The following is part of Pivotal Events that was published for our subscribers September 25, 2014.

Signs Of The Times

"The U.S. Stock market's bears have gone into hibernation. With no end in sight to a rally now in its fifth year, once pessimistic Wall Street forecasters are espousing rosier views. Healthier U.S. Economy, solid corporate profits and low interest rates."

- Wall Street Journal, September 15

"US Economic Recovery Still Has A Lot Of Life In It."

- Business Insider, September 16

The reasoning was that business cycles in the 1980s and 1990s lasted 9 to 10 years.

"Citigroup is diving deeper into derivatives. In the last five years, the firm that took the largest U.S. Bank bailout of the financial crisis increased the total amount of derivatives on its books by 69%."

"Alibaba is a historic stock deal. Profit opportunities like this come along once, maybe twice, in an investor's lifetime. For the long haul."

- Money Morning, September 19

"China's central bank joined its European counterpart in boosting liquidity to address weakening growth."

- Bloomberg, September 17

Perspective

Autumn arrived in more ways than one this week. On the calendar and in the financial markets, which seem to be early into the seasonal change to fall. An appropriate cartoon, "What A Fall There Was", follows.

As with the completion of any great bull market in any century, the key has been changes in the credit markets.

Credit Markets

Last week, we noted that the ECB bond-buying program seemed timed to provide a central bank "bid" as the Fed's buying program was scheduled to end. The strange idea that free markets need "hands on" guidance still prevails. This only exists because some with more familiarity with theories than with market history think intervention is needed, all of the time. And yet it has always been that the senior central banks have never been able to alter the curve and spreads when they reach excesses and begin to change.

Weird belief system.

On spreads, the difference between high and low grade bonds narrowed into only 140 bps in June. Widening reached 154 bps in August and corrected to 148. At 152 now, rising through 154 sets the trend reversal.

Stock Markets

Exuberance:

Last week, we reviewed the technical excesses accomplished through the summer. Also reviewed was the time from the peak in margin debt to when the stock markets roll over. That would be around late September.

A couple of other indicators have become interesting. Market cap relative to GDP is up to 1.67, which is the highest since 2000 and the Tobin "Q" measure is up to 1.12 which is also at the highest since that bubble ended.

These measure excess without providing timing.

As we have concluded, various indicators are or have been at levels only seen at cyclical peaks for the stock market.

Divergence:

Under such conditions it is appropriate to look for some divergence.

Tuesday's ChartWorks reviewed that the Russell Small Cap (RUT) has led declines in the S&P. Weakness in RUT in the latter part of September suggests a tradable decline in the S&P into the latter part of October.

RUT has been declining since the first of the month suggesting the big stock market will soon follow. RUT sets its high for the year in early July and is close to taking out support.

Volatility:

We have been watching the VIX forming what appears to be an important bottom. Lows were set at 10.29 in July and at 11.24 four weeks ago. At 13.5 now, rising above 15 would be the breakout. (Today's high has been 15.92)

Supporting this is a chart in Ron Griess' "Weekly Chart Blog". The upper and lower Bollinger Bands on the S&P are squeezing in together in a manner unseen on a two-year chart. Ron notes that the squeeze is leading to an increase in volatility. (www.thechartstore.com)

Resolution:

The resolution to all of the remarkable speculation in the stock markets will be interesting. The S&P is at 2000 and taking out the 50-Day ma would set the direction. It is at 1976. (Today's low has been 1966)

And then there is the "Hindenburg Omen" that Ross covered on Tuesday. The point is that this is the most distinctive since the one registered in March 2000.

Currencies

We have long had a target of 85 for the DX and this was exceeded on September 10. Now it has reached the 85.4 level.

Last week this section observed that an exceptional rise in the dollar can launch from an overbought level. Along with this we mentioned that phases of heavy stock liquidation can start from oversold conditions.

The thing to be noted this week is that the DX is extending its trend and the S&P is starting a new trend. In a week or so both could become exceptional.

The Canadian dollar broke below the flat trading range as commodities continue the plunge that began in June. Weakness could continue.

Commodities

The phenomenon of prices declining from oversold conditions occurred in commodities in August. We had noted the significant oversold conditions in wheat and in crude oil. Only very brief bounces followed and our August 24th view was "Most commodities are vulnerable to the rising dollar and the prospect of a liquidity crisis."

On the "vulnerable", the CRB recovered to 313 in June and concluded the big "Rotation" we called for in November. The last rally was a weak one to 292 at the end of August and it is down to 268 today.

On the "liquidity crisis", this week's action in credit spreads, the dollar and the gold/silver ratio are suggesting the crisis has started.

As we write, the grains (GKX) are setting new lows. Base metals (GYX) set a new low early yesterday. Today's weakness is threatening that low.

This week, crude oil prices have set a low for the year.

On the bigger picture, commodities set a cyclical peak in 2011. This occurred with a rare signal from our Momentum Peak Forecaster and this page called for a cyclical bear market. Indexes that don't include crude are setting new lows and extending the cyclical bear.

Crude oil has been spared the bear and is now vulnerable and often it can be weak into December-January. We have mentioned that Russia's blatant aggression could be constrained by a rapid plunge in oil prices.

We have mentioned that the cold summer depressed natural gas prices, as occurred last summer. The continuation of cooler temps into last winter provided a good trade. Cooler temps are likely to continue through this winter, but a general liquidity crisis could curb the potential play in natgas.

Precious Metals

Once again it is best to look at this sector as a financial indicator, particularly with silver down on the day and gold up. The moves are not big, with gold up .36% and silver down .41%. But it, as with the Hindenburg, is distinctive.

On September 4th we noted that the gold/silver ratio rising through 67 would be interesting and that rising through 69 would be the key breakout. Earlier today it reached 70 and that does it.

In the summer of 2008, the ratio needed to rise through 58 to warn of troubles. This was decisively accomplished by August 18. The S&P high in that May was 1440 and there was a weak rebound to 1313 in the middle of August. The previous low of 1200 was taken out in the middle of September, which marked the failure. The ultimate low was 666.

This time around, the S&P made its high for the bull market at 2019 last week. Gold's real price (relative to commodities) has also been making a statement. In setting what we have taken as a cyclical low in June, the rise since has been a warning on the durability of the cyclical bull in orthodox investments.

It has set an impressive uptrend and to get exciting it has to break above the 3.90 level. It is at 3.84 today. Taking out 3.90 would confirm today's signal from the gold/silver ratio. However, this may not be exciting to gold and silver stocks as the main influence could be diminishing liquidity in the orthodox world of stocks and bonds.

We have been thinking that the next buying opportunity could be found in October and as of this week this seems likely. The window of opportunity could be some 4 or 5 weeks from now.

Ampersand

We have been reviewing the recklessness of the issuance of sub-prime car loans bundled up as securities. Reminds of sub-prime housing loans. Further to the story, is that many cars in the boom have been sold to high-risk buyers.

Repo businesses now have disablers on the cars and when the account becomes delinquent, the button stops the car and there is nothing the driver can do.

If things go really bad there is going to be a lot of parked cars and not much of a bid for them.

Reminds of the gold mania in 1980, when everyone had to go placer mining in the Yukon. It went on for a number of years and "prospectors" needed pickup trucks and big earth-movers.

Truck dealers in Vancouver expanded rapidly in leasing any number of vehicles to the gold patch. Vancouver-based Finning Tractor provided a lot of D-9 Cats on lease.

Then precious metals and the play crashed and those trucks and cats are still in the bush. Finning had a rough survival and a number of over-extended truck dealers went broke.

There was no money to haul the equipment out of the bush.

• The debt service cost is relatively huge.
• That's at current low nominal rates.
• What happens when they go up?

Thomas Nast Cartoon On the 1873 Crash

• It happened in the fall.

• As credit strains developed during the summer, a New York paper, the Herald, editorialized that nothing could go wrong:

  "True, some great event may prick the commercial bubble of the hour, and create convulsions; but while the Secretary of the Treasury plays the role of banker for the entire United States it is difficult to conceive of any condition of circumstances which he cannot control. Power has been centralized in him to an extent not enjoyed by the Governor of the Bank of England. He can issue the paper representatives of gold, and count it as much as the yellow metal itself. [He has] a greater influence than is possessed by all the banking institutions of New York."

• The 1873 Bubble was number four in the series of great bubbles that began with the South Sea Bubble in 1720.

• 2007 was the sixth in the series.

Link to September 26 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2014/09/be-very-careful-bumpy-market-ahead/