After A Two Month Rally, Is Another Stock Market Top Close At Hand?

The Bureau of Labor Statistics presented the latest deceitful employment report Friday, November 6^th. They reported that the unemployment rate was 5 percent in October. Of course there are 98 million Americans capable of working, but not working, who were not included in the unemployment rate calculation. The labor participation rate is the lowest it has been in 38 years. The report also fails to consider quality, family-supporting paying jobs. If an executive lost a $100,000 job and is now pouring coffee at Starbucks for $11 per hour, that person is considered by the BLS as fully employed. Empirical evidence can argue the true quality jobs un/under-employment rate is closer to 30 percent. Half of U.S. jobs pay less than $36,000 per year, which is a realistic poverty level. Over 46 million Americans are on food stamps. The next Great Recession is underway, stealth to many, but underway.

The next lie from the Bureau of Labor Statistics was when they reported that a whopping 271,000 new non-farm payroll jobs were created in October. But a closer look reveals that of that 271,000 number, 165,000 were make-believe jobs, a complete fabrication. The BLS reports a CES Birth/Death statistic where they identify fictitious jobs that they add to the non-farm payroll number. They take a wild guess as to how many new jobs were possibly created by new businesses they think may have started up each month, less jobs lost from businesses they estimate closed down. So if we back out the CESBD fictitious jobs, at best only 106,000 new jobs were created in October 2015. The U.S. needs to create 150,000 new jobs each month just to break even with population growth. Not a great jobs month from October.

Stocks were mixed Friday, November 6^th on weak internals. While pattern labeling can morph into something else, there is a quality picture from the mapping count this weekend that suggests last Tuesday's high could be a decent candidate for a top for the rally from September 29th. We won't be confident until our Purchasing Power Indicator confirms with a new Sell signal. In this weekend's report to our subscribers at www.technicalindicatorindex.com , we updated our Primary Trend Indicator, our proprietary long-term indicator on pages 16 to 18.

The market sniffed around a Hindenburg Omen the past two days, but did not quite meet the requirements to generate an official observation. But we must keep watch this week to see if it is going to trigger this potential stock market crash signal. The last H.O. accurately forecast a crash, which occurred in late August.

This weekend we see maturing Bearish Divergences between prices and almost all of our key indicators. This is telling us in a loud voice that the stock market is topping again and a significant decline is approaching. Timing is the variable we want to get our arms around. The best sign will be when our Purchasing Power Indicator generates a new Sell signal. Our Demand Power / Supply Pressure Indicator should move to a Sell around the same time. Cycle analysis can help get us into the ballpark. There is a Phi mate turn date, a Bradley model turn date, and a Fibonacci turn window pointing toward the next week to ten days for a turn.          

The Industrials and S&P 500 are finishing their 3-3-5 ([a]-up, [b]-down, [c]-up) Flat pattern from August 24th. Further, they are completing the final leg up, [c]-up, the five subwave rally from September 29^th.

The conclusion of wave (5) up and the rally from late August 2015 will likely be signaled when our Blue Chip Purchasing Power Indicator changes from a Buy to a Sell signal. When a top is truly in, then a Sell signal should follow within a few days of the top and catch most of the next leg down. We show a chart of our Purchasing Power Indicator below. Since our PPI generated a Buy signal on October 15^th, the Industrials have risen 1,201 and the S&P 500 has risen 129 points.

There is a possible cycle turn date window, a Fibonacci Cluster turn window, approaching in mid November, which we present on pages 14 and 15 in this weekend's report to subscribers. If that is going to be a top, then the rally may drag on for another few days. This Fib turn window comes within a week of the next Phi mate and Bradley model turn dates, so it is possible all three cycled turn dates will merge together, and could be pointing to the same turn, perhaps a major turn. We still would want to see a new Sell signal in the Purchasing Power Indicator before being convinced a trend turn down of some significance is starting.

The purpose of such a lengthy up/sideways move from late August is to shake out the shorts, so they lose confidence in the new declining trend, and also to draw in bulls, so that they can be slaughtered at the next decline without a lot of Bears holding short positions. The point is, in primary Bear markets, the Bear wants everyone to lose, and he is very good at it. The large number of rally days with an imbalance of Demand Power and Supply Pressure measures that we track daily in our forecast reports is evidence that normal market supply and demand forces establishing equilibrium stock market prices was lacking on many of the past 60 days. In other words, since the August bottom, price determination has been distorted, meaning deep pockets intervention is responsible for a significant portion of the rally the past two months.

Technical analysis can incorporate Plunge Protection Team intervention in its indicators, patterns, and cycles after the fact, however contemporaneous deep pockets intervention can foul up a market forecast in the short run. Intervention can delay the timing of an expected decline, but not the decline itself. Further, PPT intervention is like stretching a rubber band, the snap back is ten times worse. On occasion we see heavy PPT market manipulation. In the past ten years there is evidence that on at least five or six occasions the PPT stepped in hard to stop a decline. But in each instance, the expected decline ultimately came and the extent of the decline was worse than otherwise would have been the case. I remember this occurring back in 2006, when a major decline looked like it was fast approaching. The PPT intervened aggressively and the decline was delayed all the way until October 2007. At the time, in October 2006 I set up a conservative portfolio for the expected decline. It sat in mostly cash and missed a great deal of the rally during the first ten months of 2007. However, markets topped in October 2007, the Great Recession started and stocks lost almost half their value over the next two years, dropping substantially below the October 2006 price levels. That conservative portfolio ended up substantially outperforming the S&P 500. At some point, black swan events occur which overpower PPT (in which the Fed is a huge participant) intervention efforts and the ultimate decline is made worse by their socialist corruption of free market forces. In 2008 one such black swan event was the Lehman Bros. collapse on Wall Street. In the not too distant future, we would not be surprised by one or more black swan events upsetting stock markets and overwhelming the PPT. Why? The huge Jaws of Death pattern shown in the chart on page 35 in this weekend’s report to subscribers at www.technicalindicatorindex.com from the late 1980’s is telling us that. The market has a language which tells us where it is moving in the future, and technical analysis is the process of reading that language.

Caution: I would not bet the farm on a Crash. Crashes are rare and maybe the pattern will morph into something we presently do not see that is less ominous. Risk must be managed. Maybe the Fed buys the entire stock market, who knows given their track record. Maybe a black swan event is postponed several months.

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Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com.  The statements, opinions, buy and sell signals, and analyses presented in this newsletter are provided as a general information and education service only.  Opinions, estimates, buy and sell signals, and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice.  Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision.  Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment.  Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided. Copyright 2015, Main Line Investors, Inc. All Rights Reserved.