Summary

The market is extremely overvalued.

2017 marks the end of a 17-year cycle which strongly predicts a major downturn in the market.

Comparing charts makes today’s rising market appear eerily similar to the market before the 1987 crash.

As an indicator and driver of the market, Apple stock has recently slowed and, with sales weak, the stock appears to be headed for a decline—a warning for the entire market?

Market declines have often occurred in October-December and this fall the market appears long overdue for a major correction.

In a recent report, Garrett Jones, argued for many reasons that the stock market is on the verge of a major downturn and bear market.

Overvalued Market

Today the stock market is reaching all-time highs. The NASDAQ 100 hit a top in 2000 of close to 5,000. Today, the index is well above that point at 6,113.78.  Are we set for ever-increasing highs? Nothing lasts forever and, although many believe we live in normal times, reality is far from normal today.

John Hussman of Hussman Funds, said, “What investors presently take as a comfortable environment of pleasant market returns and mild volatility is actually, quietly, the single most overvalued point in the history of the U.S. stock market.”

17-Year Cycle

Today, Jones argues, is a unique time in history.  Historically, after a period of mild volatility and healthy returns, he argues, the economy dives into a depression. Jones has analyzed a recurring 80+ year cycle and he labels three of such cycles, “a revolution cycle.” Three such 80-year cycles equals 240 years, which takes us back to 1777, during the American Revolution. With the ending of another 80-year cycle in 2017, some see another time of political instability and change marked by the election of President Donald Trump.

Jones outlines an argument based on a 17-year cycle. The year 1932 marked the low point of the Great Depression. Seventeen years later in 1949 was the start of a 17-year rally marked by high returns and low volatility when the market ran from 160 to 1000. In 1966, the Dow Jones reaches 1000 for the first time and then plateaued for 17 years. In 1983, the market finally began the longest bull market in US history and rallied for 17 years with 2000 marking the high point and the peak of the dot.com bubble.

Based on this 17-year cycle, Jones argues that every 17 years there is the start or end of a cycle. Will 2017 mark the end of the current bull market?

Sign of the Bear

Peter Eliades, with 44-years of market analysis experience, wrote that investors become complacent before market tops, so the first sign of the end of a top is a period of 21 to 27 consecutive trading days where the advance/decline (A/D) ratio remains between 0.65 and 1.95. That streak must be broken by an A/D ratio below 0.65 and confirmed by either a 2 or 3 day average A/D ratio below 0.75.  The last time we had twice as many advances as declines was on September 11, 2001: the tragic 9-11.

Jones wrote, “We have not had better than a 2:1 A/D ratio since that time. . .and a 2:1 ratio isn’t that big a deal. In a decent decade, it happens a lot.” The market is clearly indicating that it may suddenly turn into a bear market.

Market breadth or the A/D ratio line, is an excellent indicator of where the market is heading. The advance/decline line has been rising steadily for years. Has it reached an end point?

Jones also uses the McClellan Oscillator to support his argument that the market is about to collapse. He argues that the oscillator is ending a fifth wave. The oscillator hit a low when Trump was elected, with five waves since then, Jones argues. At the end of each cycle, the oscillator plunged lower than the previous cycle. When waves 1 and 3 were ending, the oscillator was “about to enter a period of almost vertical decline.” Jones argues that we are approaching a similar point now.

1987 Crash Repeated?

Gene Inger, publisher of the Inger Letter, has drawn an analogy between the October 1987 flash crash and the run up to it compared to the current market, which show similar market trends. Will 2017 be a repeat of 1987?

The market has now reached, Jones argues, “overbought levels that it has never reached before on our proprietary technical and band indicators.”

The two times it was close to such a point was in late 1996 and early 1997 during the dot.com bubble. It was then that Alan Greenspan used the term “irrational exuberance” to label the market. “It was the strongest bull market in US history at a time when the budget was balanced and we had a surplus,” Jones said. The second time was in 1987 during the strongest economic period in recent history with a popular president, Ronald Reagan. Neither period was as overbought as today and the economy today is in far worse shape with massive debt, higher unemployment and a nation divided politically facing threats from North Korea, China, Russia and ISIS.

A Rotten Apple?

GE used to be the leading market stock in terms of capitalizing and as a leading indicator for where the market overall was headed. Today that role is filled by Apple.

Jones wrote, “As Apple goes, so goes the world –give or take a little. . .Apple is without question the new bellwether stock.”

Apple represents about 12% of the NASDAQ 100 and is the largest capitalized stock in the world, as well as being the leader of the FAMG stocks: Facebook, Apple, Microsoft and Google.

 

Apple today is not tracking the NASDAQ 100; it is diverging by slowing its rise. Apple reached a top on September 1, 2017.  Why?

Apple has had to slash production of the iPhone 8and iPhone 8 Plus by “nearly 50% due to lack of demand.” Jones wrote, “This is the first time in history that production has had to be cut so soon after launch.” Priced at $1,149, the new X phone will probably do little to boost Apple’s sales, since it will probably not improve enough on past models to justify the price for most consumers.

Beware October through December

“In each year of this bull market,” Jones wrote, “there has been a correction in the October to December period.”

This is the ninth year of the bull market and another correction seems likely. The bull market is old, and it is the most overvalued and overextended bull market ever. Furthermore, Jones argues, we have not had a correction this year. The market is also not up because the economy is humming; it is up because of Qualitative Easing and the government printing money.

Fall corrections in this bull market have ranged between 2.83% and 10.37%, with an average 6.31% decline. This fall the market appears to be primed for a correction.

Credit and the Market

Jones shows how rising markets have coincided with increases in investors’ negative credit balances. When the market falls, investors have positive credit balances. Today, investors’ negative credit balance has reached more than $250 billion, while the S&P 500 has reached new highs near 2500. This data suggests the market is on the verge of a major correction.

Highs Obscure Previous Highs

Before the 1929 high just before the Great Depression, the stock market set several new all-time highs. None of them are remembered, because the high in 1929 marked the high point before the crash. The highs the market set in 1987, 2000 and 2007 will not be remembered if the market crashes in 2017. Why? Because the high of 2017 for the Dow Jones Industrials of 23,232 will be remembered as the high. Be prepared for a massive fall in the market.

What to do? Gold

If the stock market is massively overvalued, what should you do? Where do you put your money? Government bonds, bills and money market accounts pay almost no return. During the last bull markets, bills and money market funds paid well, such as 15% in 1981.

“When 15% is on the table as the alternative, the decision is easy,” Jones wrote. “With zero currently on the table, the tendency is to remain in the market. While the ‘zero option’ is real, the other reality is potential loss. Zero looks attractive when compared to a negative.”

In such times, with the market apparently on the brink of a major correction, gold is a safe haven. As I argued in previous posts, gold is set to begin a long-term bull market. Gold mining companies have slashed production costs and are poised for sharp increases in the price of their stock. If bonds, bills and money market accounts offer safe havens with almost no return on your investment, gold offers a safe haven with considerable upside.

*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any futures or options contracts. This report is for educational purposes only.