It's time to wheel out one of my favourite charts. This shows the number of net new yearly highs set on the New York Stock Exchange each week. As the chart explains, once that number exceeds a certain level stocks are due for a breather at the very least, a decent correction more likely or even, possibly, a major top.
What is so remarkable is that even from 1995-2000 in the face of the greatest bull market the world has ever seen, even amidst the freakish momentum unleashed by the Fed's QE programs since 2009, this indicator has successfully pinpointed every significant medium-term peak, and every major top, with no false positives.
I last wheeled this out in late 2010, when markets had been grinding higher on the back of Bernanke's industrial-strength prescription of stock market viagra known as QE2.
The momentum then, as now, had been unrelenting. As now, despite multiple signs of overly-giddy sentiment and questionable economic fundamentals, despite battle-weary mom and pop investors withdrawing billions from mutual funds even as the market rose, hedge funds and banks ploughed their QE-derived cash into stocks until... well, I guess until they decided they were bored with making money and went to lunch.
For an uncomfortable while my faith in this analysis was made to look foolish, as the last dumb-money investors piled in between January and May 2011. In that period the market made little progress as strong hands sold to weak, the market moved sideways and dips continued to be bought.
Eventually gravity reasserted in August and virtually all the gains laboriously ground out in the previous nine months were obliterated within nine days.
BOTTOM LINE -
This is absolutely not a time to be committing new long-term funds to the market, as current risks outweigh rewards.
The S&P500 and correlated stock markets will shortly:
- a) suffer a correction / form a major top
or
- b) move sideways for several weeks or months before beginning another leg higher
Now - it may be that we are in a similar position to late 2010, and we'll pause only briefly here before making another charge. But chasing such a move will be strictly for shorter-term players (and lemmings) as chances are extremely high that any and all gains made will be given back in a sharp downdraft, with little warning.
Perhaps the euro crisis is about to rear another of its ugly heads (or China is about to suffer a hard landing, or Israel is about to bomb Iran, or...) and a substantial correction is in the cards. But historically, without a major catalyst the degree of keen buying interest we've seen will not dissipate easily.
So its more likely that we'll get shallow dips which are quickly bought, but that any gains are not sustained. After the market has been backing and filling for a while, we'll either find that any concerns have been discounted, a surge higher begins and a major new bull market is confirmed - or that, not unlike 2011, a top will form around or just above these levels and markets succumb to another huge crisis.
