I read an interesting technical report by the good folks over at BMO Nesbitt Burns. Interestingly, it tied into many of the observations that I’ve noted on this blog recently, and presented a case for a market top appearing this winter. They too believe that the bull market, which began in 2009, may be nearing an end. They did not touch on the 5-year cycle that I observed in a recent blog ( https://www.valuetrend.ca/?p=1325 ), but did present interesting evidence indicating this market is long in the tooth. If you’ve not read my 5-year cycle report, be sure to do so by clicking on the link above – I feel its something that all traders should be aware of as we approach 2013.
Tops are complex
I’d like to summarize a couple of BMO’s observations surrounding a market-topping premises. Before doing so, I’d like to once again point out that market tops (which I like to refer to as “Phase 3” of the market cycle—please refer to my book Sideways) are almost always complex. In plain language, this means that tops take place via a series of rallies and selloffs over many months. We technical types like to assign cute names to these patterns, such as “Head & Shoulders, Double, Triple, Rounded, Expanding…etc Tops”. The point is, you don’t get a top followed by an immediate bear market very often.
It’s not until a neckline break of a topping formation occurs before one should become fully bearish and hedge a portfolio. I don’t think that we’re due for the start of a “Phase 4” bear trend until a complex top has played itself out. And, by the way, should the S&P500 definitively break up and through the 1560-ish area and remain there for at least a few weeks, I will be the first one to adapt to a bull market. Thematic investors, those who stick to one investment theme (bullish, bearish, the coming gold rush, whatever…) have not and will not make money in this market. One must look at the charts, strategize, and be willing to revamp that strategy quickly if proven wrong.
Breadth is deteriorating
Nesbitt notes that the focused stock-only breadth lines (those that eliminate preferred shares and ETF’s) are flat to declining over the past 2 years, vs. a strong uptrend in the S&P500 over the same period. Nesbitt also notes that NYSE Up-Down Volume Fund flow is flat. This indicator gauges whether money is coming into the market or leaving it on a net basis—indications are that the sellers are gaining momentum over the past 2 years. Note the rising S&P500 trendline with higher highs and lows on the above chart.
While the S&P has made new highs this year, the broader NYSE below shows a decline since 2011 – note the lower highs over the same period that the S&P made new highs. In other words, the broader picture is somewhat more bearish than some might imagine.
Oil & Copper are in bear trends
Key economic commodities such as oil and copper have also diverged in price while the S&P500 continued up over the past 2 years.
Nesbitt concludes their report as follows: “while it’s not a foregone conclusion that the cyclical bull market underway since 2009 is over just yet, there are serious cracks in the foundation. Until we see evidence that the rally is broadening out both here in North America and globally we will remain cautious on our outlook for 2013.”
I couldn’t have said it better myself.