Could This Be It?

The market-leading Nasdaq stocks have had a hard week. The FAANG stocks fell again on Friday and once again failed to top the highs of early June before the epic smash of June 9. Have we seen the top?

Bob Hoye of Institutional Advisors is one of my favorite market commentators. Why? Well, he is older than I am and he is an economic and financial market historian. That means he looks at how markets behave, not theoretical models.

I respect facts. Hoye studies facts, especially how bubbles form, how they behave and what happens when they burst. We are right now in the middle of the biggest financial bubble in history. Hoye correctly called the top of the 2000 and 2007 bubbles. Now he is calling the top of this one. His thinking was recently picked up by Barron’s.

Here is Hoye’s Bull Market Top Checklist published on June 6, 2017.

  1. Is the market up when it should be?

Yes. Historically, important tops come around June.

  1. Have there been signs of speculation?

Yes, momentum and sentiment numbers for the general market have been exceptionally high. The number of stocks in sensational rallies has been reducing, typical of the end of a bull market. When the market leaders such as AMZN and MSFT climax and fail, you have an important signal of ending action.

  1. How sound is the basic story supporting the bull move?

The Trump Rally has reached excesses and has brought the public in. Public participation comes at the end. The Trump story is now fading.

  1. What about the underlying economic expansion?

As weak as it has been, the expansion has been on since June 2009. In a bubble, the Treasury curve does not need to invert to signal a recession. This can be seen in every bubble going back to 1840 and before. Just approaching inversion and then reversing has been enough to prompt a credit contraction. The action in the credit markets is not as clear as it was going into the peaks of March 2000 and October 2007 as spreads still remain relatively tight. But loan growth has slowed dramatically in the last several months. Spread expansion (between high-yield debt and quality corporates) should be the next shoe to drop.

  1. On May 31, a “Hindenburg” Omen was registered. This was confirmed on June 26 as required for the Omen to activate. While each Omen has not been followed by serious liquidation, each severe liquidity problem has been preceded by a “Hindenburg”. One registered in June 2007 and was confirmed on October 15, 2007. One of the Omen’s key indicators – it includes a number of technical factors—is tripped when the daily number of New York Stock Exchange-listed 52-week highs and 52-week lows, are each greater than 2.2% of the total NYSE issues traded that day.

Is history repeating? The big FANG reversal on June 9 looks a lot like March 7, 2000, the first big crack in that bubble. The Nasdaq ultimately peaked out on March 10, 2000, followed by a failing rally that ended on March 24. From there, the market began to slide for real, with the craziest valuations leading the charge lower.

No one knows the exact path the market will take but my expectation is that downside acceleration will be even more violent than 2000, leading to a panic reversal of policy by the Fed not long after, when enough damage has been done to the stock market to cause a reassessment of the already-poor GDP data. It will then be gold’s turn to fly.

The collapse of the 2000 bubble ended a 20 year bear market in gold which quadrupled in price. The collapse of the 2007 bubble doubled the gold price again. Why would this time be any different?