Topping Process Leads to Big Market Top

“TOPPING PROCESS LEADS TO BIG MARKET TOP”

By Gary Kaltbaum-August 23,2015
@GaryKaltbaum
garyk.com
“The sea was angry that day, my friends, like an old man trying to send back soup in a deli!”

George Costanza
Well, it should be more than obvious why we have been urging you to pay attention to the ever narrowing market. It should be more than obvious why narrowing markets are a worry sign. It should be more than obvious as to what we meant by the potential for a severe dislocation. It should be more than obvious why we exclaimed why it was vital for the 2040 S&P number to hold. Very simply, with over 60% of the market already in bearish shape and in their own private bear market, all it would take is the rest to top…and top they did. More on that in a moment.

We have been inundated with calls all asking the same thing: “now what?” For starters, we are already hearing a large percentage of pundits saying a few things we completely disagree with. For starters, they are saying this drop “came out of nowhere!” Readers of this report know that markets have been deteriorating for many months and that the big money found its way into the biggest and most liquid names in the market(another classic sign we were nearing the top). Week after week, we were telling you how new highs vs new lows were a horror show. Week after week, we were telling you that the average stock was going by the wayside. Week after week, we were telling you about all the foreign markets that were being killed. Week after week, we were telling you there were only a handful of groups that were still bullish.  Week after week, we were telling you all this was going on with some major indices still near highs, a glaring negative divergence. Another thing we completely disagree with  and are hearing and frankly, expected to hear…was that every drop was a buying opportunity…the market was now cheap…it was now a value…the economy is sound…and that the market was still a bull market. The final thing we are hearing is that this looks just like last October when more money printing by Europe and Japan as well as easy money policy from China saved the day. Let us be clear on this…WHILE WE ARE 100% SURE THERE WILL BE NO RATE HIKE AND WE ALSO THINK ODDS FAVOR QE4, AS OF THIS SECOND, THIS DROP DOES NOT RESEMBLE LAST OCTOBER’S DROP. For starters, typically, markets do not usually top out for many months and then turn right back up. No one can ever be 100% sure and with this Fed, anything is possible, especially the amounts they may print, but we will just let the market prove itself.

Getting back to the hard numbers, our scan of more than 2500 stocks this weekend now tell us we are down to less than a 25-75 market where now 75% of the market is now in poor shape and that’s being generous, a sharp drop this past week. If there is any one indicator we follow most it is this one as it does not hide good or bad. On top of that, there is now less than a handful of  groups that are in shape as the very important financials and biotechs topped badly. We warned you if these groups broke down, there was not much left to hold things up.

Another question we get is “are we indeed starting a bear market! and if yes, with how much certainty?” Let us repeat, when you are dealing with central banks that have printed $15-20 trillion depending on what abacus you are using, anything is possible. Leave no doubt that the money printing and the 0% interest rates forever have been the driving force behind a market that has not even had a correction of 10% in 3 years. Leave no doubt that Auntie Janet is cut from the same cloth as Uncle Ben the bubble maker. What if they announce another $5 trillion? Let us just say, absent that and maybe not absent that, we believe the 6 year bull market is over and while we expect some violent back and forth, we believe there is much more time and price to go. A major topping process that lasts many months does not usually just turn back up.

And the last question…when you have used the term “dislocation,” do you mean crash? First off, last week’s action was the definition of a dislocation. If one is asking about a 1987-like event? Probably not! But possibilities? Sure! Why? As we have told you, we now have record margin and leverage in the system. Fear is a very strong emotion and leverage and margin just enhances that fear. We think you saw some of that last week. We are sure that has not been wrung out yet.

Shorter-term, anything is possible. When markets get stretched and extended away to the downside, bounces will get vicious. Puts are spiking and no doubt, bearishness has picked up. We don’t even have a best guess as the action is going to be very random, especially when Janet sends out a Fedhead to float QE4. We don’t even have support levels right now, just resistance levels on any oversold bounces.
Simply put, we expect wild swings. Just a  few words to the wise. If we have indeed ended the 6 year bull run, everything has changed. Instead of buying the pullbacks, you sell the rallies. Instead of margin, you have some cash. Those “no sales” biotechs that we have warned you about will be crushed. Companies that lose money will be crushed. Past leaders will be creamed. IPOs will stop. Secondaries will stop. Private equity valuations will crack. That’s just the way it works. Everything changes.

That all said, we repeat for you our report we sent out on Thursday It simply explains the process that has been going on for months:

 

Absent a complete 180 by the Fed in where Janet Yellen announces another round of QE (not out of the question), the classic topping process we have been writing to you about all year long looks to be now completing itself as whatever has been holding up the major indices finally have topped.

Very simply, commodities topped out last summer. Other less important areas like disk drives, gaming and a few others joined in. It then turned into all the commodity countries like Russia and Brazil. Then the new highs topped out, the a/d lines topped out which led us into March. That’s when the all-important transports topped out badly which led to the semis topping out in May.

During all this time, we have been using the same language…narrower and narrower and narrower as new lows were outdoing new highs even though major indices were a stone’s throw from the highs. Then the China bubble burst which topped out Asia and Europe.

We then watched as all these money flows came out of all those areas and found a place in the largest of large mega-caps which held the major indices up. You remember the reaction to Amazon and Google? We then saw money flow into the most defensive of areas like food,drugs,beverages, tobacco and household products. On top of that, we have been highlighting for you the biotechs and the financials and that if they broke down, it would be party.

This all led into last month where we thought things were worsening as we started to give you out important longer-term support levels. This led us into last Wednesday where those vital levels were undercut before a major reversal occurred. At that time, we told you not to expect much on the upside. And now those major indices are back into play as today, they were sliced though like a hot knife in butter.

In fact, today:

Financials have broken through important support.

Biotechs have broken through important support.

Glamour growth names have been taken out to the woodshed.

And lastly, all major indices took out support.

The only thing that bid up today was the gold/silver as we wrote in our weekend report to start paying attention to gold as the great Stanley Druckenmiller recently spent a measly $300 million on gold.

Because of central bank intervention, we have not had a bear in over 6 years (too long) and have not even had a 10 percenter in almost 3 years (too long). So comeuppance time is at hand. Our biggest worry remains the one-sided trade. Central banks are good at one thing…creating bubbles and when the bubble pops and crashes, come up with the same elixir that caused the last bubble but this time add a crapload of steroids in the name of 0% rates and a maniacal trillions of printed money…which led to the lemmings in other countries following suit. When the world is on one side and used to only little corrections, they are not ready for the day when a serious bout of ugly happens. This usually causes dislocations, not just little drops. We are very worried about these dislocations!

Keep in mind, further downside will definitely put off any rate hike (doesn’t matter). The only thing that would matter is another round of QE (again, not out of the question). Remember last October. Markets were being blasted until Japan and Europe announced their own rounds of massive printing followed by China’s easing. This stanched the bleeding. Unless Janet turns tail and starts printing, not sure there is anyone left to save the day. Be careful of those who say this is a buying opportunity. They don’t know. Let the market decide. We highly doubt markets go through a long-winded topping process and then just stop on a dime. Careful folks!