Quick update: topping pattern still in place

Stagnant prices? Check.
High sentiment? Check.
Declining RSI? Check.

Sell that market!

SPX 1 year

vix 1 year


New highs can’t be ruled out, but starting from conditions like this, they will be small in relation to the likely decline.

Throw in a developing recession and high Shiller PE ratio, and you’ve got the strong possibility of a major top.

PS – If you’re in the US, and you are the voting type (I am not), please consider the Libertarian Party and Gary Johnson.

Technical update: overbought, overbullish, declining RSI

We finally have the classic syndrome that indicates an intermediate-term top. Upward momentum has stalled, as sentiment has remained elevated for several weeks. The combination of sideways prices on high bullish readings becomes very bearish when it has been sustained for a month or longer.

Here is the RSI and price picture (note declining trend in the momemtum indicator RSI since late August, and its resemblance to the topping pattern last spring):


Charts from Yahoo

A quick glance at sentiment shows sustained optimism:
Source: http://www.naaim.org/naaimadsenttrend.aspx

Looking at the headlines, it is nice to see good news that results in a bump with no follow-through. We saw that in mid-September with QE Infinity, and last Friday with the jobs report. Rallies end on good news and declines end on bad news.

It would not be unusual to see another test of the highs, and for prices to linger at these elevated levels for another month or so, but the odds of a sharp decline are now elevated, and any further gains should be quickly erased.

Market again overbought on overbullish sentiment

The global economy is clearly on the downswing, with the US likely having entered a recession this summer (watch for revisions in GDP and employment data in the coming months). However, as in Sept-Oct 2007, the equity market has bounced from a brief oversold interlude to a new high.

Here is the NAAIM survey. This is a relatively new dataset, but it has proved high-correlated with proven sentiment indicators like DSI and Rydex fund activity). The survey is updated each Thursday with data from Wednesday.

NAAIM Sentiment Survey, 19 Sept 2012

Sentiment has been elevated for a month, which is sufficient for a significant decline, though the likelihood of a setback and the expected magnitude thereof grows with each week that it remains elevated. This, coupled with sideways price action for few weeks (we don’t have this yet) and a declining trend in daily RSI (possibly developing) would virtually lock in the case for an intermediate-term top.

S&P500 daily chart, Yahoo Finance

EDIT: To clarify, this is not a screaming short-term sell yet, since the market has had a habit of creaping slightly higher over a few weeks from conditions like this. However, things can reverse at any time, and it is highly likely that any further gains will be quickly erased once the turn comes.

The macro picture of deteriorating economic data bolsters the case that a bull market top is near, so if this is an intermediate-term top it could prove to be the final top prior to a bear market. This cyclical bull is now 3.5 years old. This is long in comparison to the cyclical bulls of the 1910s and 1970s secular bear markets (18-36 months was typical), but short in comparison to the last cyclical bull (spring 2003 – fall 2007, 4.5 years).

Retail: some perspective on the positive July figures

Advisorperspectives.com has assembled charts showing that, adjusted for inflation and population growth, sales have only half recovered from the last recession. Sales are comparable to those of a decade ago, which is probably a healthier level than what we experienced at the height of the credit boom: 

Click to View

Natural gas a value and sentiment play

Here is a chart of US natural gas (source) going back 25 years. Adjusted for inflation, gas has never been cheaper. Compared to oil and coal on an energy equivalent basis, gas is far cheaper than it has ever been.

Here are three big US gas producers, Chesapeake, Encana and Southwestern, all of whom have been beaten down to 2008 levels (chart from yahoo):

Finally, here is a composite sentiment measure (sentimenttrader.com), which suggests that investor sentiment, which is a contrary indicator at extremes, has never been more negative on the sector:

An NG long could even be paired directly against a crude short, since such a large difference between NG and crude or coal simply cannot last in a market economy. Even if gas stays low as economic activity slows, crude will likely come down.