With John Hampson
Let me recap on my overall position. I am long commodities for a parabolic finale into a secular peak in 2013, with my biggest exposure in precious metals. I am long stock indices, largely opened in Q2 2012, looking for a cyclical bull top in the current window stretching into 2013. I have recently added long certain stock indices looking for a longer term hold, where I believe secular bear value has been reached, namely China, Russia, Japan and Austria. And lastly, I am short treasuries, with less exposure than stocks and commodities, also looking longer term for a new secular treasuries bear market.
The recent draw down in equities has reduced my open profits – but judge me on my trades once they are closed. A cyclical stocks top is a process, with common characteristics. Large sideways volatility with alternate up down moves as the market gradually rolls over in a period of months, and a double top or higher high where we see negative divergences in internals, such as breadth. As the topping process unfolds, we should see more and more issues at new lows as participation thins, and we should see defensives outperforming cyclicals. Right now, we continue to see cyclicals outperforming defensives despite the falls, we have not seen the trademark congregation of new lows leading into this, and if this is a top, we have yet to see the push back up the highs, accompanied by the telltale weakening internals. I have not blindly held on to long equity positions, but am awaiting the coming together of topping indicators to sell out. Patience, as always, is the key.
If a topping process in equities has not begun, then we should need to see improvement in global macro and leading indicator data to support bull continuation following this correction. If a broad commodities acceleration is to take place, then even more reason to need improvement in such data. In another twist, we now see signs that data may indeed be improving again.
Here are the latest Conference Board leading indicator releases:
UK +0.2 (same +0.2 previous month)
Japan -0.4 (up from -0.5 previous month)
Spain +0.3 (up from -0.1 previous month)
Korea +1.2 (up from -0.6 previous month)
So improvement across the board again, and a big leap in Korea in particular.
Next is a chart showing the drop in industrial output globally that has been recently taken place (aggregated for the G7 and leading emerging 7 nations). However, the leading indicator here shows an upturn ahead. This leading indicator is global real narrow money expansion and precedes economic activity by around 6 months. Global real narrow money supply has been growing since a bottom in April/May, so industrial production should now start to increase again.
For the US, there continues to be mixed data, but the overall picture is represented here by ISI’s diffusion index, which subtracts the bad data from the good, and it can be seen this is currently positive and rising, not the picture of an economy rolling over.
Source: Advisoranalyst / Factset / ISI
The Economic Surprise Index for the US also maintains a positive picture:
Source: Advisoranalyst / Factset / ISI
Overlaying this economic surprise index on US stock market performance reveals a current disconnect – either economic data should now rapidly start to disappoint or stocks should reverse upwards – or some combination of the two.
So let’s see, but maybe tipping into global recession is premature. It could be that the mid year series of rate cuts, renewed QE and other stimulus measures needed time to have an impact. By solar-secular history, a growthflationary finale should be the theme into next year’s solar peak. A cyclical stocks bull top should also be accompanied by rising bond yields, which would be more likely under growthflationary conditions. The relationship between 5 and 10 year inflation expectations and real CPI reveals that inflation should pick up as we enter 2013. If global deflation is setting in then that would be difficult to achieve.
Lastly, here is the updated Hang Seng chart for interest (click for full size). It recently broke out of its long term triangle and is now backtesting the breakout. Will it hold and push on? Failure here would be particularly bearish, as a return into the triangle would suggest a fake out had occurred, with the possibility of a subsequent breakdown the other way.