At a current duration of 51 months, the cyclical bull market from 2009 is long overdue for termination. Fueled primarily by a historic amount of stimulus from the Federal Reserve, the stock market rally has accelerated into a prototypical speculative blow-off phase, suggesting that the next cyclical top will almost certainly develop when the advance terminates.
Driven by euphoria, highly speculative rallies of this character will often continue to advance even after the market has become extremely overbought across all time frames, and predicting the timing of the inevitable reversal with a high degree of statistical confidence is nearly impossible. However, several subcomponents of our Cyclical Trend Score (CTS) are flashing warning signs that suggest a long-term top is approaching. Our sentiment score has moved below the -80 level for the first time since May 2011, indicating that the market is vulnerable to a severe correction.
Additionally, our price oscillator score, which monitors overbought and oversold conditions from a cyclical perspective, has moved below the -80 level for the first time since June 2011, indicating that the cyclical bull market from 2009 has become extremely overbought.
Although internal measures such as market breadth and volume have yet to break down, the degradation in multiple other measures suggests that the inevitable reversal could occur at any time. The cycle high signal that was generated last week remains in effect, indicating that a half cycle high (HCH) likely formed during the week ending May 24. Only a quick move above the stop level at 1,667 this week would invalidate the signal and suggest that the initial rally phase of the intermediate-term cycle from April is still in progress.
At this very late stage in the cyclical bull market from 2009, every intermediate-term cycle high is also a potential long-term top, so it will remain important to monitor price behavior closely during the next few months.
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