bull market ending

At the top of this post you will see the September 23 cover of Time Magazine. Right below it is an image of today's New York Times front page. And below that is an image of the May 17 Economist cover.

I learned from Paul Montgomery, the inventor of the magazine cover indicator,  that the image of a bull on the cover of Time Magazine has bearish implications for the next 12 months (although the market may well rally for 4-8 weeks after the appearance of the cover). In this regard it is also interesting to recall the May 17 cover of The Economist which also depicted a bull, just a week before the May 22 top in the S&P at a level almost equal to last Friday's close.

I think today's New York Times headline reinforces this bearish warning. Why? It tells us that the economist and Obama associate Larry Summers has withdrawn his name as a possible nominee for Fed chairman. Summers has been an enemy of the Fed's quantitative easing program and has no special expertise in monetary economics. Last night when Summers' withdrawal was announced the S&P jumped more than 1% showing how much the market likes the Fed's QE program. But the headline makes me think that the beneficial effects of the Fed's QE program are now pretty much priced into the market. This doesn't mean that the S&P won't go higher - the economy is improving after all. But it does mean than one prop under the market has now been kicked away.

When the S&P reached the 1540 level I took a guess that the market would have a hard time moving above its 2007 top and on this basis suggested that conservative contrarians cut back on their stock market exposure. Such a cut-back normally would require a 2% drop in the 200 day moving average (the red line on the bottom chart). This moving average is currently at 1575. However I think that while this cut-back was early these magazine covers and headlines suggest that it will turn out to be as good an exit point as any subsequent moving average signal.

The bottom line is that the odds now favor a lower S&P 500 index 12 months from now.