Tom McClellan On July Sell-Off, Bull Market Peak, And Gold Bottom

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 |  Includes: GLD, SPY
by: Financial Sense

By FS Staff

In a recent interview with Financial Sense, well-known market technician Tom McClellan says current sentiment is "horribly bullish" with the market probably due for a big sell-off this month. Although cautious in the short term, McClellan does not believe we are approaching a bull market peak and cites an interesting relationship between stocks and oil prices, which projects a top sometime around 2018.

Here are a few excerpts from his interview that aired on Saturday (click here for audio):

Financial Sense: Tom, is there anything out there that you're seeing technically that would tell you it's time to get a little cautious here-maybe take some profits off the table?

Tom McClellan: Well, sentiment is horribly bullish. That sounds like a terribly contradictory phrase, "horribly bullish." But when everybody is already bullish, they can't get more bullish; but they can get more bearish. We've seen really low levels on the VIX. And now we've seen low VIX levels that have not been confirming the latest additional higher highs [in the market]. Normally, when the S&P 500 makes a higher price high, you get a lower low in the VIX. Well, we now have a divergence in the VIX where the VIX seems to be making a higher low, and that is a big warning sign and a big trading setup for the type of selloff that I think we're due for, probably in July.

Financial Sense: So, do you think the market could be forming a major top right now?

Tom McClellan: I don't look for a bear market anytime soon. And the leading indications that we follow when I've talked about it at on a chart on the home page of our website (see chart below), if you look at what crude oil prices were doing ten years ago, that tells you what stock prices are going to be doing now. And ten years ago, crude oil prices were still in the middle of a long bull market leading up to the 2008 top. So, spring forward ten years, and stock prices are now in a long bull market leading up to a top due in 2018 plus or minus. But along the way, you've got to have some texture; you can't go in a very linear precise uptrend. You've got to wiggle the pen as you draw the chart on the graph paper. You don't ever get to draw just only with a straight edge. And that's the kind of market we've been in, so we need to have a little bit of a scary event. Oil prices could do it; geopolitics could do it; some FED official saying something inappropriate could do it. I'm not sure what the cause is going to be, I just see the conditions ripe for an avalanche, but a small avalanche of limited magnitude.


Source: www.mcoscillator.com

Financial Sense: And Tom, if that were to happen, what type of areas do you think will do well coming out of a correction?

Tom McClellan: Housing related stocks should do well until about January 2015. So the next six months looks like a great time for the housing sector. Now I don't have any individual picks within that sector, but the overall sector as depicted by the HGX Index or by ITB as an ETF you can trade that tracks that. And I also think that inflation is going to rise for the next six months; I'm talking about CPI inflation. I'm not sure about anybody else's definition, but I think that we are due to see from some of the leading indications a continuing rise of inflation. But then, inflation rates should start going back down again in 2015. So only between about now and December/January should we see a big rise in actual CPI inflation rates. We'll still be worried about inflation rates well into 2015 because it takes a long time for the worry to go back down when the turn has already happened, but I think that inflation numbers are going to pick up.

Financial Sense: Along the lines of inflation, what is your take on gold here? I mean, it's got a little spark to it and we're also seeing, unlike what we've seen in the past, some very good movement in the gold stocks. If you take a look at some things like the GDX and the HUI, they are up quite substantially this year.

Tom McClellan: They are and it's a little bit early. There is an important 13.5 month cycle in gold prices that's been going on for the last couple of decades at least. And it's due for its bottom, ideally, in the month of July. Well, gold started up early so either that cycle bottom was put in earlier than it was supposed to or we're seeing a phenomenon that quite often happens with gold as it's making a last dying gasp right before the real bottom of that cycle, which is to have a late blow off and one more sell off. I think we're going to see one more sell off in gold prices that will surprise all the guys that rushed in to by the gold stocks and they'll start hating gold again. And when everybody starts really really hating gold again, right after that sell off, then it would be the time to buy for a really strong up phase of gold as it starts its next 13.5 month cycle. But I think that it's a little bit too premature and I think there was a little bit too much eagerness of people to rush back into gold on this little bit of strength. So that tells me that … no, they haven't been slapped down hard enough yet, and gold's still got that mission to do before this real bottom is done.

Financial Sense: If we we're to sum up, you don't see any signs of a market top or this bull market coming to an end. We may get a correction here in the short term, but in your opinion, that's going to present another buying opportunity.

Tom McClellan: That's very well said. We're still in a long-term uptrend. It's gotten to an overdone point within the uptrend. You don't ever keep going up. You go up three steps forward and two steps back. So you've got to have a little bit of a pullback now just to keep the market healthy. A farmer has to let a field lie fallow every once in a while, we have to have winter come along to get all the leaves off the trees so that the new leaves can grow. It's that sort of a thing that is normal, natural and healthy; and we're due for one.