In The Balance

The US dollar appears to be on the verge of breaking down, but it isn’t a done deal yet.

Source: Andrew Nyquist

The Chinese stock index is on the cusp of a breakout. A Shangai breakout and a dollar breakdown would really give commodities some acceleration. However, no China break out either as yet, and a reversal into the triangle is possible.

Source: Bloomberg

AAII bullish sentiment has really washed out, which is supportive for US stocks.

Source: Bespoke

European stocks are underperforming, and Euro debt continues to weigh. Spanish CDSs have eased a little, but only to just below record highs. I expect them to come again.

Source: Bloomberg

Economic Surprises continue to collapse.

Source: Bloomberg

Geomagnetism appears to have ebbed today, but 4 days of disturbance has tipped the model projection over to a slightly downwards bias, with particular downward pressure into next weekend’s full moon.

We have US earnings exceeding, a washout in bullish sentiment, and a double bottom on the S&P500 at the backtest of the 2011 old highs, together with a lack of major topping indicators at the 2012 highs, all supportive of further upside for stocks. Then we have collapsing economic surprises, Euro debt, and geomagnetism all exerting downward pressure. And we have the US dollar index and Chinese stock index both at crunch points.

The combination of excessive pessimism in multiple commodities, higher sunspots which should encourage commodity speculation, and lagging in both Euro and Shanghai correlations as shown below, makes it likely commodities are about to perform.

Source: PFS Group / Stockcharts

If commodities are about to perform, then a breakdown in the US dollar and a breakup in China stocks would make sense, and those developments should in turn pull up equities too. But as yet we remain in the balance, and if we get movement the other way in the dollar/China, due to Economic Surprises, Euro debt, and/or geomagnetism/full moon then it may mean a little more time is needed. But to reiterate my expectations drawing together previous solar maximum / secular commodity conclusions, commodities should start to outfperform whilst stocks track overall sideways with volatility. I remain lightly long stocks and heavily long commodities.

On a personal note, Spring is here in the UK, and the outdoor pursuits are calling. I have a list of research threads to look into related to trading and the markets, some provided by readers, some of my own sourcing, but I expect to address them in the next off-season, towards the end of 2012. I fully intend to maintain posting and analysis several times a week, but additional deeper, original pieces of research are on hold for now, so if you put a suggestion my way, it’s on my off-season to-do list. The UK good weather season isn’t as long as some others, so time to make the most of it.

 

WP Model

Here is Will Preston’s updated SP500 model chart.

Apple jumped 7% in afterhours last night, so looks likely to be bullish for the markets today, now let’s see what the FOMC outputs are and how they are received. Sunspots continue to climb, but geomagnetic disturbances continue. Dutch CDSs are at joint record highs, following the fall of their government, joining Spain debt in reaching accute again. Yet the Euro is edging up against the dollar despite these troubles.

Update

The sun has woken up. Current sunspots are more in line with a rising trend.

A geomagnetic storm is in progress, so caution. But the extended geomagnetism forecast continues to show a flat to upwards trend ahead, which should provide support for risk assets.

I have updated all the short term and medium models, on their relevant pages.

Economic Surprises for major economies finally went negative yesterday – a bearish development.

Source: Bloomberg

European PMIs were weaker than expected, suggesting Europe is not out of recession yet. Leading indicators for Germany and China came in positive.

The US dollar remains undecided in the nose of its triangle, but running out of room. I maintain the expectation that the FOMC outputs may push it one way or the other.

Source: Stockcharts

Spain, Italy and France CDSs continue to rise. Portgual CDSs have fallen away and out of the limelight. But the bigger trio have the potential to overwhelm the markets if this continues.

Apple earnings today after the bell.

Solar Peak Secular Asset Conclusion

Here is a table showing just the last 3 secular commodities bulls and associated solar maximums. I have created a forecast along the top row for the current cycle, based on them.

I found it help clarify what could come to pass. Gold could potentially not peak until late 2013. But peak inflation should occur fairly close to the solar peak, suggesting oil/food, at least, should surge ahead of that, and gold should be performing well by association. Real equities valuations could potentially not bottom for another few years, if a recession begins later or a double recession occurs. It doesn’t alter my strategy or positions. It perhaps implies a little more patience is required in seeing it all play out.

The chart below shows the current Dow chart overlaid on the 1980-82 Dow chart. 1980 was the US election year like now, and it was also a parallel secular commodities and solar maximum. A similar unfolding would see equities track sideways to upwards into the elections later this year, before down into their final low in 2014. I would note though that the solar maximum takes place after the elections this time, not before like back then.

Source: Charles Githler (Hat tip Juan)

Turning to the current markets, Tiho did another great summary yesterday at his Shortsideoflong blog, and my thinking is very much aligned with that. I will just add that I continue to expect a bit more pro-risk upside into this weekend’s new moon, so that means today, but I expect to keep my bounce longs as the upside hasn’t been decisive. As my equities longs are fairly small, I would happily add lower if this turned out to be an extended B wave in an ABC down. Sunspots continue to increase. Economic Surprises continue to flounder. Asia continues to outperform currently.

Charts

The first chart shows the Aussie dollar broke out of a falling wedge and successfully backtested, which previous marked new bullish uptrends in stocks and commodities.

Source: Chris Kimble

This second chart shows the Indian Sensex in a similarly bullish technical formation.

Source: Market Letters

The third chart shows that Dax sentiment washed out fairly swiftly, echoing AAII sentiment for US indices, making upside appear more likely  than down, from a contrarian perspective.

Source: Animus

And the last chart shows capacity utilisation as a US economic proxy, revealing the Fed has kept rates too easy recently, making significant inflation ahead more likely.

Source: Scott Grannis

All four charts make pro-risk look attractive right now. Shorter term I am still looking for upside into the end of this week, and will then review whether or not to sell my bounce equity longs. There are more important earnings first, and I am aware the uptrend in place again since yesterday could yet be part of a longer B wave that began a week ago, in an ABC correction down. Alternatively, given how quickly capitulative breadth was reached, the low could already be in and a revist of the highs coming next.

This Week

Friday’s action was a reversal of Thursday’s strength, including a potentially decisive channel exit for Apple, and Spain CDSs reaching new highs.

I maintain the expectation of upside into the end of this week, into the new moon. There are some key US earnings out this week. Last week’s opening set produced a beat rate of 75%. If Spain becomes more accute, or earnings disappoint, and we make a lower low on the indices, I’d be looking for more evidence of capitulation or positive divergences, such as on the Nymo. Only Spain debt is showing signs of stress currently. There is no notable contagion elsewhere. However, it is a large economy with peak debt rollover requirements this year, so clearly a threat.

Economic Surprises remain in their overall downwards trend, whilst still positive, and ECRI leading indicators remain in their uptrend, now at 1.4% positive. PFS recession leading indicators show no current likelihood of the US slipping into negative growth.

Gold miners are into week 9 of a potential perfected DeMark buy set up this week. The US dollar is pressing for the decisive triangle breakout against the Euro.

Two great posts by Tiho at his Shortsideoflong Blogspot on Friday and today.

OK, to sum up, I expect a push up in stocks into the end of this week. If we get that, I may exit my bounce longs. If not, I’d look to add more lower down on signs of capitulation or positive divergences. In the medium term, I still expect overall sideways action for stocks, with global leading indicators still on the up, but economic surprises on the down, with us having seen no regular major top indicators at the March top, and having fairly swiftly reached oversold Nymo and a washout in bullish sentiment. I maintain the better opportunities are in gold and miners, which are due lift off. But the US dollar may hamper this. Continued stress in Spain debt may weaken the Euro versus the dollar.

Update

China GDP came in lower than expected but new lending much higher. Ryan Puplava makes the case for the Chinese economy and stocks to be bottoming here.

Source: PFS Group / Wolfe Trahan

If so, that should provide a push on commodities.

William Dudley of the NY Federal Reserve yesterday suggested they were ready to deploy QE3 if things deteriorated, which adds to the recent mixed messages but perhaps provided one reason for gold and the Euro to rally yesterday. The US dollar index has accordingly dropped to the bottom of the triangle nose.

Source: Stockcharts

Clearly, the triangle is running out of room. Spain CDSs remain critically high, though Italian debt sales yesterday went better than expected. US earnings are only just getting going, but Google last night beat expectations. US economic surprises made a leap up yesterday, but so did surprises for all the major economies. I remain of the expectation that the dollar will eventually break down, in a commodities finale, but in the shorter term I am not sure which way this will break. Sentiment still gives no clues either way.

AAII bullish sentiment for stocks has collapsed, following the recent correction in equities.

Source: Bespoke

This collapse perhaps echoes the swift collapse in the Nymo and move to capitulative breadth in that we might expect upside in stocks from here rather than downside. Capitulative Breadth dropped from 7 to 2 following yesterday’s rally, so back to neutral. We often see a positive divergence in Nymo to mark a low, which could mean a W bottom in stocks. There is a geomagnetic storm in progress today. Combined, we could see a pullback in equities shortly, to make the second half of the W bottom, and this is perhaps echoed in having reached the backtest of the broken uptrend:

Source: Andrew Nyquist 

Positive pressure should resume into the end of next week and the new moon, following the passing of the geomagnetic storm.

Models

Yesterday a little pressure eased in Euro debt as there were supportive bond-buying noises from the ECB, but Spain CDSs remain critical. Crude oil inventories came in above average, but didn’t translate into downward pressure in the oil price. Capitualtive Breadth ended at 6 or 7 despite the upswing in stocks, suggesting equities should be underpinned and that a rally remains likely. The US dollar index remains in its triangle for now.

Will Preston has kindly shared his updated models with us again. These models are an amalgamation of political cycles, economic cycles and statistical cycles. The first chart is the SP500, showing overall sideways volatility but with an upward bias into the summer.

Tom McClellan’s Eurodollar 1 year advanced model predicts sideways consolidation into June, whilst geomagnetism seasonality predicts an upward bias into June. Jan Benestad’s 100 day momentum indicator suggests a higher high in around 2 months time. Stock market health remains pretty good, with no typical major top signals at the March top. Euro debt, China growth and Economic Surprises remain threats, but leading indicators and Operation Twist continuing into June remain supportive. Drawing all that together, sideways volatility with an upward bias for the next couple of months appears reasonable, unless there is a significant escalation in one of the listed threats or US earnings signifcantly disappoint.

Next is Will’s gold model, which shows a steep upward bias from now into August, with a target of $2600 by early August.

The inverse head and shoulders formation, which can be seen in that chart, has a target of $2050. With gold recently triggering overbearish and intermediate term buy signals, I consider there is a reasonable chance of that fulfilling. That would make for a new all time high, and would decisively end any doubt that gold’s bull was over. With that confirmation, and into clear air, gold could really become a momentum buy. However, for now, we are a long way from that, with gold going nowhere in the middle of a 6-month sideways range.

Sunspots have weakened again, but by planetary influence should pick up in May/June again. Increasing sunspots should encourage speculation in commodities and inflation.

Opportunities

Got back from vacation last night, and my priority was to look for any glaring opportunities, covered below. I will catch up gradually on mails, comments, etc. I have updated the short term models page and will update the others in due course. Below are models for the Dax and CRB which show potential upside from now into the end of next week.

Stocks finally corrected then, and yet we now see a very oversold Nymo – below – which is a good signal for a bounce. Plus, Rob Hanna’s Capitulative Breadth indicator jumped to 6, where 7-10 historically implies capitulation and a market bottom of some kind. Together, they suggest the market won’t fall away here but will bounce soon, if not to a new high then to a partial retrace of the falls. I have therefore bought stock indices for a bounce.

Source: Stockcharts / Cobra

Gold and gold miners are the other opportunity I see. Here is gold miners bullish percent versus the gold miners ETF at a level which has historically been a great buy.

Source: Stockcharts 

By various oversold/overbearish indicators, gold and gold miners look a buy opportunity here. Bernanke’s remarks whilst I was away that implied no QE3 caused another sell off in gold, but I believe that’s just part of the final clear out of weak hands. Gold does not need QE3 whilst negative real interest rates, central bank demand, money supply increases and real inflation data all remain supportive.

Regarding ‘threats’: China slowdown, Euro debt re-escalation and Economic Surprises downward trend, there is some positive news on the former, but worsening on the latter two.

Here are the latest OECD leading indicators. China has flipped to the positive since last month’s readings.

Source: OECD

ECRI’s leading indicators for the US also finally moved into the positive. Euro debt has flared again though, through Spain. Here are Spain CDSs. Italy CDSs are also trending up but not quite as critical as Spain.

Source: Bloomberg

Here are Economic Surprises for the main global economies, which continue their downtrend but remain just positive. US Economic Surprises are similar.

Source: Blooomberg

The situation in stocks, Euro debt and economic surprises shares some similarities with the first half of 2011. Then, stocks exited their strong uptrend in Feb 2011, as Surprises dropped and Euro debt came to the fore, but stocks traded overall sideways into July, with opportunities long and short. As we did not see major topping signals with our recent March 2012 top, I suggest we may be in for something similar, and the quick reaching of Nymo and CBI bounce signals supports this. My projected bounce window is into 21/22 April, so the end of next week.

US earnings kicked off yesterday and will be influential on the markets, but we won’t get a feel for an earnings trend until next week.