The bull market run since March 2009, when unprecedented money printing became the economic driver du jour, recently become the longest in history without a 20%-plus correction.
Past stock bubbles have lasted five years; six years max.
This one is now 9.8 years old –off the charts.
We have the unprecedented major tax cut and repatriation program near the top of a boom to thank for that, never mind that corporate profits as a percent of GDP are at record levels…
Now, volatility is rife. Markets are having a terrible December.
Is this the beginning of the end?
I don’t think so because we’ve not yet seen these seven signs, especially at this stage, the first one…
If a leading U.S. index like the Nasdaq or Dow and/or S&P 500 corrects more than 30% from the top in three months or less, that is a SIGN it’s already over!
Then you wait for the first big bounce and get out (typically about a 50% retracement of the sharp fall).
Out of seven major stock bubbles in the last century, the average first crash has been severe, averaging a 42% loss in the first 2.6 months.
But, even though markets have seen a lot of red since early October, we’ve not yet reached even close to that 30% minimum mark over two months in. The late January 2018 peak looked more like a classic blow-off top, but this rule told me by April that it was not a top.
Of course, if that changes dramatically by year end with a break below 2,500 on the S&P 500 and a much sharper crash to follow, it’s possibly the strongest sign that this epic bubble is finally done for. A decisive break below 2,300 would be curtains. But, if things continue as they are currently with only minor new lows just ahead, we’ll look for…
U.S. stocks make substantial new highs in 2019, but with strong divergences between foreign and smaller cap U.S. sectors.
The U.S. was the only major market making new highs in late 2018, before the recent correction. Not Europe, not Japan (even in its bear market rally since 2009), not China, not emerging markets…
And the recent correction has been stronger in the small caps like the Russell 2000 and the NYSE, which allows for greater chances of these indices not making new highs. The bank stocks are down 27% from their January peak, another candidate for a divergence in 2019.
If the Nasdaq, Dow, and S&P 500 make major new highs and most or all of these other indices do not: That’s a major and a very classic SIGN.
Better if that happens well into 2019 rather than just a slight new high between now and February.
Homebuilding stocks led the last top in October 2007 by 26 months as housing and the subprime crisis lead the recession and Global Financial Crisis. That’s happening again, more due to overvaluation this time than bad lending like last time.
By the time the Dow peaked on October 7, 2007, the Dow Homebuilding Index was already down 65%. It’s already been down 37% recently.
If the homebuilding index continues to decline while stocks continue to bubble, that’s a SIGN, and a newer one most analysts won’t see.
In a bubble, each wave tends to progress or get steeper.
If we look at this bubble back to March 2009, the last wave up from February 2016 is much steeper than the longer first wave up from March 2009 into May 2015.
The final wave, from December 2018 or so forward should be steeper still than its previous sub-wave from June 2017 to late September 2018.
I would expect the market to be moving up 900 to 1,000 points a month in this final rally, rather than 600 points a month as it did in the last one. That means we could see markets 7,000 to 11,000 points higher than they are now by late 2019.
That would be a SIGN, especially after the rally moves into early September or later in 2019, when the crash season strikes… and our most powerful 90-year Bubble Buster Cycle hits most strongly around late 2019. The most likely window for a top would be early September 2019 to early January 2020.
And especially if the Dow approaches or breaks above 30,000.
A Dow 33,000 to 35,000 is likely the extreme end of the potential range in such a blow-off top, and that would be an “all hands off-deck” SIGN.
30-year Treasury yields started to spike up, breaking above a key level of 3.22% in September 2018. That pattern projected a potential spike up to 4.3% or so. But they’ve have pulled back below that level, bringing that spike into question.
However, the U.S. government still needs to issue about $1.2 trillion in Treasury bonds in 2019 to finance its enlarged deficit from the tax cuts and it still plans to sell $50 billion a month of its bond stock from QE stimulus. That could put strong upward pressure on yields.
If 30-year T-bond yields do start spiking towards 4% again, that would be a SIGN we’re about to suffer a massive market reset as such yields work against both stock and real estate valuations.
They would have to first break above 3.5% for that to be a scenario in play.
Bitcoin bubbled more than any investment in history, going from around $1,135 to near $19,600 in just 8.5 months in 2017. Then it crashed a bloody 83% as of early December.
But it bubbled up similarly, just at lower levels, into late 2013 and then crashed 87%.
It could go down as low as $2,500 (87% again) and still a have a final wave up in its “hype” cycle before crashing back to $2,500 or lower and then following a more normal, longer-term bull market in blockchain technologies into around 2036 – 2037 on about a 20-year lag to the internet bull market after it similarly crashed into 2001 after a hype phase into early 2000.
If Bitcoin breaks back up sharply, along with a stock rally into 2019, and starts to hit new highs, like $21,500-plus, that’s a big SIGN the end is nearing fast. It’s major peak in December 2017 came just over a month ahead of the stock peak in January. Hence, a sharp crash after making a new high would be the ultimate sell signal for stocks.
This should happen by late 2019, or early 2020 at the very latest if Bitcoin accelerates rapidly again and first breaks back above $8,500 to show this is possible.
Like the extreme internet bubble from late 1998 into early 2000, the Bitcoin bubble should be the last and most extreme.
And last (but certainly not least)…
The U.S. dollar started to break up above 97 and since has moved more sideways. A rising dollar hurts U.S. exports and more so kills emerging countries that have been borrowing largely in dollars for making paying loans back more expensive.
It’s these same emerging countries that have been leading the downturn this year and look most unlikely to make new highs and create divergences as I mentioned in SIGN #2.
If the U.S. dollar can break convincingly above 98 and starts to rally strongly, that would be a SIGN, especially if it approaches 120.
If all or most of these seven signs make an appearance, we know this bubble is near over!
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