The Topping Process Begins. The Bubble Finds its Pin.

Monday, February 12, 2018
By Paul Martin

By: Plunger
Monday, 12 February 2018

Volatility has now returned to the stock market after a hibernation of several years. An explosion of volatility normally is indicative of a change of trend. The recent signals transmitted by this market have been classic and has been telling us that we have entered the final topping process of this extended and stretched economic cycle. The trading over the past 7 market sessions fit a classic pattern of market panic which corrects the excesses of a market which just completed an upside climax and had been without correction for close to two years. I believe this panic is now over and the muscle memory of buy the dip will now reassert itself. That however does not mean good times will continue as the froth has now been blown off of the bubble.

Anecdotal signs of a market top have been flashing loud and clear now for the past 6 months. Since last summer the public has finally embraced this market and over the last 3 months have been recklessly plunging head long into it. Complacency reigns supreme so that after last Friday’s 666 point drop even the superstitious remained complacent.

Complacency exists due to the lack of any meaningful correction over the past 2 years and valuation levels set records with the S&P 500 trading at 26X earnings and the Russell 2000 at 150X earnings. With interest rates now in an established uptrend we now have a bubble in search of a pin…looks like it may have just found it.

We have noted before that the month of January often accommodates market tops. Gold in 1980, the DOW in 1973 and the Nikkei in 1990 are stand out examples. With the Deep State spying scandal now reaching critical mass the similarities to the Watergate bear market of 1973-1974 have become undeniable. The scandal reaching critical mass means it will now have to run its course to completion, exerting a cancerous effect upon the market.

The Bloated Market Exhausts itself

After putting in 15 consecutive months of higher lows and two years of closes above its 50-week moving average it began to feel like the market would never go down again. After prolonged rises such as this when a correction finally comes around it can unfold quite violently as this one indeed has. Most investors actually have no idea just how extended this market had become. In late December I wrote the piece on how the DOW had entered a throw over top. Throw overs such as the DOW in 1929, Nikkei 1990 and Gold 2011 where shown. We now see the resolution of the current throw over is shaping up like others in the past.

1929 Throwover Top

The Rest…HERE

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