MARK HULBERT: Four leading indicators of a market top
These indicators are painting a worrisome picture
The bull market is on shaky ground, according to four leading indicators of major market tops.
Those four indicators are based on the performance of sectors that, prior to past market tops, either led or lagged the overall market. According to a study conducted by Ned Davis Research of returns over the last three months of each stock bull market in the U.S. since the early 1970s, two sectors stood out as usually leading the market: Consumer Discretionary and Consumer Staples.
Two other sectors, in contrast, typically lagged the market prior to those tops: Financials and Utilities.
The accompanying table, courtesy of FactSet, shows where we currently stand according to these four indicators.
|Performance over last three months|
|S&P 500 Index||2.24%|
|Sectors that typically lead the market prior to tops:|
|Sectors that typically lag the market prior to tops:|
A mixed picture, to be sure.
However, in my opinion, too much should not be made of the two sectors whose recent performance appear to be inconsistent with an imminent top.
In any case, the sector so far this year is nicely ahead of the S&P 500. If it keeps that up for several more weeks, then the leading indicator based on this sector will join the two others in suggesting a top is imminent.
With stocks sitting at their 5-year highs, many investors are wondering what’s next.
According to Lee’s reading of the charts, long-term “mean-reversion” could send stocks plummeting.
Currently, the mean based on Lee’s “1942 trendline” values the S&P 500 at 740.
The S&P closed yesterday at 1,472.
Lee doesn’t think that stocks will return to the trendline right away. But if it does by 2014, the S&P 500 would be at around 850.
Peter Lee: We are about to enter this convergence period, and we suspect in the second half of this year and into 2014 we will see a great deal of major movements in these financial markets. The charts below go back to the Great Depression when we had an 85% drop in the S&P.
The most recent test was the March 2009 low at 666 on the S&P. At that time the trendline was up into the low 600s, at 620, 630. So we were within striking distance during that panic. This 1942 trendline should be somewhere in the 850 area or above by 2014 (this would represent a horrendous drop of roughly 42% on the S&P).
Eric King: “Either way we are in for one hell of a rough ride for equities.”
Lee: “We’re not done yet. Everyone thinks that we’re nearing the end of the bear market, or structural sideways trading market. We suspect we probably have another 5 to 8 years of this. No one wants to hear this call because investors have already been frustrated by the last 13 years.
We have run a number of internal studies dating back to 1800, and the track record has been 100% accurate. Every single time we have overextended market to the upside, we see a ‘mean reversion’ back to normal levels. Again, this is 100% accurate going back to the 1800s.”
Here’s Lee’s chart via King World News:
Russia Says World Is Nearing Currency War as Europe Joins
The world is on the brink of a fresh “currency war,” Russia warned, as European policy makers joined Japan in bemoaning the economic cost of rising exchange rates.
“Japan is weakening the yen and other countries may follow,” Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said at a conference today in Moscow.
The alert from the country that chairs the Group of 20 came as Luxembourg Prime Minister Jean-Claude Juncker complained of a “dangerously high” euro and officials in Norway and Sweden expressed exchange-rate concern.
The push for weaker currencies is being driven by a need to find new sources of economic growth as monetary and fiscal policies run out of room. The risk is as each country tries to boost exports, it hurts the competitiveness of other economies and provokes retaliation.
Yesterday “will go down as the first day European policy makers fired a shot in the 2013 currency war,” said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London.
The skirmish may lead to a clash of G-20 finance ministers and central banks when they meet next month in Moscow, three months after reiterating their 2009 pledge to “refrain from competitive devaluation of currencies.”
While emerging markets have repeatedly complained about strong currencies as a result of easy monetary policies in the west, the engagement of richer nations is adding a new dimension to what Brazilian Finance Minister Guido Mantegafirst dubbed a currency war in 2010.
The U.S. is currently coming down from mid-cycle in the business cycle and will likely stay that way, provided that debt ceiling discussions go smoothly. This is according to Lisa Emsbo-Mattingly, an economist at Fidelity Investments.
This means that growth might not be as strong at it was when the U.S. economy went from -3.5% in 2009 to a 3% growth in 2010, she said. But it will grow.
“2% is the new normal,” she said.
Here’s where the U.S. is on the recession cycle, with respect to Germany, China and Japan, according to a report by Fidelity’s Emsbo-Mattingly and Dirk Hofschire:
A “Frightening Pattern” Indicate That We Are Heading To A Massive Economic Catastrophe Unlike Anything Ever Seen And Countdown Clock Is Quickly Approaching Zero
Famed economist Marc Faber appeared on Bloomberg TV with a harsh, direct warning to investors.
“U.S. monetary policies will destroy the world,” he said, referring to the new round of stimulus – QE3, or “QE Forever” – the Fed plans to launch this year.
Faber’s not alone.
A group of his economic peers agree that with more central bank action like QE3, global economic collapse is imminent.
In a newly released documentary that went viral last month, a team of influential economic experts say they have discovered a “frightening pattern” they believe points to a massive economic catastrophe unlike anything ever seen.
“What this pattern represents is a dangerous countdown clock that’s quickly approaching zero,” said Keith Fitz-Gerald, the Chief Investment Strategist for the Money Map Press, who predicted the 2008 oil shock, the credit default swap crisis that helped bring about the recession, and the Greek and European fiscal catastrophe that is still wreaking havoc until this day.
“The resulting chaos is going to crush Americans.”
Another member of this team, Chris Martenson, a global economic trend forecaster, former VP of a Fortune 300, and an internationally recognized expert on the dangers of exponential growth in the economy, explained their findings further:
“We found an identical pattern in our debt, total credit market, and money supply that guarantees they’re going to fail,” Martenson said. “This pattern is nearly the same as in any pyramid scheme, one that escalates exponentially fast before it collapses. Governments around the globe are chiefly responsible.”