The stock market is in the process of making a generational top.
The story is right there, directly in front of everyone's face. However, just like some of America's most infamous serial killers, it is hiding in plain sight. The gigantic, broadening top, aka megaphone pattern, in the major stock indices is like nothing ever witnessed by modern day traders or investors. While rare, these patterns are some of the most reliable in trading and are telling market participants an unthinkably frightening story. The definition below is from investopedia.com
One of the old adages of Wall Street is "they don't ring a bell at the top." Well, that might be true but Ms. Market is yelling at everyone through her megaphone that the bear is coming and his wealth destruction this time around will ruin the psyche of a generation or more of investors.
Before writing this post I did some minor searching to see if there was any mention of this ominous formation in the more mainstream financial sites. While I'm sure it is being talked about and discussed somewhere, I was unable to find any mention of the multi-decade megaphone pattern that has formed on all of the Dow Indices and is so profoundly obvious. Before I post the present day charts I wanted to post some previous tops that have occurred in this particular pattern. Keep in mind that none of the previous market tops were formed from a megaphone near the size that the current market faces.
These were all significant market tops. The 1929 and 1987 markets crashed. Perhaps the most frightening thing of all is that none of these broadening tops took more than few months or so to develop. As you will see in the following charts, depending on the index, some of the formations have been developing for decades.
The charts of these indices should be extremely sobering to anyone who says they are a technician. They are telling investors that the market will be embarking on a bear market journey that will probably be unlike anything in the modern financial era. While I do think there is some more work and time before the markets finally break, long term, passive investors have no business being invested in the stock market at this stage of the cycle. My work suggests that after this 1st decline of 12-15% there should be a higher high, probably in late spring/early summer 2014. That is when I expect this bearish pattern to exert it's force on the market.
With all the talk of a secular bond market decline along with several analysts who were bullish at the recent top and are now negative, bond prices should begin to outperform the market on a secular basis in the next couple of quarters.