Beware: Market is close to dangerous 'triple top'

The Dow has run up to -- and been turned away from -- 16,000 twice before.

By MSN Money Partner Dec 10, 2013 4:43PM

Financial Stock Chart © Kick Images, Photodisc, Getty ImagesBy Mark Hulbert, MarketWatch


Here’s something really scary: The stock market may be forming a dangerous triple top of major long-term significance.


That’s because the Dow Jones industrials ($INDU), in inflation-adjusted terms, is no higher today than it was at the 2000 and 2007 tops. It should give us pause to note that the market -- strong as it has been -- is only back to the level that turned the market back on two prior occasions.


That puts the market in a “make-or-break” position. On the one hand, it would be a sign of significant strength if the market were able to break through the “resistance” created by the 2000 and 2007 tops.


On the other hand, if the market were to turn down from close-to-current levels -- and thereby form a triple top -- then it would mean that the market on three occasions had tried, and failed, to break through to higher levels. According to the theory behind technical analysis, that would mean that current levels represent particularly strong resistance -- and make it that much harder for the market to break through in the future as well.


In other words, if you believe in technical analysis, the market is at a very critical juncture.


Take a look at the accompanying chart, which plots the Dow in constant 2013 dollars.























Compared to the Dow’s current level of close to 16,000, the October 2007 bull market top was near 15,800 and the Dow at its early 2000 top stood at close to 16,200.


To be sure, as David Aronson points out, a chart of the inflation-adjusted S&P 500 index tells a slightly different story. Aronson is president of Hood River Research, a firm that employs sophisticated modeling to “enhance the profitability of quantitative investing strategies,” and the recent author (with Dr. Timothy Masters) of “Statistically Sound Machine Learning for Algorithmic Trading of Financial Instruments.”


For example, while the inflation-adjusted S&P 500 currently is ahead of where it stood at the October 2007 market high, it is below where it stood in early 2000. Still, Aronson said in an interview, the picture painted by the S&P 500’s inflation-adjusted chart is broadly similar to the message of the Dow chart: “From a technical analysis perspective [the S&P 500 is] in a zone of resistance based on the two prior highs.”


Also worth noting is that this analysis focuses on price levels and does not include dividends. Though the market’s dividend yield over the last 15 years has been quite low, the inflation-adjusted market today would be modestly higher than at the 2007 and 2000 peaks if dividends were taken into account. However, Aronson argues, it wouldn’t be so much higher as to invalidate the concern about a potential triple top.


To be sure, the market may resolve its current critical juncture by headed higher rather than turning down. Yet Aronson notes that other indicators are also flashing caution.


One to which he draws special attention is known as the Value Line Median Appreciation Potential, or VLMAP, for short. This represents the median of the projections made by Value Line’s analysts of where the 1,700 widely followed stocks they closely monitor will be trading in three to five years’ time. But for brief exceptions, the VLMAP currently is lower than it’s been in many decades.


For example, the VLMAP today stands at 30%, where it’s been for seven straight weeks. Prior to the October 2007 peak, it got this low for just one week. And it never got this low in the months leading up to the 2000 market top. ( Read a column I devoted earlier this year to the VLMAP. )


In fact, you have to go all the way back to early 1969 to find another time in which the VLMAP spent as long a period at 30% or below. From then until the market’s December 1974 low, of course, the Dow fell more than 40%.


When coupling the bearish message of the VLMAP with the potential triple top of the inflation-adjusted market, Aronson thinks we should be worried about where the market is headed.


More from MarketWatch


 

48Comments
Dec 10, 2013 6:41PM
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This must be the 10,468,251st article trying to make sense of this market.  When are these people going to learn - we are in UNCHARTED waters here.  When it comes to charting and technical analysis, history can't tell us a damn thing, because these conditions haven't existed before, ever.

It's time to go back to basics and look at the forest instead of the trees.  Equity markets are trading at all-time highs.  Under normal circumstances, we should be getting close to a good time to sell.  But with QE being shoved down our throats and a bunch of other things artificially propping up the economy, etc..., it's nearly impossible to get a read on exactly where we're at.  Bottom line, what's the best we can reasonably hope for before the inevitable correction?  A 5% move above all-time highs?  A 10% move?  Did you ever hear someone lament the fact that they moved to cash when indices were trading near all-time highs?

At some point, you go from being smart to being greedy, and then to being stupid.  Evenutally, everyone who acts stupid will pay the price.
Dec 10, 2013 6:10PM
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And that dear idiots who keep saying it's a great time to buy, (everyone who commented before me), is why 40% of my holdings have been moved into cash. I'm ready this time.

Dec 10, 2013 5:41PM
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Instead of looking at numbers and making stupid guesses about records, why not write articles about facts and factors, the likely attributes in play. Pretty much everything is either failing, a crisis or so chock-full of QE that it has no tangible substance. 
If you are Brent-- the eternal optimist of buffoonery, stay all in. If you want to eat in January, realize that the growing scenario is failure. Europe is brainstorming bank revival for the umpteenth time. America just invoked the Volcker Rule to stop banks from careless stupid arrogant investing. What other type do they do? A majority of Fed Presidents favor ending QE now. That's not a taper, it's an end before it does any more damage. The omnipotent powers that control everything commercial in the world are realizing that we are better off with them dead, and since they can't change their adult diapers on their own, aides could and would do the deed. Pretty sad to be that bad and still not be able to live one day without over-control. Pathetic does not describe it well enough.  
Dec 10, 2013 9:08PM
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Wish that I was on ole Triple Top
Down in the Wall Street Hills.
Ain't no taper talk on Triple Top,
Ain't no national debt bills.

Once I had a great stock on Triple Top,
Half bear the other half bull fat;
Wild as a Yahoo as sweet as Coke pop,
I still dream about that.

Triple Top, you'll always be,
Money sweet money to me.
Good ole Triple Top,
Triple Top can't you see.

Once two investors climbed ole Triple Top,
Lookin' for a thousand dollar bill,.
Investors ain't come down from Triple Top,
Reckon they never will.
Dividends won't grow at all on Triple Top,
Charts are too rocky by far.
That's why all the investors on Triple Top,
keep their gold in a jar.

Triple Top, you'll always be,
Money sweet money to me.
Good ole Triple Top,
Triple Top can't you see.

I've had years of stocks cut me like a knife,
Trapped like a duck in a pen.
All I know is it's a pity life,
Can't be simple again.*

 

* props to wedding reception disk jockeys everywhere

Dec 10, 2013 7:10PM
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"Zone of resistance?" Give me a break. This "technical analysis" is bunk. Past trends do not reliably predict future performance. 

Now if you want to craft a bull or bear argument based on real economics, I'm all ears. But even that can be a fool's errand.
Dec 10, 2013 8:19PM
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Almost as bad as the dreaded Triple MuffinTop! Aries rising! Pisces recumbent! Oh ho!

Run away! Run away!...
Dec 10, 2013 5:20PM
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Well.... why chart back to only 1990?  ..or for that matter, why not chart back only a decade... to 2003? I agree, Brent, we can find a chart to fit our point of view. 

Dec 10, 2013 5:53PM
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How about facts and data instead of voodoo magic smoke and mirrors?
Dec 10, 2013 6:54PM
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Scare me today cheat me out tomorrow
Dec 10, 2013 6:27PM
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When Bush was President, you didn't hear certain folks complaining about stocks were going up due to Scam Derivatives and the Housing ATM. Now the Markets are going up mostly due not because of any posters on websites but because of Cheap Credit. Stock Buybacks by Corporate America Dwarf retail investors in a massive way.

We are seeing Financial Engineering on a level not seen before due to the Feds printing to Infinity propping up Stocks and Worthless $500-700 Trillion in Scam Banking Derivatives. Meanwhile Corporations care not to pay a living WAGE as they now feel they can keep all profits to themselves. This will end badly. The last time the Wealth Divide was this great, The Great Depression.
Dec 10, 2013 5:01PM
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The crbaby bears would like this story.I`m a chart man myself,but,you can always find a chart

to capture your point of view.

Dec 11, 2013 12:04PM
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PROPHECY ABOUT  WALL-STREET - It is a prophecy against the United Sates but specifically about her wealth making machine. Details can be found in Revelation 18:

".... and in one hour, her wealth will be gone. And the merchants of the earth, who fornicated with her a delighted in her will weep and cry in desperation"
Dec 11, 2013 2:56PM
Dec 11, 2013 12:40PM
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OMG....Now we have to deal with this shidt too, and the end of days...?
Dec 11, 2013 9:04AM
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Oh no, what's next 


The " Quad Crumbler" ?

Then the " Penta paralizer " ?

I'm out when we get to the " Octo Oh-God-Awful "
Dec 11, 2013 9:31AM
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Great article..enjoyed it, agreed with it.
Dec 11, 2013 9:55AM
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I'll be selling at the Quad Que....
Dec 11, 2013 2:49PM
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We have been in a depression since 2007.  bubble after bubble after bubble...  I go by the coke machine index.  In 2007 a can of coke from the coke machine was .65...  I just paid 1.00. A friggin dollar for a coke out of the coke machine...  Inflation is going to explode soon everyone.  They can't contain this forever.  They will need a large war or a dirty bomb or nuke in a major city or something to float this debacle out.
Dec 11, 2013 11:17AM
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Oh heaven a triple top! This will certainly lend more credence  to the gloom & doom view of the forum morons who believe the end is near. Yup they believe we are soon going to be living in bunkers and wearing gas masks and radiation protection suits! 

Oh yes little fellows exit the market right now and buy Gold with your few pennies. Also stock up on ammo too. Don't forget the Spam!

Yuk yuk!
Dec 10, 2013 8:10PM
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Here's my observation.  It's amazing how the  chart literally balances out to almost perfection, opposite and equal reaction to the future.  Pay attention:  The Triple Chart warning is very supportive in my charting.  From the low area in 1995, to the peak in 2000 (5 years), then from the low of 1995, to the dip low in 2003 (8 years), then the dip 2003 to peak 2008 (5 years), and thus from the low 2008 to 2013 (5 years).  Then the low 2008, projected ahead to 2016 (8 years).  So, is the next peak in 2016, or very close to the present <?>.  Supposedly, outside the box observation, well, who knows.....
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