Is the breakout for real?
Posted by Danny on June 9, 2014
Stocks have pushed to new highs in rather convincing fashion. Is this a real breakout, or a just blow-off top?
Here is the current chart for the S&P 500 (click for larger image):
Our lunar red period has not stopped the recent rally and the S&P 500 chart is showing a clear breakout from the recent sideways pattern. This kind of breakouts is usually tested, so I think the market will drop back to 1920, where resistance should have turned into support, before possibly heading higher in the next lunar green period. Meanwhile my technical indicators have dissolved the bearish divergences that plagued the market since the start of the year, and there is now further room to rise based on the long term up trend channel. A drop below 1850 would tell us that this is a false breakout.
We cannot rule out a peak at this point, but on blogs and social networks I don’t see the kind euphoria that normally comes with major tops. Rather on the contrary, I see massive disbelief, cynicism and even anger about this stock market’s continued climb. Everybody seems to be trying to go short at the top. Comparisons with 1929 or 1987 have been getting extensive coverage in financial news media, implying that we are about to crash. Few and far between are the calls for a continued bull market.
It is one of the great benefits of writing a financial blog or newsletter that the responses (or absence of them) often provides good clues where the market is actually going. For the last couple of years, whenever my analysis or chart points to an impending decline in stocks, it gets comments and likes on twitter. But whenever I post a bullish scenario it just harvests silence. And for gold it has been just the reverse. So, I have gradually learned to doubt my forecast if too many readers agree with it. The scenario that nobody believes is not rarely the one that pans out.
For example, almost nobody is considering the possibility that we are in a repeat of the 1920s, a scenario I have been watching since last year. Since our latest update the odds for this scenario have continued to go up. Here is the updated chart (click for larger image):
The correlation between “Dow Aug 1921 – Nov 1926” and “Dow Feb 2009 – May 2014” has now climbed to a whopping 90.4%, up from 81% when I first posted this chart. The case has become even more compelling with the news that Q1 US GDP was negative. A mild recession in 1927 also forced the Fed to delay their unwinding of ultra-low rates. When they finally started raising rates in 1928 it caused the stock market to double within 18 months, and then a collapse into the great depression. The Fed is quietly setting us up for a similar disaster, simply repeating their mistakes from the 1920s.
One of the conditions to keep this scenario on the table was that the Dow needs to break out above 17000 this year. We are now very close to that point. I still think the market will deviate from the 1920s at some point. But the question is: when? Keeping up with the roaring twenties would give us Dow 20000 by early 2015, with the market spinning out of control after that. If so, I would expect to start getting comments and likes for bullish posts, while harvesting silence for bearish scenarios. That’s how we will eventually know when we are close to the top.