Market Timing and Price Projections

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Table of Contents

• Introduction

• SPX Technical Analysis

• Sentiment Analysis

• Cycles Snapshot

• Cycle “X-Rays” of Major Indexes

• EW analysis of Major Indexes

• Annexes- Commodities Corner (NG and GC)

Introduction

• Technical indicators, on both daily and weekly charts, are suggesting that an incredible move up from late October, driven likely in bit part by short covering and FOMO is starting to show signs of slowing and potential reversal;

• The sentiment indicators are in or near the extreme over-confidence/greed region;

• VIX is hitting new lows, at a 5-year low, and is approaching pre-COVID levels. It showed some signs of bottoming late last week but we should be cognizant of traditionally low volatility during holiday periods, which would enable VIX to slide even lower. At some point, within a couple of weeks; it should turn up decisively;

• Cycles suggest topping in major indexes soon, within a week, or two. One possibility is some additional up this week and no Santa rally this year. The Santa rally occurred only 38% of the time from 2010-2020, although long-term records favor the Santa rally.

• Bigger picture, multiple cycles, including approximately 2.2Y cycle, should turn down in all indexes this month resulting in a significant cycle peak and initially about a 2-month correction. We will examine the details more thoroughly further below;

• Most indexes reached cycle price projection targets but could still push higher within the target range.

• EW counts ideally also look for a small to modest push higher, but things do not need to be ideal at the tops.

• I was extremely bullish at the end of October and said “next several weeks the game is buy the dip (BTD)”. 2-3 weeks ago I switched to BTD , sell the rip (STR), to use the Wall Street traders’ lingo, which served nicely intra-day traders. Now although I expect still somewhat higher, it is not guaranteed though, I switched the game to STR, raise CASH, as the risks for longs started to look high.

• The Bullish Percentage Index (BPI) chart by Boni Gortler suggests that a top should not be far away.

• Finally, look at the chart below, John Hussman’s 12-year estimated annual return model for a 60/30/10 mix of Stocks / Treasury Bonds /T-bills. It was accurate in the past and is not looking good 12 years out. Will it be accurate again? BTW, it rhymes with my long-term cycle model suggesting a super-cycle degree low in the early 2030s (posted in one of the weekend newsletters, see also the slide deck under the educational tab).

SPX Technical Analysis

Figure 1 shows SPX and several technical indicators that are flashing red bearish flags:

• The NYSE Adv/Dec line ($NYAD) shows an extreme double negative divergence relative to SPX prices;

• The SPX/VIX ratio is hitting historic highs, really extreme. This suggests a major bearish reversal within days/weeks;

• The Money Flow Index (MFI) is exhibiting a strong negative divergence. In the past this resulted in moderate to big drops in SPX;

• RSI is in extreme “overbought” condition. Very often SPX peaks with negative divergence in RSI but occasionally SPX and RSI peak coincidentally. So it is reasonable to expect a loss of momentum and then one more pop in SPX to get a diverging RSI, but should not be shocked if they both turn down simultaneously.

• McClellan Oscillator in Figure 2 shows significant divergence relative to SPX, usually a precursor to a notable correction.

Sentiment Analysis

Sentiment has reached over-confidence levels raising a red flag. Requires caution on the part of investors and traders!

• Figure 3 shows the AAII sentiment survey, which gives bearish vibes;

• Bulls > 50% (4th times in 5 years)  Bearish;

• Bears <20% (lowest since late 2017)  Bearish.

• Intermediate-term OPTIX, shown in Figure 4, is flashing a bearish reversal;

  • Components include indicators like put/call ratios, mutual fund flows, futures traders' positioning, sentiment surveys, price ratios, etc.;

  • When the Optix exceeds 65%, it suggests a broad number of indicators have reached excessive optimism levels. This is a contrary guide, so such extremes would suggest price weakness going forward;

• Optix is presently at 87 and was only higher in Jul’23 (at 88) in the past 5 years;

• Usually peaks in Optix coincide with or precede market peaks. The exceptions are in the middle of strong bull markets when it is normal to have a high optimism.

• Thus, we are in a new bull market Optix is OK, but if we are still in a bear market (despite some indexes achieving marginally higher highs) than this extreme value of Optix sends bearish vibes.

Cycles Snapshot

• Last weekend our dynamic cycles analysis from the daily charts, using the average of cycle composites of SPX, NDX, DJI, and RUT, estimated 5 days up in major market indexes as shown in Figure 5 (copied from last weekend's newsletter), not including cycles shorter than 10 TDs;

• We got 5 days up. Is that it?

• Did dynamic cycles change somewhat (cycles generally vary over time)? We will reevaluate the cycle picture in more detail below, including looking at weekly charts and short cycles from hourly charts.

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