Don't Wait for Top Tick

In March 2009, both the Dow Jones Industrial Average ETF (NYSE ARCA: DIA) and the S&P 500 ETF Trust (NYSE ARCA: SPY) bottomed out, a culmination of the infamous 2007/2008 financial crisis for US equity markets.

The accumulation and then the repayment of debt basically drives every economic cycle there is. And right now we have probably explored the envelope of mortgaging our future earnings.
— Paul Tudor Jones, "Trader - The Documentary", 1987

DIA traded as low as $64.78 in that month, whereas SPY traded as low as $67.10; from then onwards, neither index has looked back, and one of the greatest bull markets in US stock history has ensued.

On Friday, DIA closed at $177.65 and SPY closed at $206.52. Yesterday, DIA closed at $179.36 and SPY closed at $207.47. To say that these indexes have had quite the run over the past six years is self evident.

Bullish momentum is undeniable - every single downturn is seen as a buying opportunity and prices ferociously rebound after sell offs to reclaim highs, to such an extent that the SPY traded as high as $212.97 on 12/18, albeit briefly, when what can only be explained as black box trading programs rushed in a frenzy to scoop it up.

What we must ask ourselves at this juncture, now that 2015 is upon us, is can this truly continue unabated? History has demonstrated that it simply cannot.

Although traders should not concern ourselves with calling tops and bottoms, risk versus reward is nonetheless a consideration in our decision making process, and there are some signs which should cause us to pause when deciding whether to enter the markets long at these levels for an extended period of time.

$SPY : SPDR S&P 500 ETF Trust; $DIA : SPDR Dow Jones Industrial Average ETF

On the monthly chart for SPY and DIA, -DMI spiked up significantly following the broad market October sell off, a marked reflection of underlying bearish feelings about equity prices. Notably, a similar spike higher in -DMI occurred in 2011 and this was followed by a protracted sell off for the next five months. What is different now is that we have not seen follow through in the selling - instead, the market rebounded to new highs.

If growing geopolitical tensions and rapidly falling commodity prices haven't caused stock markets to blink in recent years, it is our estimation that the topic of global debt will at some point take precedence in 2015 and start to rattle US indexes. To what extent, we are not certain, but a shift in sentiment is inevitable.

As noted on the chart, +DMI in early 2009 had flat lined to such an extent that the bulls seemed incapable of defending falling stock prices; we then saw +DMI spike higher and the bullish train left the station. This past year has been one in which the bears threw in the towel; however, with the recent rise in -DMI, will they finally start to put up a fight? Time will tell.

+DMI remains above -DMI on the monthly charts for both SPY and DIA, so the bulls are still in control in this timeframe, although the ADX line is no longer rising, which may indicate the longer term trending move higher that picked up speed in early 2013 is approaching its climax.