Monitor These Signs That Will Flash A Red Alert Of A Pending Top
What Friday’s Action Tells
You
The Generals had a hat trick going into
month-end
on Monday. The SPX
(
$SPX.X |
Quote |
Chart |
News |
PowerRating) has advanced for three days and +2.3%,
closing Friday at 1211.37, +0.9% on the day. The volume ratio for those
three
days is 74 and breadth +1316, so there is no question about month-end
activity,
plus whatever else the news followers and short-covering added to the
equation.
The
(
SPY |
Quote |
Chart |
News |
PowerRating) made a new closing high at 121.43 vs. 121.36 on 12/29/04. The
SPX’s previous closing high was 1213.55 on 12/30/04. The semis led the
primary
sectors, with the
(
SMH |
Quote |
Chart |
News |
PowerRating) +2.0% on Friday, and that is certainly a
positive.
Both indices continue to be “Above the
Line”
conditions, and that even includes the 10 DEMA. This has been the case since
02/04. However, the SPX is advancing with fewer stocks leading as the
Generals’
focus narrows. There is a negative divergence in the percentage of S&P
500
stocks above their 150-day MA. This is not unusual in the last leg of a
cycle
preceding a top of some significant degree. This divergence is more
pronounced,
as you would expect, with the percentage of stocks above their 50-day MAs.
The
commodity-led sectors are in charge, and they are late-in-cycle-strength
stocks
under normal business cycle conditions. The S&P 500 material sector
index ($SPM)
is making new highs in a very strong trend. There has been lots of news over
the
past month, and it gets pretty confusing as the market overreacts in each
direction. In fact, over the past month, there is very little separating the
SPX
closing price each week. Starting with the week ending 02/04, the SPX weekly
closing prices are 1203.03, 1205.30, 1201.59 and Friday’s 1211.37. The
high/low
range for the past four weeks is 1212.44 – 1171.36.
Remember, the media/Wall Street hype was all
rosy
going into the 2000 top, and it will be the same for this next top.
Identifying
stock market bottoms is a lot easier than identifying stock market tops.
Bottoms
occur while the economy is in the midst of an officially declared recession,
while stocks on the other hand, will top out before recessions begin, which
means the news is still very positive, especially from the brokerage firms
and
mutual funds. Also, bull cycles can last from one to maybe eight years,
unlike
bear markets which are usually much shorter. There are, however, signs that
individuals can monitor on their own, assuming a normal business cycle that
will
flash the red alert of a pending top.
The first thing is that this current bull
cycle
will be 29 months old on 03/10, so it qualifies as the average length of a
bull
cycle. After the last recession was over, the economy started to grow in
2001
while interest rates were still declining and bottoming out in the second
quarter of 2003. With the current growing economy, inflation and interest
rates
are now rising, and it is the phase of the business cycle in which
everything is
going up:Â stocks, interest rates, inflation, economy, and commodity
prices. This phase is the last lap of the business cycle and sets the table
for
the next stock market top that coincides with the current fifth leg of the
bull
cycle which started from the 1061 low, confirmed by taking out the Wave 3
high
of 1163. There are various ways that a fifth wave is measured, but suffice
to
say, by most measures, the SPX 1254 – 1350 zone is the highest probability
with
the .786 retracement to 1553 at 1385.
You can’t define the top number, but you can
see
the red alert of a pending top by focusing on some business cycle indicator
charts, like the M2 money supply peaking out as the percentage change in M2
declines, while the stock market continues to rise. Simple technical
indicators
help paint a picture, like long-term oscillator divergences, breadth
(advances
minus declines) turning down as the percentage of SPX stocks leading the
advance
is declining. Money-flow indicators will also turn down, and any cumulative
high/low line will also noticeably decline.
^next^
In a primary business cycle, the leading
indicators will turn down first, as they have since some time at the end of
the
first quarter, or early second, of 2004. This is usually followed by the
ratio
of coincident to lagging indicators turning down, followed by coincident
indicators and capacity utilization, both of which are still rising. If
there is
a soft landing, the coincident indicators and capacity utilization will
usually
continue to rise and a stock market decline could be shorter and less
severe.
Looking at the March 2000 top for the SPX,
you
will see that the leading indicators peaked in mid-June 1999 with the
coincident/lagging ratio topping in the first quarter 2000, followed by the
coincident indicators. The lagging indicators peaked in the last quarter of
2000
and did not bottom out until the last quarter of 2001. However, the leading
indicators for this current bull cycle turned up in January 2001, along with
the
coincident lagging ratio followed by coincident indicators in late 2001.
In spite of all the parabolic hoopla in 2000,
the
simple business indicators told you a story, and the technical market
indicators
provided many divergences which flashed red lights. You got the same
positive
alert at the beginning of this bull cycle.
I obviously had time on my hands this
weekend,
but this “War and Peace” was written to make the point that it is
your
responsibility to look for these signs because you will not get any help
from
the media or most of Wall Street, which makes a whole lot more money when
you
are buying as opposed to selling.
If the Generals take stocks up some this
first
week of March, then the 03/07 and 03/08 time dates (measured by trading
days)
are in play, followed by 03/17 and 03/18, which are also time dates, in
addition
to Triple Witch.
This is being done Sunday for
Monday.
Have a good trading day,
Kevin Haggerty