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January Year Highs?

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1994 (the year of so-called bond shock), gave us a yearly high for equities in January followed by a 10% correction (you can see the 1994 SPX chart below). Of course, we are not going from 6% to 8%, but if we are moving out of super low rates, the adjustment could be just as brutal.

Click to enlarge

However, my current scenario is actually much more bleak than that. Based on the last great secular bear, 1966 to 1982, we can draw some pretty important parallels.

First of all, that's 16 years in length. What makes pundits believe that this cyclical bull market that started in 2009 is the actual end of the most critical secular bear market in 70 years (due to baby boomer demographics) with a measly 9 years in duration?

Secondly, the last cyclical bull within the 66/82 secular bear lasted a little over 3 years, followed by the last cyclical bear within the secular bear for over 1.3 years. If history rhymes, and this cyclical bull is not by any means the end of the great bear of 2000, then the present bull is very extended at almost 4 years.

So either we are in a 1994 scenario -- prelude to a great bull over a year later -- or we are about to enter another bearish phase of the secular bear. Either way, we are going to correct soon, and at least by 10%.

Third, and more importantly, no great secular bear has ended without the broad market clocking in a single digit p/e. The 2009 crash low was around 13.3. This is far from over, and though we most likely made a price low, we did not make a valuation low.

As for correlations, NDX started the bear market (dot-com bust) and only that index can end it. Not being able to close a month above 2806 (50% retrace) was the kiss of death last year and set up the bear market in Apple (NASDAQ:AAPL). The lag against SPX and the Dow is just too large to ignore, even with the support of solid companies like Google (NASDAQ:GOOG). Do you really think this time is different and that the tape in NDX does not matter?

Think again.

And of course, I cannot end this cautionary rant without emphasizing sentiment. Advisors (notoriously wrong at extremes) are all frothing at the mouth with bullish complacency, 3 weeks in a row above 51% bullish, and around 23% bearish. Even Tepper, who should know better, is out clamoring that this is going to be easy upside money. Since that was a couple of days ago, I will hereby name this the Tepper top.

Stay safe,

Marc Eckelberry.

The following was posted in real-time earlier today on our Buzz & Banter. To follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
POSITION:  No positions in stocks mentioned.