Sentiment Speaks: Is The Stock Market Finally Topping?

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Avi Gilburt
Summary

Outlining what it takes for a market to top.

We are nearing a market top based upon a number of indications.

My minimum downside expectation is 2600SPX, with an ideal expectation in the 2200SPX region.

Many investors maintain beliefs about the stock market which often have them looking the wrong way at the market turns. In fact, I can no longer count how many comments I see about how the Fed is what directs our stock market action, and it just makes me scratch my head.

The main argument by Fed watchers is that the Fed’s easy money drives the stock market. Yet, the Fed's balance sheet peaked at $4.52 trillion in January of 2015 and is down over 12% from that peak. Yet, the stock market has added over 40% since the Fed’s balance sheet peaked. Remember how often we were told by the Fed watchers that a shrinking Fed balance sheet would lead to a stock market crash? Well, it certainly did, but not in the direction most expected.

But, the stock market is clearly not going to top based upon the Fed’s balance sheet. Nor will it top based upon stock earnings. Nor will it top based upon the economic fundamentals. Rather, the stock market will top when the bulls run out of money.

You see, stock markets top due to a lack of buying. When market sentiment is at extreme bullishness, then it means the bulls are “all-in” and there is no more money that is going to push the market marginally higher. And, when the there is nothing left in the bull’s tank, there is only one direction for the market to go – and that is down. At this point, the market seems to be approaching such a point.

First, as I have mentioned so many times before, since the market is made up of stocks, our StockWaves analysts at Elliottwavetrader.net have told me that the great majority of the stocks they follow are still very much within an overlapping b-wave structure.

Next, Luke Miller, who runs our Bayesian service at Elliottwavetrader.net (which analyzes options pricing to determine probabilistic market direction) had his computers calculate the probabilities of us topping in a b-wave at 70%. His specific words to me were that it “looks bad under the hood.”

Furthermore, Garrett Patten, who runs our World Markets service at Elliottwavetrader.net noted that “the B-wave [structures] off the December low on many of the European indices are still looking really solid.”

Additionally, Dr. Cari Bourette’s MarketMood Indicator at Elliottwavetrader.com has just issued a "topping in progress" signal. This implies an “unsustainable bullish trend.”

Lastly, it seems that investors have jumped into the market in a big way over the last week as we saw one of the largest weekly inflows into US Equities in 52 weeks [+$25B] and 4th largest weekly inflow on record. So, based upon the other evidence, this could suggest that investors are piling back into the market as we are nearing a top.

Now, of course, this is all in addition to the structure we have been tracking in the SPX. Even before we bottomed in December, I prepared our members of The Market Pinball Wizard for my expectation that the b-wave rally will likely take us to “at least the 2800SPX region, and may even potentially make a higher all-time high before it completes.” At this time, I do not think we get a higher high, but I do think that this b-wave has done its job in making many think that a trip down to the 2200SPX region is “simply not gonna happen.”

So, my expectation is that the market will likely top out over the next week or two in this b-wave corrective rally, and drop back down to at least the 2520-2640SPX region. However, my primary expectation remains that we will drop down to the 2200SPX region in a c-wave to complete the a-b-c pattern for this correction off the 2018 high. The manner in which we drop off the impending high we strike will be instructive as to whether we can drop down to our ideal target or not. And, I will continue to provide that detailed analysis for my members in The Market Pinball Wizard service.

Lastly, I want to remind investors that this next drop should be viewed as a major buying opportunity. For years, our long-term expectation has been that the market will exceed the 3200SPX region before it tops out in the bull market off the 2009 lows. Moreover, based upon much of what I am seeing, I think there is a greater likelihood we can reach the 3500-4000 region by 2022/23. Once we move into 2020, I will likely have a much more narrowed target for a top in 2022/23.

Housekeeping Matter

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.