Fueled by a historic amount of direct stimulus from the Federal Reserve, the cyclical bull market in the S&P 500 that began in 2009 accelerated into an unsustainable advance, creating a massive equity bubble and causing investment risk to increase to one of the three highest readings during the past 85 years.
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The latest cyclical top is long overdue and it could form at any time. A monthly close well below long-term uptrend support currently near 1,980 would be a meaningful breakdown that would signal the start of a substantial overbought correction. Additionally, due to the extreme nature of the cyclical uptrend from 2009, the forthcoming cyclical downtrend will likely result in losses of 30 percent to 50 percent before the next cyclical bottom forms.
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Our Cyclical Trend Score (CTS) has correctly identified more than 90% of the cyclical turning points in the stock market during the past 70 years, and it is currently on the verge of issuing its first signal since 2012. A cyclical sell setup occurred in October when the CTS moved into sell territory during the violent short-term decline.
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If the uptrend from October reconfirms the bull market by closing at least five percent above the high in September, the potential sell signal would be eliminated. However, if the uptrend breaks down before closing above 2,114, a confirmed cyclical trend sell signal would be generated, indicating that the long overdue cyclical top is likely in the process of forming.
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A short-term breakdown would occur if the advance from October closes well below uptrend support. However, due to the violent and extreme nature of the advance off of the October low, uptrend support has yet to be identified. The identification process will occur soon after the latest short-term cycle low (STCL) forms, which could happen at any time.
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As we often note, a cyclical top is a process, not an event. The CTS sell setup that occurred in October was the first meaningful sign of weakness exhibited by the bull market since 2012, and we are now on the verge of a confirmed cyclical trend sell signal. Therefore, it will be critical to monitor stock market behavior closely during the next several weeks.