The Fun Ought To Continue Soon

Last week, the "fun" started shortly after my post.

On cue, Emerging Markets sold-off having finished their impulsive ascent from February lows. Currently, this instrument appears to have finished the correction higher, and should carry on lower soon.

Similarly, the US Broker-Dealers' index (where Goldman Sachs is the largest component) also appears to have finished its correction higher, and ought to fall imminently.

And finally for today - the Real Estate sector in the US. The pattern could not get any more perfect. This particular market is about to sell-off very hard.

The Fun Ought To Begin Soon

Since Easter, European markets have stalled, and are effectively flat. US and some Emerging Markets are moving much higher. I continue to believe that this is not going to last.

From wave analysis:

The CRB index is ready to fall in a rather rapid third wave decline:

Emerging Markets moved to new highs (as forecasted all the way back in February 2010) in what appears to be a finished impulse:

The quality of this rally [specifically in Europe] remains very poor. Since the March’09 lows, there has been no price thrust that remained out of reach of a subsequent correction lower. However, the latest rally (from February’10 lows) appears to be impulsive. While this strongly points to a coming multi-week correction, it also suggests an absence of imminent collapse. I believe the most likely scenario will be one of extended range trading, as what I expect to be the final zig-zag forms.

From other indicators:

This rally is becoming more and more speculative in nature, as total volume on the NASDAQ is running into record territory relative to that of the NYSE:

Sentiment is in record bullish territory: according to CBOE never before have so many calls been bought relative to puts. At the same time, ISE Equities only index’s moving average measure is moving in on levels last seen in July and October 2007.

Relative to historic norms, the market is under pricing near-term (1 month) volatility relative to medium-term (3 month) volatility, as shown by the blue line in the chart below (ratio of VIX to VXV).

It is often said (past couple of months) that the market’s internals are very strong, as shown by the ever rising cumulative advancing-declining issues count, shown below. It also true that major tops during the XX century have all been accompanied by deterioration in breadth. This does not rule out a decline of about 10-15% now, followed by an advance, by most US averages to new highs, this time not accompanied by a rally to new highs by the AD line. This is how the top formed in 2007.

Finally, the McClellan oscillator has shown negative divergences prior to all market tops. It is doing so now:

The End-Game

Nothing like being two weeks (so far) early in calling a top to dent one's confidence, but as Chuck Prince said: "While the music is playing, you have to get up and dance - we are still dancing" - got to keep dancing!

Only thing is, I firmly believe that the music is about to stop, at least for a few weeks. On a number of metrics, including put/call ratios, VIX/VXV ratios, recent to older advancing/declining issues ratios - the market is as, if not more overbought than at a number of intermediate-term tops since at least 2000.

There are a couple of counts that I am following for major equity markets.

The only way in which they differ is where wave 4 ended and what I expect to be the final advance began. In either case, the most bullish projection that I can come up with extends to about 1200, and then comes off hard.

Both of the charts below are hourly S&P500.