The Minsky risk call, featured in past reports and media interviews, is now heightened as the S&P 500 reactivates its crash pattern after finally breaking under key support at 4100 (Figure 1). This is further amplified by a broad-based breakdown in major headline U.S. indices such as the Russell-2000 and Nasdaq 100. In terms of behavioral sentiment, the S&P 500 Minsky crash pattern continues to characterize a polarization between buyers and sellers as part of a broadening top, with each higher price high (point 1, 3, & 5) and lower price low (point 2, 4, & 6). Expanding volatility becomes self-feeding. Point 5 is deemed as the “kiss of death” signal. This pattern spans from the prior highs of 2018 and includes the pre-pandemic peak and price exhaustion gap near 3400. It equates to an extended 20% price drop and net peak-trough drawdown of 30% from the all-time highs of 2022.
Currently, there remains a divergence in bearish sentiment versus real positioning with initial spikes in fear indicators, but still no panic, thereby implying further capitulation ahead. A notable example is AAII cash position and allocation into equities, which signals the mood of investors is more bearish than positioning (Figure 2). Global equities remain bearish, marked by the EM top in Q1 2021, the global market breadth and the MSCI World (ex. U.S.) top of June 2021, followed by the major breakdown of growth vs. value in Q1 2022.
Market internals continue to be fragile in the U.S., led by mega cap technology and the ongoing FAANG stocks being de-faanged. The chart breakdown still warns of an extended 40% price drop into pre-post pandemic levels (Figure 3). Watch AAPL, MSFT, and semiconductors for further downside risk.
A key driver has been the prior growth-value rotation during the reflationary cycle of spring 2020. However, in January 2022, the first reversal was triggered on the MSCI World Value chart, which is part of a distributive top phase that is verging on a breakdown under key support (Figure 4). The negative domino effect is also now translating to other sectors, notably steel and miners, with increasing evidence of a top in late cyclical sectors. This would mark an interim top in commodities, marked by energy-oil as the last domino to fall, exasperated by a deflationary bust scenario of the 2022 bull cycle and rising socio-economic concerns.
A key measure of the unwind of selective bubble phenomena and related greed trades will be the completion of a top in Bitcoin as part of the major bear market ahead and potential Darwinian winter period in digital assets over the next few years (Figure 5).
A confluence of market timing headwinds remains, with both seasonality and our composite cycle warning of growing mean-reversion risk into H2 2022 and 2023 (Figure 6). More to follow on seasonality timing patterns in future FSC blog articles.
Author: Ron Willian, FSC Development Director
By Bill Sarubbi, FSC Board Member
May 28-30 is likely a low. The period of May-June, EOM strength will begin on May 31 and run to June 12. This period has been up 64.4% of the time. The expected return is the sixth highest of the 12 months. June is likely to be a positive month. This period of strong seasonality is supported by dynamic cycles. Below, are both the daily and the weekly S&P cycles. The buy signals have been accurate 92% of the time (10 of 12) in the last year. All 6 weekly buy signals have been profitable. The combination of this trio of rhythms will likely propel the S&P to 4250 and higher.
Join us live for Market Forecast 2021, a week-long speaker series featuring renowned experts in the world of finance and trading, including Robert Prechter, President and Founder of Elliott Wave International and author of Conquer the Crash, a New York Times bestseller, and Jack Schwager, author of the best-selling series of interviews with the greatest hedge fund managers of the last three decades.
Part of FSC’s ongoing 80th Anniversary celebration, Market Forecast 2021 features one speaker a day for five days, starting on January 18. Presentations start at 4:30 PM EST and will last an hour. You will hear from some of the world’s most celebrated traders and market experts, including:
President and Founder of Elliott Wave International, Robert Prechter’s name is familiar to market observers the world over. Since founding EWI in 1979, he has focused on applying and enhancing the Wave Principle, R.N. Elliott’s fractal model of financial pricing. He shares his market insights in The Elliott Wave Theorist, one of the longest-running financial publications. Prechter developed a theory of social causality called socionomics, based on the hypothesis that events don’t shape moods; moods shape events. He has written 18 books on finance and socionomics, including Conquer the Crash, a New York Times bestseller.
Tom DeMark is creator of DeMARK Indicators and founder and CEO of DeMARK Analytics, LLC. Renowned for their objective and mechanically driven approach to trading and investing, DeMARK studies are designed to identify and anticipate potential price activity in the financial markets. For nearly 50 years he has been developing, trading, and teaching his techniques to institutional professionals. Mr. DeMark currently serves as special advisor to Steven A. Cohen of Point72 Asset Management and has consulted to Goldman Sachs, Steinhardt Partners, Loews Corporation, Citigroup Inc, JP Morgan, IBM, Union Carbide, MMM, Soros Fund Management, Omega Advisors, Charlie DiFrancesca, and more.
Rob Hoffman is CEO & Founder of the largest online investing, wealth, and business entrepreneurship summit in the world, the Wealth365 Summit. He is a fourteen-time international trading champion and has won over sixteen domestic trading competitions, for a total of 30 victories. Combined he has won more onsite, real money, international and domestic trading competitions than anyone in the world. One of the world’s top traders, Hoffman is an internationally recognized speaker, writer, coach, and mentor to retail and institutional clients. He has been featured on ABC, NBC, Yahoo! Finance, Fox, Market Watch, and more.
Professional trader Lawrence McMillan is best known as the author of Options as a Strategic Investment, a best-selling work on stock and index options strategies. An active trader, he manages option-oriented accounts and edits and contributes to his firm’s derivative products newsletters covering equity, index, and futures options. An international speaker on option strategies at seminars and colloquia, he appears on CNBC and Bloomberg TV and is quoted in publications, like The Wall Street Journal, Barron’s, Technical Analysis of Stocks and Commodities, and more. He is the President of McMillan Analysis Corporation, which he founded in 1991.
Jack Schwager is a recognized industry expert in futures and hedge funds. He has written extensively on the futures industry and is best known for his best-selling series of interviews with the greatest hedge fund managers of the last three decades. He is one of the founders of Fund Seeder, a platform designed to find undiscovered trading talent worldwide and connect unknown successful traders with sources of investment capital. Schwager was a partner in the Fortune Group (2001-2010), a London-based hedge fund advisory firm. His prior experience includes 22 years as Director of Futures research for some of Wall Street’s leading firms.
Join us live every day from January 18-22 at 4:30 PM EST. Stay tuned for registration details!
We pulled the major charts from our cycle app. Are we reaching key turning points in major markets? Please check the charts on your own. All charts are simple 1:1 views on the cycle app for every user.
I did a video walk-through in German in the Markus Koch show (German):
"Was sind Zyklen und stehen wir vor einer Trendumkehr?"
Feel free to watch as we go over each chart:
You can download all charts here: