At a current duration of 49 months, the cyclical bull market from 2009 is long overdue for termination. Fueled by a historic amount of stimulus, the rally has taken on a highly speculative character during the last two years. Although it is nearly impossible to predict the timing of a cyclical top in advance, recent developments suggest that a long-term reversal will likely occur sometime during the next few months. From a monthly perspective, the rebound off of the low in 2011 has taken the form of a speculative blow-off move, indicating that the final phase of the bull market is likely in progress.
From an intermediate-term perspective, the advance off of the low in November marks the second time that the angle of ascent has increased following the formation of the low in 2011. The cyclical bull market is moving higher at an unsustainable rate and it will likely be followed by a violent overbought correction.
Another way to model an unsustainable advance is via a log periodic bubble. This mathematical formula replicates market behavior extremely well during highly speculative uptrends and the following chart from a recent weekly commentary at the Hussman Funds website displays the high degree to which the current stock market rally is exhibiting the classic characteristics of a bubble.
Again, it is nearly impossible to predict the timing of a bubble reversal with any useful degree of statistical confidence. However, market internals are beginning to show signs of fatigue. For example, a negative divergence has developed between breadth summation and price behavior, indicating that the bull market is losing strength even as it surges to new highs.
As always, there are no certainties when it comes to financial market forecasting, only possibilities and their associated probabilities. Driven by irrational hope and euphoria, the duration of a highly speculative advance can easily exceed all rational expectations. However, at some point, the music stops and the pendulum inevitably swings violently in the other direction. Current market behavior suggests that the overdue cyclical top will likely form sometime during the next few months, so we remain fully defensive from an investment perspective.