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Is This the Top of the Pops for the S&P 500?

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In a transaction involving two people there is usually one sucker, but quite often two.
-Nassim Taleb

There’s a sucker born every minute.
-David Hannum (P.T. Barnum’s rival)

You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.
-Abraham Lincoln

Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.
-George Soros

The vast majority believe the “there’s a sucker born every minute” quote was from PT Barnum; however, it was actually said by his rival David Hannum, a big sucker himself, apparently.

Hannum, Barnum. What’s a few consonants lost through history worth?

So it is with bubbles and the stock market -- memories are short.

The S&P 500 (INDEXSP:.INX) is on track to set its best yearly gain in a decade with a 25.33% year-to-date return. The NASDAQ Composite (INDEXNASDAQ:.IXIC) is 25 points away from touching 4,000 for the first time in 13 years.

Yesterday’s report noted the significance of the 13-year cycle.

To wit, it was 13 years from the bear market bottom in 1974 to the 1987 top. From the 1987 top (or bottom, depending on where you want to measure from that year’s crash) to the 2000 top was 13 years. From 2000 to 2013 gives another 13 years.

What’s so remarkable about this year is not only the gain, but the absence of volatility. We haven’t had a daily decline of more than 1.6% in almost five months.

In the second half of 2011, it happened 24 times.

As I said, it's been a remarkable run.

We are now 532 days without a 10% correction, one of the longest such skeins in history.

Saturday is the anniversary of  the low from where this one-year vertical ascent began. In addition, today will mark one year since the S&P closed below its 200 day moving average.

Remarkable indeed...

I mention this because yesterday I heard an astute advisor say this: “the market’s good fortune has led to a lot of talk, much of it careless, about the stock market being in a bubble. Do I think the market is in a bubble? The answer... I don’t know and I don’t care.”

I bring this up because that is just what one should expect in the late stages of an advance. Mr. Market’s job at this point is to pull in as many players as possible. The money managers' job is to keep as many market participants in the corral as possible.

Yesterday, in her hearing on the Hill, Janet Antoinette, er, Yellen was even asked the bubble question by a Congressman.

What did he expect her to say?

And what do you expect a money manager to do when asked the same question other than to talk their book?

The lip service from the vast majority of market participants and the action in the SPX itself in breaking out over several trendlines in the last two sessions may be the beginning of something... but this is exactly what the market did at in 1973, 1987, 2000, 2007, and of course -- 1929 -- to bring in as many players as possible.

It’s just Mr. Market’s job. It's not personal.

At the late stages of any bull cycle, rational warnings to be aware of past history fall on deaf ears. The higher the market goes, the greater the crying wolf.

And who can blame players for not heeding a warning? After all, the market has come back like Lazarus from two debacles in the last 13 years.

Obviously, the old rules no longer apply.

In 2000, it was a new age and a new economy that justified the buying into the top. In 2007, it was the new era of globalization and the boom in real estate (which obviously never goes down).

Now the consensus seems to be there is no alternative other than stocks. Apparently, the rational for buying stocks on the head of this pin is backstopped by the logic of an obviously soon-to-be-improving economy.

On Main Street, it seems to be a case of, as John Lennon sang, “it’s getting better all the time, it couldn’t get no worse.”

Obviously, the stock market is a discounting mechanism and current prices are justified.


What was the market justifying and discounting in 2007 and in 2009? The short answer, mood.

I can’t help but wonder if those  lessons must be relearned and that it is the same old economy and that the same old rules apply and that this is not a new paradigm.

You would think the debacles into the 2002 low and the 2009 low were enough to produce memorable lessons. But perhaps that’s the rub, that in coming back to score new highs relatively quickly, the lessons have been relegated to the dustbins of history.

Perhaps a truly memorable lesson must play out to create values associated with real bear market lows which did NOT occur at the 2002 or 2009, bottoms which arguably were installed by the largesse of the Fed’s printing press.

I mention the following becauseif the SPX tags 1802 today or Monday, the same time/price harmonics that occurred at the October 2007 top and the March 2009 low will play out..

On October 9, 2007, the SPX was 90 degrees square a price of precisely 1576. This square-out proved to be an historic top.

On March 6, 2009, the SPX was precisely 90 degrees square a price of 666/667.

Again, today/Monday will square a price of 1802.

This relationship is conspicuous with the aid of a Square of 9 Calculator or Wheel of Time & Price.

Those of you who are Gann students of mine and have acquired a Wheel can observe this time/price relationship.

I can’t help but wonder whether this same relationship won’t play here as the SPY is magnetized to the 180 strike.

The following technicals are worthy of consideration:

1) The recent breakout of the last two days comes on declining volume

2) The SPY (NYSEARCA:SPY) has overthrown multiple trendlines (as seen in the daily SPY below), which often defines a buying climax.

3) Round numbers often present formidable resistance. This occurred in early August at 170 SPY.

The important thing to remember about square-outs is that while all major highs and lows are time/price square-outs in keeping with Gann’s theories of the Law of Vibration, not all square-outs are major highs and lows.

It is the behavior subsequent to the square-out that will tell the tale. However, this potential square-out seems significant if proved by the ensuing price action because:

1) It is occurring as the 60-month cycle and the 12-month cycle are due to exert their influence.

2) It is occurring as many extremes have been registered including sentiment and complacency.

The chart below of the VIX (INDEXCBOE:VIX) shows that a reversal signal may be triggered if the VIX re-enters the Bollinger Bands. This is a sell signal for stocks.

Out on the edge you see all the kinds of things you can’t see from the center.
-Kurt Vonnegut

The Edge…there is no honest way to explain it because the only people who really know where it is are the ones who have gone over. -Hunter S. Thompson

Conclusion. We are entering that time of the year when a Santa Claus rally seems to be a foregone conclusion.

I can’t help but wonder if what everybody ‘knows’ isn’t worth knowing.

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POSITION:  No positions in stocks mentioned.