Last week saw the second highest buy climax reading -probably ever- but certainly in the past quarter century. A weekly buying climax occurs when a stock hits a 52-week high price, but closes the week at a lower price than where it began. Conversely, a weekly selling climax occurs when a stock hits a 52-week low and closes higher for the week. Weekly buying climaxes tend to cluster near secular stock market highs, while selling climaxes cluster near secular stock market bottoms. There are approximately 5,000 stocks included in the weekly survey. A typical weekly reading sees 25-75 stocks with buy or sell climaxes. Buy climaxes of 400 or more are of interest in identifying secular stock market tops.
The trouble with buy climaxes and sell climaxes is they tend to be more prone to false alarms than I’m comfortable with. So I do not rely heavily on them. Instead, buy and sell climaxes are combined with other input parameters in the Greedometer strategic risk gauge. That said, buy climaxes can be used as a wake-up call. Let me wake you up with this information. The top three buy climaxes (probably of all-time), but certainly for the past 25 years were:
#1 1079. Last week of April 2010.
- QE1 was ending.
- The S&P500 had stretched 11.5% above the 200-day moving average.
- The Greedometer briefly redlined (reached 7000rpm).
- What came next:
- the Flash crash.
- 10 weeks after the buy climax, the S&P500 was flirting with a 20% drop. Losing nearly 20% in 10 weeks is brutally fast. Very few periods in the history of the S&P500 have seen a drop this fast — probably just 1929 and 1987.
- The Fed stopped the crash by announcing QE2.
- The uninformed (and most of the investment industry) treat this period as a mere correction -and an excellent “buy-the-dip” opportunity in hindsight. This is delusional. Without the Fed intervening with QE2, another crash would have continued.
#3 643. First week of May 2011.
- QE2 was slated to end 2 months away.
- The S&P500 had stretched 12.7% above the 200-day moving average.
- The Greedometer had been redlining since the beginning of the year, and reached an all-time high reading of 8000rpm the previous week.
- What came next:
- The S&P500 once again quickly dropped 20% — this time over 4 months (FYI: it took 8 months to drop the first 20% from the 2007 market peak, so 4 months is quite fast).
- It required more Fed as well as the European Central Bank (ECB) efforts to stop the crash.
#2 887. Last week.
- QE3/4 was threatened to be reduced or ended.
- The S&P500 had stretched 12.7% above the 200-day moving average.
- The Greedometer has been redlining since mid January. 8000rpm was reached in the first week of April. The highest average reading has been seen so far this year (5 months) –an epic 7600rpm. This crushes the pre-crash 2007 average, as well as 2010 and 2011.
- What comes next?
- Will the Fed back off the QE throttles as it seems to be threatening to do?
It’s not a sure-thing that the Fed will begin reducing its current $85B/month QE program. But -per my previous comments- it must at all cost avoid being caught in a situation wherein it is seen to be still doing everything it can while the U.S. economy falls back into recession. It must maintain the illusion it can intervene to squash any inconvenient recessions, therein keeping the great theoretic “wealth effect” moving forward. From recent regional Fed reports and ECRI’s data, I’d say the chances are good the U.S. enters recession in Q3 (and that Q2 shows very anemic economic growth).
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