Here’s Why I Doubt We’re Near A Major Market Top

Now, Dear Reader, do not get me wrong: yes, I know that the indexes are expensive; yes, I know we are miles above many long-term moving averages; and yes, I still enjoy trying to solve my own psychological problems germinating from my profound unhappiness by watching things burn to the ground.

None of these variables has changed. However, it’s just that those things aren’t always very good predictors of major market tops. Do I think we may be getting close to some delicious corrective action? It’s absolutely possible: and in fact, it’s my preferred analysis. But as far as, let’s say, seeing anything more than a ten or twelve percent decline, I am skeptical of that here and I wanted to share my evidence for that all in one article. And even if we do get some corrective action, that may also still be a ways ahead of us though I am open to the possibility that it could come at any time. Hell, I’d love it if we just fell apart right now.

There are several things I like to watch that very often help us to measure the risk off sentiment of the big players in the market:

  1. Oil – Obviously as growth slows, energy demand does too, and oil often leads equity markets lower.
  2. Copper – Same as oil, the decelerating use of copper as an industrial metal will very often lead the markets lower, so effectively so at times, that we’ve come to refer to it as “Dr. Copper” in recognition of this metal’s ability to ascertain market health.
  3. Yields – Yields falling of course implies that the safety of shitty returns is being highly sought. Since the big boys don’t have mattresses large enough to stick their cash into, they like to park it here.
  4. The dollar – Though not always perfectly correlated, dollar weakness can often be tied to equity strength.
  5. Credit – In the great debt black hole that has become the world financial clown show, an expanding economy necessarily requires an expansion of credit. A slowdown in credit expansion (or heaven forbid, an outright contraction of credit) is the canary in the coal mine that can alert us to the onset of Bear Paradise.
  6. LEI – The Conference Board’s “Leading Economic Index” has an uncanny ability to often, ahem, lead the markets lower and alert us to recessionary forces.

Let’s look at each one in turn.

I have two preferred ways to count $OIL. The first one is as a nested 1-2-1-2 (pink, then orange).

OIL

If this count is correct, oil stands to make significant gains over the coming many months. This would imply some admixture of growth and inflation ahead. The count seems to me to have “a good look” in terms of both price and time. But let us not be obnoxiously bullish because that feels silly. And so, we can move a couple of things around and assign a different bullish-but-less-bullish count to oil thusly:

OIL

In this count, it’s still bullish, but instead of many months of upside, it implies weeks or maybe a couple of months of upside ahead before either a very large correction (if that big number at the top is in fact a 1) or a complete washout (if that number up there is something completely different). Be that as it may, until proven otherwise, so long as we have what looks like merely corrective recent price action (overlapping wave structure in parallel rails with RSI diverging) my bias here remains to the long side. And what’s even worse is this: when I say “oil often leads equity markets lower,” I don’t mean like “by a matter of days.” Oil often leads by months. And so, if equity markets won’t top until oil has led us lower by months and if oil has not yet actually even topped, then it stands to reason that we’re not close to a huge swoon in the equity markets.

As with oil, copper, too counts well bullishly and though it has broken its uptrend that began last year, it also has not yet begun a significant downtrend, either, and the recent price action—much like oil—looks merely corrective (implying to me that it is counter-trend and that we may expect new highs at some point).

COPPER

And 10-year yields, while not yet marching steadily yet to new highs, has broken its very local downtrend and resides in a large inverse head & shoulders pattern that, until it invalidates by going significantly lower, at the very least, holds the potential for a very significant rally. That of course would be quite the boon for oil and copper.

10YRYLD

And, as I’ve recently pointed out on Twitter, $DXY does not look particularly bullish to me yet (and you know how much that hurts for me to admit, as I am a long-term dollar bull). Nevertheless, what this count suggests to me is that the dollar index’s destiny may eventually lie well within the eighties.

DXY

Two final things I would like to point out. With credit, we can look at some FRED data, “Loans and Leases, All Commercial Banks.” And what we see right now is not any credit contraction, nor do we see any slowing of credit expansion, but rather, it looks to me that what we’re seeing right now is an outright acceleration of credit expansion.

FRED-CREDIT-2021-09-12-01

And unless a terrible catalyst comes along [coughEvergrandecough] to stop that trajectory, it is hard for me to expect contractionary forces in credit to help push the indexes to their doom.

The last point I want to raise is the LEI. It often has the remarkable ability to anticipate recessions, and recessions have the remarkable ability to coincide with beautiful equity waterfalls, and it’s not showing any signs of turning down. And what’s worse is that even if it were turning down, as a leading indicator, it would not even necessarily mean that a market top was upon us. You will want to examine the charts on the second page of the pdf below:

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Now, does any of this mean that there are not risks in the markets right now? Of course not. The S&P 500 hasn’t had a meaningful correction in a year. It’s stupidly above its long-term moving averages. The $VIX is scaring the shit out of me. Breadth is otherworldly poor right now. But on balance, unless we do get a Black Swan, it’s hard to not appreciate some of the evidence here that doesn’t yet scream “TOP.”

 

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