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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
  • 2014 - US Market Update (3) - May / June / July 0 comments
    Jul 24, 2014 9:18 AM

    SUMMARY

    • The Dow Jones Industrial Average (DJIA) continues to record new all-time closing highs.
    • 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 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%.
    • The yield on the 10 year US treasury note continues to head lower, with a new lower low anticipated in 2015.

    This is my third news letter for 2014, covering events from mid-May through to mid-July. I have waited until mid-July to release this news letter because the Dow Jones Industrial Average (DJIA) signaled in mid-June that a US market top is near, and I needed to build a new stock market timing tool to determine, with better accuracy, when the top will occur.

    The Dow Jones Industrial Average (DJIA) continues to record new all-time closing highs, however, the recent new highs are not significantly higher than at year end, which is now 7 months ago. Indeed, the DJIA has moved mostly sideways this year as market professionals (who are aware that a top is near) are selling their large stock inventories in small increments to retail investors, funds held in 401(k)s and to other investors who are not aware.

    MARKET TOP SIGNAL

    In mid-June, the DJIA finally signaled that a US market top is near. I have been waiting for this signal since summer 2013, and it was finally recorded a month ago. To gain further confirmation, I ran the same market timing model against other key US market indexes and found 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.

    The DJIA market top signal only happens, on average, every 6 to 7 years, and has been recorded 21 times since the start of the DJIA index in 1885. 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. Its 100% accurate, since all 21 instances of the signal have led to significant market drops. The signal also occurred prior to the 1929 great depression and prior to the 1987 stock market crash.

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

    I have developed a statistically based market timing tool 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 higher probability than later ones, so I expect the market top to occur at either, 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.

    Its 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 at 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.

    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 presently 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.

    Finally, on the monthly chart, the fulfillment of the downward momentum phase 2 segment by November suggests that the yield continues to move down in August and September inline with the drops in April and May. This would support an equity market high in July, or perhaps the possibility of a market top in July.

    DAILY CHART of DJIA

    Upward momentum continued to build during late May and early June, and it was sufficient to complete phases 1, 2 and 3 of an upward momentum sequence thus driving the DJIA index higher. This move upward helped to support the upward momentum on the weekly chart which is covered in the following section.

    WEEKLY CHART of DJIA

    As reported previously, the weekly chart has been blocked for the last 9 to 12 months since last summer, but finally at the end of spring this year, the DJIA managed to break to the upside on the weekly chart. A new upward momentum phase 1 and phase 2 both completed in early June. A phase 3 segment has begun following the completion of phase 2.

    This recent push upwards on the weekly chart is the final signal that I needed to predict a market top sometime in 2014 and a significant market drop there after.

    MONTHLY CHART of DJIA

    Upward momentum on the monthly chart remains intact. Support exists at a level of 12,000 for the DJIA.

    YEARLY CHART of DJIA

    Upward momentum on the yearly chart also remains intact. Inline with the monthly chart, a key level of support exists at 12,000 for the DJIA on the yearly chart.

    FINAL WORDS

    I'll continue to provide updates on the US stock market with the next update coming at the end of August. If the market tops in late July, then we should see a significant drop down by the end of August. In this case, I will focus more in the August news letter on analysis of how low the market could go, before it reaches a bottom.

    If you have feedback, please don't hesitate to write back to me with comments. I appreciate any and all feedback, and I will aim to improve this news letter over time, based upon the feedback.

    Good luck !

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

    Themes: US Market Top
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