Today I like to share my thoughts about the S&P 500 index, the volatility
index, and what I believe will be the trigger/event which sends stock markets
around the world to new multi-year lows.
While the charts shown here are very simple there is a lot of information
behind the scenes that backup the analysis/predictions on the charts below.
For example, the sentiment of the average market participant remains extremely
bullish on the market. The majority of investors think and feel stocks will
continue to rise in the coming year. Typically, when the majority of investors
think the same thing it tends to be a contrarian signal that the opposite
will soon take place.
Cycle analysis is telling us that the seven-year cycle, which is one of the
most powerful cycles that reoccurs in the stock market is now topping. What
does this mean? It means we should expect a 1 to 3-year stock market correction.
The market breadth has been slowly deteriorating over the past year. Fewer
stocks are making new highs, and many leading sectors are already in bear
markets.
So it is just a matter of time before the US large-cap stocks roll over, breakdown,
and start a new bear market.
As of Friday, July 9 we've seen the stock market momentum show signs of a
short squeeze, and also that the majority of market participants are in a
panic running to buy stocks. In fact, the NYSE volume ratio shows that there
are 18 shares being purchased to every 1 being sold on Friday. I consider
a ratio over three to be an extreme level, meaning 18 is signaling a potential
significant turning point in stocks in the coming week.
SP500 & VIX Weekly Comparison Chart
If you take a look at the chart below you can see where I feel the stock market
is currently trading in terms of its 2007 to 2008 market top. The volatility
index is also showing similar patterns to what we saw before the 2008 bear
market.
Based on the current price action of the S&P 500 index and the volatility
index it appears that a sharp decline in shares is likely to unfold in the
coming weeks.
SP500 & Bond Price Comparison – Bonds rally before/lead Bear Markets
Take a look at the chart below. The red line is the price of US bonds. The
black candlestick chart is the S&P 500 index which is the US large-cap
stocks. As you can see the price of bonds start to rally way before the US
stock market rolls over and sells off.
Why does this happen? I believe that the smart money is rotating their money
slowly out of equities and into bonds in anticipation of the bear market
collapse. Bonds act as a safe haven during times of weakness in both the
economy and stock market.
US equities still have a long way to fall before they are technically in a
confirmed bear market. The recent rally in bonds is just the beginning for
what is to happen.
The Trigger/Event/Tipping Point for A Global Equities Crash
In a recent article called "Deutsche
Bank to initiate the next financial crisis", I wrote about how Deutsche
Bank is going down the exact same road as Lehman Brothers. In short,
both stocks are declining in a similar fashion in terms of share price.
But here is the kicker... If you thought Lehman Brothers was bad you haven't
seen anything yet. The big differences this time around with the banking
crisis is that this is 40 times larger than Lehman Brothers and will directly
affect almost all key countries and banks around the world. And this time,
countries are in far worse shape financially than they were in 2008 during
the Lehman Brothers bankruptcy.
My Concluding Thoughts:
In short, the US stock market is trying to hold up and convince investors
everything is fine. While stocks are testing all-time highs I know as a technical
analyst that the market is much weaker than it appears.
A lot of things are coming together to form a major market top but like all
previous stock market tops, they require a lot of time to mature before they
breakdown and new nominal highs are normal to see.
