Social mood and hence the markets, seem to be nearing an inflection point. The two 90% up volume days of recent appear to have been the "kickoff" to perhaps the final stage of this bear market rally since the 2009 low. How much more staying power prices have is a best guess. But it probably won't be too long. Previous breadth thrusts resulted in "Zweig" Breadth Thrusts (2009 low and 2011 low) but this recent one did not result in a ZBT.
Social mood should be heading into a major turning point. Underneath the nearly 4 year rebound in social mood, things are still on a long term downward slope. Here are a few charts to suggest that point:
Note the trendlines. (Via Sentiment Trader) Each one is near or at its trendline more or less.
Yet despite the rebounded mood, things just feel exhausting. Will resistance on this line produce a hard downturn? We'll likely know this first half of 2013.
Yet that exhausting feeling fits well with a very large ending diagonal triangle we can count on at least the Wilshire5000, which is after all, probably the best index to use for overall social mood since its the broadest array of stocks. Ending diagonal triangles are a sign of exhaustion. Social mood may be exhausting and the waves reflect as much for now.
In any event, one can be reasonably assured that the rate of increase in government spending will slow and perhaps reverse. This will impact GDP. This will impact the massive monetary "flows" (read Zero Hedge on flows) required just in trying to stay afloat.
Just how high will the bubble go? Well its shows signs of rolling over. Even the FED has expressed reservations of taking on more debt. The FED is dwarfed by the size of the total credit markets and they know it. They too are finally feeling the effects of exhaustion I suppose.
Look at the latest rise since the one downturn in 2008. The continued rise since looks exhausted too. By the way that small downtick resulted in a 55% market loss! Imagine what a bigger downturn will produce?
Yes the credit bubble will pop indeed. Social mood seems exhausted to keep the credit thing going. Government has finally caught on to the trend and is finally struggling with its spending. And now the FED has finally expressed more serious concerns about taking on more debt. They cannot! Look at the chart above!
I once had a post titled "Liquidity is a state of mind". I still very much believe that. The state of mind (social mood) is showing signs of exhaustion in maintaining the funds flows required to keep the financial system from imploding. But implode it surely will. Timing - as usual - has been the key. And this overlapping mess since the 2009 low has kept us guessing the correct count all along. The market does its best to hide its intentions. But overlapping waves since the 2009 low betray its true nature - a massive bear market rally.
But one thing is certain, the markets are supposed to be where they are. Social mood is peaking since the 2009 low (as shown in the first three charts above). Even the President's ratings are high as a result of the general social mood rebound. The market is not lying. But it is diverging in a historical amount with true fiscal reality. And that too is meant to be. Because eventually the divergence will be too great for nature's laws to bear and the divergence will close. And the closing will be to the downside and may be violent and rapid. That too is a result of exhaustion.
So to recap:
1. Social mood is in a long term downtrend. Mood topped in 2000. Although rebounding for 4 years now, its well below peak and is nearing its upper rebound trendline. See my first 3 charts in this post. Yet the markets are not lying. We are at the highest mood peak since the 2009 low so hence the markets are at their highest (Wilshire 5000). So bears may not like it, but the market is not wrong.
2. The credit bubble is slowing. The slope of the rise since the 2008 low is less steep. (heck you can call it a small fifth wave event). The public, Congress, and now the FED are showing signs of unwillingness to take on more debt. Since it takes a long time to affect government actions, and government is typically "last to a trend" (due to the long time to build a consensus and then finally act on it), it is a social mood sign and an inflection point.
3. Any small downturn in total credit debt will result in a major decline in financial markets. See the FRED chart above on what the small downtick in 2008 resulted in a major market panic.
4. The divergence between where the financial markets are (near all time highs) versus the underlying reality of the situation (it took massive injections of debt to get it back up here) will close eventually. And since points 1, 2, and 3 support the notion that it will turn down hard, we may be seeing a collapse of historic proportions to close this divergence.
5. Exhaustion may be setting in for this social mood rise. People are forcing themselves to endure onward in the face of reality, but things are becoming obviously absurd. The "$1 Trillion coin" is an obvious absurdity. Yet they seriosuly have proposed it! Here is another example of absurdity I found today.
6. This exhaustion has a basis in the overlapping wave wedge shape of the last year or so. An ending diagonal pattern does not bode well because the size of it is so huge. Prices collapse after ending diagonals are completed.
When will the turning point come? The short term waves are not clear. But we do see a small breadth divergence. Sometimes its the smallest of clues.