Once we have accepted that economic cycles happen, and will always happen, viewing and judging markets is an exercise in guessing where we are in that cycle. After the worst week in equities in a couple of years – the question becomes: are we at the top of the cycle.
To determine that, we weigh some of the evidence available to us:
Evidence indicating the market has topped:
1. Housing appears to have peaked. While not revealed in the numbers yet, the number of houses sitting on the market in my neighborhood has gone up dramatically, homes are not selling as fast as they were, and prices appear to be declining.
2. John Hampson at solarcycles.net makes a very strong case that markets can be attributed to sunspot activity. While inconclusive to date, it appears sunspot activity has peaked
3. The Russell 2000, which represents small cap and more peripheral companies to the global financial system peaked in July and is down around 14% since then. The periphery always break down first
4. Many international indexes topped in July including Germany and other european markets.
5. The federal reserve is ending its QE program
Evidence indicating this is a temporary market correction:
1. The ECB is just now ramping up a massive QE program
2. Ray Dalio has currently indicated that he believes the market will continue strong for the next 18 months. Given his success and knowledge, this means a lot.
Traditional economic indicators like unemployment rates, hours worked, etc. are lagging indicators and do nothing to help us decide where we are in equity cycle. For this reason, none of these indicators are used. Given the evidence I am seeing now, its 5 -2 in favor of this being the market top of the cycle. This puts the odds around 70%, and thus its a 30% chance that its a temporary correction.