiting the market. a negative
> spread means a credit crinch is on. goodby.