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First off, bonds have triggered a new trend sell signal, as have muni-bonds, with high yield not far behind. This could either be a sign that money is moving from defensive sectors of the markets to more cyclical and aggressive, or the early warning shots that the FED liquidity bubble is in the process of popping. If it's the latter, stocks should not be far from peaking and joining the bear slide misery.
There are four phases of the bull/bear cycle, with the current phase the orange line high risk - blow off - bull. The first chart below shows the average monthly returns for each phase of the cycle, with the black line current trading action for 2013 for the NASDAQ. That chart says we are overdue the corrective churn period highlighted by the numbers 2 through 5. If the bears score a big win during that expected corrective churn phase, then the next Great Bear has likely begun, with the maroon extreme line showing how those progress once confirmed. Update continues below chart…
The second chart shows the Dow Jones Industrial Average rocketing to a touch of the upper trend-line of an expanding triangle with point E near the 16,000 level. That was the target of my 2013 forecast I wrote about late last year, with the Dow a week or so of further rally away from touching that potential bull killer line. Parabolic moves coming at the end of prolonged bull markets reverse with similar speed experienced during the upslope, with this chart suggesting the bulls better be ready to hit the sell button on any further rally push. Update continues below chart…
The third chart below focuses more closely on the usual path stocks takes during high risk - blow off - bull phases, using other high risk years of 1987 and 2007 as a comparison, especially in regards to the position and expected movement of the contrarian indicator on top, and trend trading indicator at the bottom of the chart.
That comparison shows the white line of the current NASDAQ tracking returns experienced during the 1987 run up in the middle rally position. If so, then we are facing a swift correction that drives the contrarian indicators from the red circle to the green buy one, to be followed by one final rally surge later in the summer.
The bears may score the big win that confirms the bull market is already in the final rally position, though I believe the middle rally position is best fit, especially in regards to the trend trading indicator at the bottom racing toward the yellow circle at the high risk - exit - line, which is my cue to take profits on longs and head for the hills.
That said, the position of the Dow Industrials and the upper trend line of that expanding triangle shown above says the bulls are skating on very thin ice, with the prime question just how elaborate and prolonged the topping process will be? We should have a better clue on that once the corrective churn begins, though for now the set-up says clearly to get ready to sell…
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Disclosure: I am long QQQ.