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Calling a top is difficult at best, and I’m much less interested in being right about a top
than I am in generating grounded analysis and presenting it well to readers. In this case, it’s hard to see the current spike in equities as anything other than a blow-off move into a final top. It’s the only description for what the equity markets are doing. Let me explain further.
The above introductory comments are edited excerpts from an article* by Bob Loukas (TheFinancialTap.com) entitled Reminiscent of Pompeii.
Loukas goes on to say in further edited excerpts:
…The idea behind current central bank actions, that higher asset prices create a “wealth effect” that will become self-sustaining and spur economic growth, ignores two key facts:
- world economies are laden with high, non-performing debt, and
- the economies’ problems are structural in nature.
These structural problems can’t be fixed with liquidity, so pumping additional cheap money into economies is not a solution. Money can be created through cheap credit, but money velocity cannot. Until we see a real business cycle downturn, one in which non-performing debt is finally expunged from the system, we will never have a foundation for organic economic growth and an expansion of GDP. In short, the world needs to experience a fair amount of pain before it has the potential for real gain.
Given the world’s poor economic fundamentals, equity markets at current levels are both artificial and unsustainable. They are far from reflecting the current economic state and, more importantly, are completely misaligned with future risks.
Once the business cycle turns lower again – as it inevitably will – the market will collapse on itself and will be seen to have been hugely, woefully overpriced. The market re-pricing which occurs during these periods is always severe and generally swift. It’s the market’s mechanism for closing the imbalance between prices at the peak of speculative fever, and the market’s intrinsic value. However, since pricing imbalances often work both ways, during true secular bear markets, prices (valuation) typically fall well below a market’s true value.
Markets are often ignorant of what lies directly ahead, and I believe that’s the case with equities today. After a relentless move higher, the recent sideways consolidation has given way to yet another speculative spike higher. The rally since the last Daily Cycle Low has been extreme by any standard, but the character of the current move is now consistent with the final weeks of a blow-off top.
Conclusion
Blow-offs end with a final exhaustive peak and we’re not there yet. To be perfectly honest, I’m not sure exactly when it will peak, only that it’s likely to be in the coming month. A possible clue is the length of the typical Daily Cycle, roughly 40 to 45 trading days in total.
If this breathless trajectory continues, then this Cycle is likely to mark that peak. As it’s already on Day 27, that Cycle top is just another 13 to 20 sessions away, just in time for the holidays.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://thefinancialtap.com/public/reminiscent-of-pompeii (Copyright © 2014 thefinancialtap.com. All rights reserved.)
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