The divergences across the equity markets are everywhere now, and this was exactly the type of environment I expected to see this late in the Cycle. The small-cap Russell index has broken down completely and some of the leading sectors like the financial, home builders, and consumer discretionary have led the markets lower. We’re seeing just 120 net new highs and the amount of stocks above their 50dma has dropped to 63%. With the S&P just 17 points from record all-time highs, this is hardly the type of market breadth that indicates it has the legs to power higher.
In addition to these topping like divergences, the S&P printed its first closing Daily Swing High of this Cycle. In doing so, the S&P also gave up its 10 and 20 day moving averages, both are normally a sign that a Cycle is in decline. Because the Daily Cycle is already (late) on day 26, I’m strongly led to believe that this Daily Cycle has peaked.
If the Daily Cycle has peaked, then it also implies that the very overbought and extended Investor Cycle is also ready to top. At 20 weeks of relentless rallying, this Cycle is well overdue for a top and then decline into an ICL.
Indeed just a 17 point drop off the highs has been enough to turn many of the key Investor Cycle indicators and oscillators into the bearish column. All of the indicators I use to predict an IC Top are either flashing or are about to indicate that a top is at hand. The indicators are secondary confirmers, so this means that they only work well when the primary Cycle is well in the timing for a Cycle top.
There is little doubt with regards to the timing of the Cycle. This has certainly been both a very powerful and lengthy Cycle and the odds are more than stacked on the side of it being close to a top. Unfortunately we just won’t know for sure if this is the top until some of the decline is behind us. With a FED determined to keep the markets moving higher, we need to be aware that markets can and do remain irrational for extended periods of time.
So it’s early in the process, but this setup and these conditions are exactly what I have been expecting for over 10 weeks. In my opinion, the markets have topped, I’m calling this the top of the IC. Of course this isn’t a “biased prediction”, it’s based on facts and a set of conditions that when met have led to a topping of the Cycle. With a motivated FED, I won’t be surprised either way; I will not be fighting the Cycle if this does not turn out to be the top, I will just re-work the framework and try again.
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