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David Harris is an independent stock market investor and trader with an interest in modeling price movements in stock markets. In particular, David has spent the last ten years developing mathematical models to identify market tops and market bottoms and more recently a model that identifies... More
  • US Market Top Is Now In Sight : Part 1 0 comments
    Jul 24, 2014 9:15 PM

    SUMMARY

    • In June, the DJIA signaled that a significant US market top is near and will be reached in the next few weeks or months.
    • The S&P 500, NASDAQ and Russell 2000 indexes have already signaled in late 2013, that a market top is near.
    • A new market timing model calculates that the market top is likely to occur in either late July, in October or at year end.
    • The market timing model determines that the resulting market drop is likely to be at least 12% and could be as much as 33%.

    MARKET TOP SIGNAL

    For over 9 months the Dow Jones Industrial Average (DJIA) index has been close to generating a US market top signal, but each time it came close the signal failed. In mid-June, the DJIA index finally signaled that a US market top is near, using a proprietary market timing model developed over the last few years.

    To gain further confirmation, the same market timing model was run against other key US market indexes. The results show that the S&P 500, NASDAQ and Russell 2000 all provided their own signals in late 2013, so the DJIA was the last key US market index to give up its signal.

    This DJIA market top signal only happens, on average, every 6 years, and has been recorded 21 times since the start of the DJIA index in 1885, almost 130 years ago. The signal occurs at major US market tops, and was triggered in 1999 before the 2000 market top and again in 2007 before the previous market top in October 2007.

    The signal is 100% accurate, since all 21 instances of the signal have led to significant market drops. The signal also occurred prior to the 1929 stock market crash during the great depression and prior to the 1987 stock market crash.

    Analysis of the 21 previous occurrences of the signal provides the following statistics. The minimum DJIA drop after the signal was recorded is 12%. The average market drop is 33%. The worst market drop was 90% during the US great depression. So we are in for a rough ride when the market top finally occurs. We can expect a drop in the DJIA of between 12% and 33%.

    The market timing model cannot pin-point the exact moment that the market top will occur. For this reason a second, statistically based, market timing tool has been built that provides a more accurate likelihood of when the market top will occur. The new tool shows that there are three valid windows of opportunity for the market top, and these are :-

    [1] The last two weeks of July (period from July 21 - August 1)

    [2] The month of October into early November

    [3] The last two weeks of December and first two weeks of January

    Statistically, the earlier windows of opportunity have a higher probability than later ones, so its reasonable to expect that the market top will occur at case [1] or case [2].

    REASONS FOR MARKETS TO DROP

    I can see two key reasons why the markets may drop significantly.

    For case [1], where the markets drop in late July, the most likely reason would be a negative value for initial reading of US Q2 GDP. The final reading of Q1 GDP was -2.9% and a second consecutive negative reading for Q2 GDP would signal the start of a recession in the US. Its generally accepted that two negative quarters of GDP recorded back to back indicates the start of a recession. The initial estimate of Q2 GDP will be published Wednesday July 30. This could result in the last week of July being a market top.

    For case [2] where the markets drop in October, the most likely reason for this would be the ending of QE3 bond purchases, at the end of October, which has already been signaled as a possibility by the FED chair.

    It is not known whether political issues around the globe or an escalation of financial issues in Europe could also be factors that lead to a drop in the US markets.

    BUBBLE TROUBLE IN ARGENTINA

    The stock market in Argentina continues to climb higher. I have commented previously that Argentina is already in a bubble which must eventually burst. The rate of exponential growth is so extreme that it cannot keep climbing higher for much longer. The top of the bubble must be near.

    Its likely that the stock market in Argentina will reach a top around the same time that the US markets reach a top, suggesting that the July window is perhaps more likely than the October window, because the Argentina bubble must burst sooner rather than later, due to its very over-heated state.

    Stock market bubbles can never be considered as normal because they are quite rare, however, the growth of the stock market in Argentina has grown well beyond the normal growth seen in stock market bubbles and has now reached "super" bubble status. Only about 15% of true price bubbles reach this very over heated state.

    US TREASURY 10 YEAR YIELD

    The yield on the 10 year US treasury note continues to head lower with consistent downward momentum. Evidence of the move lower is now present on the yearly chart, monthly chart and weekly chart of $TNX. As reported previously, it is anticipated that we will see an all-time low in yields sometime in mid to late 2015, or at least a double bottom matching the 2012 low in the 10 year yield.

    Hence, a continued move lower in treasury yield through 2014 into 2015 and perhaps into early 2016, would be consistent with a "fear trade" brought on by the threat of a US recession or the ending of QE3 in October this year.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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