Japan’s Nikkei dropped 7% on Wednesday night that was then followed by another significant fall. In the end it was a 2,000 point rout that was a “shot across the bow” for world markets. However on a weekly chart it was barely a blimp, the Nikkei has rallied 7,000 points in just 5 months and it highlights how far world markets have moved in such a short period. For the S&P though, the move lower already began on Wednesday with Bernanke’s testimony to congress. That day was marked by push into all-time highs that was followed by a reversal of over 1%.
Wednesday’s reversal came on Day 25 of a Cycle that was already up a massive 150 points. The entire Investor Cycle has added a stunning 330 points and this 4th Daily Cycle has been the biggest gainer of the 4 Daily Cycles. To have the 4th Daily Cycle as the best performing just illustrates the parabolic like behavior of this Investor Cycle.
So after 3 declining sessions we now have our first closing Daily Swing High, along with a close below the 10dma. The drop hasn’t been severe, but because the rise was so steep this drop has broken below the Daily Cycle trend-line. Normally when these conditions are present at this stage of a Daily Cycle it’s pretty good odds that the Cycle as topped. In addition we see the oscillators have turned lower, so therefore it’s my expectation that the Cycle has topped and we should spend the next 12 days moving to a DCL.
We know that markets can remain elevated for extended periods of time and this has clearly been one of those times. Newsletter positioning is again at the highest levels of this bull market. We know it’s not a timing tool, but it does line up well with the Daily and Investor Cycles being very deep in their respective Cycles.
Yes another record was set this month with margin debt up into all-time highs. Investors now have $384 billion in margin debt and have exceeded the record set in 2007. The growth in margin debt has been very steep of late and this additional liquidity is just one reason that explains why the Dow index has gone 101 trading days without a three-day decline. That streak is a record; it’s the longest streak in history!
Forget the talking heads telling you this is all a normal bull market rally because it’s not. With a near parabolic rise over 6 months, I can assure you that we are very close to a significant multi-month decline. The Investor Cycle is now extremely stretched and overbought, so it’s well overdue to begin its long decline back to an ICL. The Cycle was extended by a full Daily Cycle which is why we’re seeing a top in week 27, a point where most Cycles have already completed.
If the Daily Cycle has topped, then this is also evident on the weekly chart as the slower oscillators have begun to turn lower. They’re not flashing a sell signal just yet, but a week of weakness will be enough to confirm that the Investor Cycle has likely topped. I know it feels almost impossible to call a top in the equity markets, but after a 27 week surge of 330 points there just comes a point where every run must come to an end.