Last week, we observed that several subcomponents of our Cyclical Trend Score (CTS) had declined to their lowest levels during the last two years, suggesting that the formation of a long-term top in the stock market is becoming more likely. For example, our sentiment and price oscillator scores have moved below the -80 level for the first time since 2011, indicating that the cyclical bull market from 2009 has become vulnerable to a severe correction.
Although market internals such as breadth and volume have yet to generate comparable signals, they have begun to exhibit early signs of weakness. For example, the recent pullback in the S&P 500 index was accompanied by a severe decline in breadth summation.
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 current intermediate-term advance from 2012 terminates.
The CTS has started moving lower in negative territory, although it remains well above sell territory at the -65 level. Therefore, a cyclical trend sell signal is not imminent.
However, when the CTS does move into signal territory, it tends to do so very quickly, so it will be important to monitor the current decline closely during the next few weeks. A move into sell territory would be the first step in the potential generation of a cyclical trend sell signal, but we are still a long way from any definitive developments. Cyclical tops usually take from several weeks to several months to form and the market will provide plenty of advance warning when the forthcoming long-term reversal is in progress. As always, the judicious study of market data will tell us when the cyclical top is likely in place.