WARNING, Market Top Near - Read NOW

Regretfully, Signs of a Market Top are Here

This is a post I wish I didn’t have to write, but it’s my duty to report the facts as I see them. This is a long post, but an important one. I will give you the data, and let you decide what is best for you. As a newsletter subscriber, you get this info first before it hits YouTube.

Market tops have a playbook, and I’m going to show it to you. Since the economy provides the stock market and crypto with money, we will look at signs of an incoming recession, then we will fine tune timing with stock market indicators. What I uncovered, I don’t think you’re going to find anywhere else - and I think it will surprise most.

Turning Bearish, Slowly

I would describe myself as a partial bear right now. I originally wrote this post a few days ago, and stock indexes in the US have almost regained their previous high, putting me on high alert. This is a decision point, as you will see later. Trading tops is difficult and risky. Volatility is up and direction tough to predict. I will react when the market tells me it’s time. This is probably a good time to remind you none of the following is personalized trading advice.

Narrow Down Timing - Recession Indicators

Signs are stacking up that a recession is near. Reliable recession indicators are triggering. Along with deterioration of the housing market, the labor market and small business sentiment among others, it appears a recession is imminent. It could come as soon as Q4. There are two reliable indicators that have triggered recently.

Sahm Recession Rule

On August 2nd, the US saw an unemployment increase of 0.2%, which triggered the Sahm Recession Rule. The rule says if the average three month unemployment rises by half a percentage point or more, we are ALREADY in a recession. I don’t think we’re in a recession now, but I think we’re close (1-3 quarters max).

This indicator has been correct ALL 11 recessions since 1950 with one exception. The only time it was wrong was in 1959, but we entered a recession 6 months later anyway… pretty reliable imo.

Unemployment is an unavoidable problem for the economy… we live in a consumer driven economy, and without jobs, consumers aren’t growing the economy.

Inverted Yield Curve

Ol’ reliable, the Inverted Yield Curve is the yield (aka % interest rate) of the US 10yr bond - US 2yr bond. This indicator has also predicted every recession since 1950, with one false positive. The indicator ‘trips’ when it goes negative and the longer we’re inverted, the more reliable the indicator is. We’ve been inverted for ~2 YEARS!!

Historically, we don’t fall into a recession until AFTER the yield curve un-inverts, or turns positive. The yield curve is still negative (-0.17% at time of writing), but has been on the uptrend lately. The recession usually begins 1-12 months after the yield curve turns positive again.

What about the Crypto Cycle, Ending in 2025?

A lot of people will say, "This doesn't fit with the 4 year crypto cycle"…… I know. If we follow the 4 year cycle, Bitcoin and crypto should top in 2025. I am a believer in with the 4 year crypto cycle, you can’t deny the pattern. But, crypto has never been through a true business cycle.

Crypto and stocks do not drive the economy, the business cycle does. If the economy falls on hard times before 2025, investors will have less money to put into investments, and some will need cash to cover expenses while experiencing employment gaps. Crypto is going to take a hit. The hierarchy cannot be ignored.

Fine Tune Timing - Market Tops of the Past

Markets top before recessions. Predicting recessions is relatively easy, there are dozens of indicators and clear patterns. But trading on recession indicators will cause you to be late. You will miss market tops, unless you’re a long time holder and would rather hold through market turmoil. Once we see a recession around the corner, we can start looking for market top signals.

Remember, crypto hasn’t been through a “real” recession, so I like to look at stocks for more reliable data.

There is a clear pattern in stock market tops, without exception stock indexes experience a double top. Interestingly, as more investors have jumped into Bitcoin, it also double topped in 2022. It could be different this time, but based on history it is wildly predictable, see for yourself:

Market Top Indicator, the VIX

Recently, I identified a market top pattern in stock indexes prior to recessions, and the indicator is the structure of the VIX. The VIX is a measure of estimated market volatility (aka, price swings in the market) over the next 30 days. This makes sense, volatility increases when investors are fighting for direction.

After hundreds of hours of research, I found a structure in the VIX that gives clues of deeper, systematic problems in financial markets, BEFORE prices begin to crash.

After the following charts we will dive into news articles that show evidence that markets know about underlying issues. The higher VIX confirms these issues will become a larger problem down the road. My take is market participants slowly see problems developing, and they react.

Market Top Pattern

This pattern is so consistent, we can create a template on how it should play out:

1. Pre-crash

2. Frist Top

   • VIX may or may not begin to make higher lows)

3. Valley of Optimism

   • Fed saves the day!

4. Top of Last Hope

   • We’re going to new ATHs!!! (just kidding)

The Market Always Knows, 2007 Edition

August 16th, 2007 marked the bottom of the Valley of Optimism in 2007. The S&P sank to ~12% from it’s First Top peak. According to the WSJ at the time, the market rightfully knew subprime mortgages were a problem. While the extent of issues were only known to a small cohort of market participants, news of liquidity problems began to spread and more investors began to get out of the market. But then something interesting happened, the Fed stepped in.

The Last Hope is False Hope, 2007 Edition

After the Fed’s announcement to cut the discount rate on August 17th, 2007, markets rallied into the Top of Last Hope. The “discount rate” is overnight bank lending, not the federal funds rate. But, it paved the way for rate cuts in the minds of investors. It was a band-aid to the fundamental problems, kind of like getting a participation trophy… it makes you feel good but you’re still a terrible soccer player. As we know, the sub-prime mortgage problem didn’t go away, but the symptoms were treated so many investors thought the disease had been cured.

The Japan Carry Trade, 2024’s Crash Catalyst?

Tough to say. On one hand, JP Morgan Chase reported 75% of the carry trade has been unwound. However, some rumors are circulating that hedge funds are getting back into their carry trades after the BOJ promised to stop increasing their interest rate. I mean, why not, the spread still exists and you just got a promise you won’t be blindsided by more rate hikes from the BOJ?

Another concern, raised by Jeffrey Kleintop at Schwab, are medium and long term carry trades totaling $4 trillion dollars. That’s a boat load of money. And, the BOJ’s pause on rate hikes will be hard to commit to over the long run as inflation is finally beginning to cause real pain in Japan’s economy.

Furthermore, the US will likely cut interest rates soon. If a 0.25% rate hike from the BOJ caused such a painful unwind, will the tightening spread between Japan & the US interest rates cause the longer carry trades to unwind as the US Feds begins it’s rate cut cycle? Only time will tell.

Regardless, the US economy is weakening quickly. Whether it’s a routine downturn in the business cycle, or a more volatile break in the financial system, signs are undeniable that we’re headed for recession. It is prudent to keep an eye on the carry trade none-the-less. A market event that caused the third largest VIX spike in history isn’t something to forget about quickly.

What is Next for 2024?

With this framework, there are two scenarios. Because so many economic indicators are flashing red, and the market reacted strongly to a potential market crash catalyst (the carry trade), I think we’re in the Valley of Optimism, if not at the Top of Last Hope.

Scenario #1 - Valley of Optimism

I am 70% certain we are currently in Valley of Optimism. As of Tuesday morning, we are almost at ATHs on the stock indexes and the VIX is still elevated. This is more likely if we see the VIX make a higher low… our previous VIX low was $$11.90. We are currently at $14.89 which is ~25% higher. It will take a week or so to find out if we level off near here. Any higher-low of the VIX will suffice, but I’d prefer to see 10% or higher from the $11.90 mark.

The catalyst for the Top of Last Hope could very well be the Fed loosening monetary policy September 18th at the next Fed meeting.

Scenario #2 - Pre-Crash

The second scenario would be that we’re only at the pre-crash. If this is the case, the market has new ATHs to make. In order to confirm this last market turmoil was the pre-crash, we need to see the VIX return to it’s previous low of $11.90-$12.00.

While this is plausible, I think we’d need at least another 6 months to play out the market top in this scenario. We’re so close to unemployment running away, I don’t see market participants sticking out an exponential rise in unemployment data much longer. But hey - markets are known to do crazy things.

My Exit Plan

I have an exit plan, but I want to get this email out first for you all. A video is coming soon that will cover all of this information.

*Reminder, this entire post is for informational purposes only, it is in no way personalized financial advice.