December 06, 2022: Recap of key market structure going into Q1

The bull market is very mature. It has been advancing for 14 straight years. There are a number of signs that signal a change in major structure is developing. One of the first signals that a bull market peak has occurred is the shift from deflationary assets to inflationary assets.

In Chart 1, we see the long-term performance between deflationary assets (Dow) and inflationary assets (CRB-commodities).

From 2002 to 2012, the CRB was generally outperforming the Dow. Starting in 2012 and going to the end of 2020, the Dow's performance was dominant over the CRB. That all changed in 2021.

Beginning in early 2021, commodities (CRB) are once again outperforming the deflationary-based Dow.

These key shifts from one asset group to another also occur at about the same time as the bull market makes important shifts in trends.

Chart 2, shows the benchmark S&P 500 reaching the well-established downward trend line in December and rolling over. This year-long pattern of lower lows and lower highs is expected to continue into Q1.

Chart 3 points to one of the early signs of a pending recession and market correction. A prolonged inverted yield curve.

An inverted yield curve is when short-term yields are higher than longer-term yields. If this event occurs for a few weeks (less than 6 weeks), then there is no signal for a recession. However, beyond 6 weeks, the probability greatly increases. The current inversion is now 22 weeks old.

Bottom line: There is mounting evidence that the 14-year bull market has come to a completion. The shift of performance from deflationary assets (Dow) to inflationary assets (CRB-commodities), the new downward trend in the S&P 500 (the same is occurring with the NYSE, Nasdaq, Russell 2000), and the prolonged US yield curve inversion are some of the more obvious markings of a bull market completion.

Indications of an overextended economy are the rapid rise in inflation, the drop in consumer confidence, the plunge in pending home sales, and the sharp decline in US Manufacturing index.

Models point to a downside target for the S&P 500 of 3250.