Harry Dent | Wednesday, March 06, 2013 >>
Believe it or not, there are a handful of experts we respect. They’re in the minority. But they do exist. So what I’m about to say next is… well… unpleasant.
“Unpleasant” has never stopped me before though, so here goes…
“This time guys, you’re wrong.
“Listen. You’re calling for a top in stocks here… after markets got giddy in January and February. And you know such stock surges early on tend to bode well for a positive year to follow.
“But as much as I respect you, I’ve got to disagree with you on this one.”
This is NOT going to be a good year for stocks. The first half of 2014 won’t be any better either.
But we DON’T think we are at a top here. Not quite yet at least. Chicken Little’s too early.
That said, these experts are not wrong about it all. There is one thing we think they’re right about…
That is: it’s time to get more cautious!
We have studied tops for decades. In each and every case there were major signs that warnrned investors markets had reached nose-bleed levels. For example, the smart money starts to exit, which you see when selling pressure rises and buying power falls, despite a new rally to higher highs.
That’s not happening here. That tells us the smart money that leads most trends doesn’t see a peak here either. You need to think more like the smart money.
Another sign is late-stage buyers more selectively buying the best large cap stocks, those outperforming smaller cap stocks. That’s not happening here either (although it does seem to be starting as more everyday stock investors pour into this rally).
In short, the typical divergence – smart money running for the hills, dumb money storming the burnrning building – is not anywhere to be found.
This divergence happened in the major top of late 2007. It happened in the major top of early 2000. It happened in the major top of 1987. Every time. Without fail.
Nada. Zip. Zilch.
We’re not at the top yet.
The Pièce de Résistance
The most important trend we can present in support of our view is a simple “megaphone” patternrn…
From 1994 to 2013 we saw higher highs on each bubble top (early 2000 and late 2007). These were followed by lower lows on each bubble burst (late 2002 and early 2009). From the bottom of the bust in late 2002, we saw a rally – just like the one we see today – into June 2007. Then we experienced a near 10% correction into August. And one last rally to slight new highs into early October 2007.
That was the top (early October). After that the bubble burst and the market crashed until March 2009. The total loss: a painful 55%!
And before this massive correction, guess what we saw…
You got it. We saw major divergences in buying and selling pressure (the smart money exiting) and small caps underperformed (the dumb money entering) into October.
A 7% to 10% correction is very likely between early March and May, thanks to the looming debt ceiling debate. But don’t be fooled into thinking it’s the beginning of the end.
And don’t be misled by analysts talking about the Dow’s 14,000 resistance level, or more precisely the past all-time closing high of 14,164 they’ve latched onto… the very same one we exceeded yesterday.
The intraday-high in late 2007 of 14,280, which was also exceeded yesterday, is more important to us. But the most important level for stocks is at the top of the megaphone channel in the chart above.
In other words, watch out for action when the S&P 500 challenges the 1,600 resistance barrier. That’s a level markets will find very hard to penetrate.
Ahead of the Curve with Adam O’Dell
Harry and I are together on this one: we may be close to a market top, but we’re not there just yet. Watch for another wave of this bull market rally as retail investors join the trend.