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Erik McCurdy
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Erik is the senior market technician for Prometheus Market Insight and has been performing chart analysis since 1995. The software program that he developed to monitor long-term stock market trends has correctly identified 92% of the cyclical turning points in the S&P 500 index since 1940.... More
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  • Stock Market Cyclical Bull Faces Important Test

    Click the image below the play this video.

    Fueled by a historic amount of stimulus from the Federal Reserve, the cyclical bull market in stocks that began in 2009 has accelerated into an unsustainable advance, causing investment risk to increase to one of the three highest readings during the past 85 years.

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    Following the low in 2010, the stock market rally has exhibited the characteristics of a classic bubble as defined by a log periodic advance. The violent decline in January was a meaningful breakdown, signaling that the bubble may have begun the topping process. Since then, short-term market moves have become increasingly violent. When it occurs during the final phase of a highly irrational advance, this type of behavior is usually indicative of speculative exhaustion.

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    From a short-term perspective, the decline last week favors the development of another violent downtrend heading into the next meaningful short-term low. On April 4, our cycle analysis identified the formation of the latest alpha high (NYSE:AH). Additionally, we noted that a quick move below the short-term cycle low (STCL) in late March would signal the likely transition to a bearish translation. Since the formation of the AH, stocks have moved well below the last STCL, confirming the transition to a bearish short-term translation and favoring additional weakness heading into the next STCL in late May.

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    Looking ahead, if an extended alpha phase decline is followed by a weak beta phase rally and an extended beta phase decline, the new bearish translation would be reconfirmed and additional short-term weakness would be forecast in June and July.

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    Alternatively, an extended beta phase rally that returns to recent long-term highs followed by a beta phase decline that holds well above the forthcoming beta low (BL) would suggest that cycle translation is in question.

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    As always, these scenarios are approximations that represent the most likely possibilities identified by our computer models and actual price behavior will likely deviate from both. However, note that both scenarios suggest the current environment of extreme volatility is likely to continue for at least the next several weeks. From an intermediate-term perspective, the decline last week moved the S&P 500 index well below support at the lower boundary of the uptrend from 2011. Additional weakness next week would confirm this breakdown on the weekly chart and strongly favor the bearish short-term scenario that was outlined above.

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    As we often note, a cyclical top is a process, not an event. A confirmed breakdown on the weekly chart would be a significant technical signal, and market behavior during the next several weeks will determine if the next cyclical bear market is likely commencing.

    We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers. Try our service for free.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 13 6:44 PM | Link | Comment!
  • Has The Stock Market Bubble Burst?

    Click the graphic below to play this video.

    For the past four years, the stock market has exhibited the classic characteristics of a bubble as defined by a log periodic advance. Fueled by a historic amount of stimulus from the Federal Reserve, the cyclical bull market from 2009 has accelerated into an unsustainable advance and the next long-term top will almost certainly be followed by a violent correction that will result in substantial losses. In early January, we noted that the historic extreme in bullish sentiment suggested that the bubble was on the verge of collapse. Since then, the S&P 500 index has moved sharply lower, indicating that the top of the bubble may be in the process of forming.

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    However, as we often note, a cyclical top is a process, not an event. The recent breakdown of the power uptrend from 2012 is the first sign of a long-term reversal, but market behavior during the next several weeks will determine if the next cyclical bear market is commencing.

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    The latest intermediate-term cycle low (ITCL) is imminent and it could form at any time. How the stock market behaves following the confirmed formation of the latest ITCL will tell us if a long-term top is likely developing.

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    From a short-term perspective, the magnitude of the beta phase decline of the cycle from December signaled the likely transition to a bearish translation. Our computer models identified the potential formation of the latest short-term cycle low (STCL) last week and the cycle low signal that was generated on Thursdayconfirmed that a new cycle is in progress. If the formation of the latest ITCL is confirmed by subsequent market behavior during the next two weeks, the character of the developing short-term cycle will provide the next assessment of cyclical bull market health.

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    Regardless of whether the next cyclical top is forming right now, it is important to maintain focus on the long-term view. The bull market from 2009 is long overdue for termination and market investment risk remains at an extremely high level.

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    As with all bubbles, it is impossible to predict when the inevitable collapse will occur with a meaningful degree of statistical confidence. However, recent developments suggest that a long-term reversal could be in progress right now, so it will be important to monitor market behavior carefully during the next several weeks. Given the magnitude and duration of the developing stock market bubble, it is a virtual certainty that the next cyclical downtrend will be extremely violent and severe. If this bubble is followed by a typical post-bubble correction, the S&P 500 index will likely lose 30 to 50 percent during the forthcoming bear market. Therefore, now remains a time for extreme caution and we remain fully defensive from an investment perspective.

    We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers. Try our service for free.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Feb 09 7:25 PM | Link | 1 Comment
  • Historic Sentiment Extreme Suggests Stock Market Bubble On Verge Of Collapse

    Click the graphic below to play this video.

    At a current duration of 58 months, the cyclical bull market in stocks that began in early 2009 is long overdue for termination and the character of market behavior during the last 12 months suggests that we are in the final, speculative blow-off phase of the rally.

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    Additionally, since early last year, stock market investment risk has remained in the highest one percentile of all historical observations. The latest speculative advance from October has increased risk to another historic extreme, joining a select group of four time periods that includes the long-term tops in 1929, 2000 and 2007.

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    According to the valuation components of the data used to calculate investment risk, the S&P 500 index is priced to produce an annual return of only 2.0 percent during the coming decade. Therefore, when you take into account the current dividend yield on the index, these highly reliable data suggest that stocks are poised to gain nothing in real terms during the next ten years. Granted, the market will likely go nowhere in an interesting fashion, but buy-and-hold investors who are entering the stock market at this level will almost certainly experience extremely poor performance during the next decade. Fueled by a historic amount of stimulus from the Federal Reserve, the cyclical bull market in stocks that began in 2009 continues to exhibit the characteristics of a classic bubble as defined by a log periodic advance.

    (click to enlarge)

    As with all bubbles, it is impossible to predict when the inevitable collapse will occur with a meaningful degree of statistical confidence. However, extremely bullish investor sentiment during the last several weeks has caused our sentiment score to decline to the -100 level for the first time since early 1987. In October of that year, the stock market experienced one of the most memorable crashes of the past century. This extremely bearish reading suggests that the current bubble is on the verge of collapse.

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    Given the magnitude and duration of the developing stock market bubble, it is a virtual certainty that the next cyclical downtrend will be extremely violent and severe. If this bubble is followed by a typical post-bubble correction, the S&P 500 index will likely lose 30 to 50 percent during the forthcoming bear market. Of course, there will come a time when the risk/reward profile of stocks is once again favorable and the judicious study of market data will signal when that next long opportunity develops, just as it did in March 2009. However, now is a time for extreme caution and we remain fully defensive from an investment perspective.

    We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers. Try our service for free.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jan 08 10:49 PM | Link | Comment!
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