Financial Sense Newshour just spoke with noted technician Tom McClellan for our weekend podcast. He's predicting a major market top this August and bear market into early 2016. Here are his comments and charts (full audio interview available on iTunes and the Newshour page this Saturday):
Tom McClellan: "The signs of a dry up in liquidity are growing. I mentioned the advance-decline line that made its top back on April 24th and it hasn't been able to exceed that even though the price indices are chopping sideways and in some cases even making higher highs but that's not a good piece of news. That says that liquidity is starting to dry up and the longer that that divergence takes place and goes on, the more significant the message will be. I do think that we have a chance to make a higher price high into July...but ideally I want to be out of everything around the first week of August and looking to make money by harvesting some of the losses that we are going to see in Q3 and Q4."
Jim Puplava: "And this is based on liquidity drying up? What about the fact that even coming out of this FOMC meeting the consensus now is that they will go in September. So does this coincide with, let's say, the first rate hike?"
Tom McClellan: "It could. I think it will happen regardless of what the Fed does. I think the Fed can dampen it a little bit but there are forces that are greater than the Fed that are gathering here and so the Fed is not going to be the driver of it."
Jim Puplava: "Let's talk about another chart you sent me, which is the eurodollar commercial positions [see below]. Explain that for our listeners and what you think this chart means?"
Tom McClellan: "Well, it's a little bit of an exotic indicator but it's probably my favorite because it gives us the answers a year ahead of time.
What I'm doing is I'm looking at the commitment of traders report that's published each week by the commodity futures trading commission (CFTC) and they give a report on what all of the futures contracts that they track and who's holding them: either the commercial traders, which is the big money; the non-commercial, which is kind of the hedge funds; and then the non-reportables, which is people with very small positions that are not even worth having reported individually.
The commercials are the smart money so when you look at what the commercials are doing as a group in eurodollar futures—that's an interest rate product, not a currency product—that tells you what the stock market is going to do a year later.
The stock market tends to follow those same dance steps almost literally. It got into a little bit of trouble back in 2013 when those traders weren't anticipating the stimulus of QE3 and it didn't work back then but it's generally been working almost perfectly since about 1997 [see chart below]. It correctly forecasted the 2008 decline. It correctly forecasted the bear market in 2002 and 2003. It correctly forecasted most of the big up-move that we've had off the 2009 bottom and now it's telling us that we have a top due in early August and a big decline into early 2016.
It's a scary looking chart. It's a scary looking prospect. I don't know exactly what the news is that's going to be crafted to explain why we're going to have a bear market at the end of this year but I can see it coming."
Jim Puplava: "So from what you're saying, the market is now in the final stages of a topping process heading into a bear market? Would that be your view?"
Tom McClellan: "Yes, that's fair and we're seeing typical signs of a top—prices are getting very quiet. If you look at indications of price movement such as average daily range or standard deviation—in other words, how volatile is the movement of prices on a day-to-day basis—it's just gotten very quiet. There's just no one expecting anything bad so there just saying, 'Why bother, I'll trade tomorrow.' It's just gotten very quiet and that's a normal sign of a top... Ideally, that top is due in early August but tops are funny in the way they can be constructed so I wouldn't put all my money on that the market is going to follow the script exactly. That's why it's good to have a plan for what's supposed to happen and then you also look at what actually is happening and when those two match up you can bet big and bet confidently....but right now it's tracking well for a top in early August and then a big ugly decline the latter half of this year."
Listen to the rest of this interview with noted market technician Tom McClellan along with our weekly market wrap-up on the Newshour page here or on iTunes here. Subscribe to our weekly premium podcast by clicking here.