There is only one real story for 2014. FROTH! Unprecedented levels in terms of time. Since February we have been on a sell-signal with regard to the bull-bear spread. Low rates and liquidity from the Fed here and abroad have allowed that signal to be ignored for the most part other that two quick pullback's of 5.1% and 9.9%. They were painful but healed up quite rapidly. There were decent gains for the year across the board with the Nasdaq 100 leading early, the S&P 500 and Dow 30 catching up as the year moved on. But the small- and mid-cap stocks were the big gainers late in the year. Froth prevailing in those areas -- the high levels of bulls to bears notwithstanding. Froth is greatest in those small-cap risky companies, but that didn't stop the bulls from running there late in the year.
Ridiculous Levels
The bull-bear spread not only held above 30% all year, for the most part, but it held above 40% for many weeks including last week when we closed at a ridiculous 41.5%. We tested down toward 30%, but now we're back over 40% and that's just not a good thing for the big picture. When markets snap from 40%, they fall hard and fast as we saw during the 9.9% correction which occurred after a few readings above 40%. So we started with some froth. It got worse as the year moved on and after dropping back a bit, though still frothy, we're at it again. Off-the-charts bullishness, which will have to be corrected at some point soon. No way to know when, but corrected nonetheless. Will 2015 be the year of payback? We just don't know. Impossible to tell since technically we still have nothing to suggest it's upon us.
But beware, it can get ugly fast when it does kick in.
Our monthly charts show that, technically, there are no topping sticks. Monthly charts have been known to flash sell signals through engulfing sticks to the prior month. Sometimes it's with very long tails of the top after testing key resistance but none of these things exist in the moment so, based on the monthly charts alone, there are no real topping sticks to say a strong drop is imminent. It may happen, but it's not showing its hand at the moment. It can happen just from the weight of froth and all the bulls being in but you look at the end of the month for some guidance from those key index charts and on some leading stocks in different sectors. The indexes being the most important and, for now, we're just not seeing it. Nothing that says run for the hills if you're long. The risk is there, for sure, without the warning candle sticks, but nothing in terms of true technical's that say 'I'm out of here'.
Classic Sign?
What is the classic warning sign that a bear is about to take over? Distribution of stocks on high volume off tops. You then spend months -- up to six -- putting in the top. You get the usual retail investor buying up on low volume and every time it gets back to or near the highs, big money sells it off again on high volume. It can take as many as three to four journeys up and down before a true top is set. Eventually the retail bulls of the world give up and down we go. But it's very unusual to have a market just collapse into a bear without this process taking place. It's annoying in the sense that it takes so long to put in a final top.
It’s no different than what we saw in SPDR Gold Trust (ARCA:GLD) in 2011. One heavy volume pullback off the top after another. It seemingly took forever but ultimately the top was in and now it's down about 40% off those highs. Also, when oscillators lag the drop in price -- meaning when price leads over the oscillators -- that too is a bearish sign, which you'll see quite often during distribution. For now, we don't have to worry about that but we'll keep a keen eye on the possibility since froth is so out of control and, more importantly, for such a long period of time. There will be payback. No one -- and I mean no one -- knows exactly when.
2015
With all the froth we've been dealing with it's hard to imagine 2015 won't be far more difficult than 2014. Larger selling periods and deeper selling episodes are all likely, though nothing is guaranteed. Play with your vision not your mind. Play simply what you see. I'll be here to help guide you through the nonsense and the game we call the market. 2015 begins with the highest level of risk seen in over a decade and in many ways, more than we saw in 1999-2000. We can keep going higher for a while, but recognize the risk reward for what it is and do what feels right.
Happy New Year and Peace!