Equities Cyclical Top?

There has been some consolidation in pro-risk over the last few sessions, which is normal into today’s full moon. The correction overall has been minor, and the next two week period into the new moon is one of low-forecast geomagnetism. I believe therefore that subject to some last minute resolution or postponement of the fiscal cliff issue, pro-risk can now rally again. But how near are we to a cyclical bull market top in equities? In the last few weeks we have seen technical breakouts in the FTSE, Dax and Nikkei, to add to the recent Hang Seng breakout. Plus we have seen a compelling bottoming formation in the Shanghai Composite. None of that looks like a top. If there is a cyclical bull topping process occurring anywhere then the most likely would be the US markets, as they have pulled back from their highs and remain someway beneath, with tech (usually a leader) underperforming. It is possible that US markets could top first, leading the rest, so let’s take a look under the hood of the US markets.

NAAIM sentiment is into the bullish extreme. That’s a caution, but note how we saw a congregation of such extremes in 2007 prior to the peak, i.e. we could be at the start of such a process rather than the sell point.

28dec7Source: Sentimentrader

Investors Intelligence sentiment remains neutral – bullish, not into the extreme bullish zone. Bullish percent over call/put ratio remains very neutral:

28dec2Source: Stockcharts

There is as yet no negative divergence in breadth as measured by advance-declines, shown below compared to 2007:

28dec8

Source: Cobra / Stockcharts

Cyclical sectors continue to perform well overall, with the exception of technology. Below are four cyclical sectors versus the SP500. Note that in 2007, around half a year before the final peak, cyclical sectors started to underperform the index and defensives outperform. This is not what we see, bar tech.

28dec9 28dec10 28dec11 28dec12

Source: Stockcharts

Economic surprises for the US remain in an uptrend, and ECRI leading indicators are positive and have been ticking up again the last 2 weeks. Global leading indicators remain mixed. Two PMI readings for Japan and Russia disappointed this week, with Russia falling to 5o (the dividing line between growth and contraction) and Japan languishing further negative.

Now take a look at this. Eurodollar COT 1 year in advance as a predictor of US equities, which I’ve referenced before. Whilst it has not been a perfect predictor, it is fairly compelling and points to a clear sharp downturn for equities as of the turn of the year.

28dec13

Source: Tradetrekker

And to that I will add Norwegian Jan’s chart of the Kitchin cycle, which also shows a significant fall is due.

28dec14

Source: Jan Benestad

Eurodollar COT and Kitchin cycles are not part of my usual toolkit, so I am unsure how much weighting to give. But it’s a signal for caution at the least. So what might I do? Well, if I draw in other historic signals of a stock market top and forthcoming recession, there’s a less compelling case for a top here. Treasury yields are rising but not significantly yet, inflation is not yet accelerating, leading indicators are mixed but showing weak growth ahead rather than rolling over, and we don’t yet see generally in equities the topping process of a rangebound market with reversals of reversals of reversals lasting several months whilst internals decay. If that process has begun, then I would argue that we don’t yet see anywhere where that process is mature.

On the other hand, the Nikkei has rocketed to overbought levels, whilst the yen is at bearish sentiment extremes, plus the Aussie dollar is at the bullish extreme. Potentially a reversal in these assets could be ahead which could imply a wider move anti-risk, pro-safety. But as yet we do not see such significant sentiment extremes across wider pro-risk or safety that would make this more compelling.

I continue to watch treasuries, which may have topped out, and if so outflows should find a home pro-risk. Flows into equities remain negative, as opposed to frothy, as shown by the chart below which measures flows into US equity funds. It captures the secular bull / bear cycle well.

28dec6

Source: Pragcap

Tom DeMark predicts a 50% increase in Chinese shares over the next 9 months. Solar/secular history predicts a blow off top in commodities ahead in 2013/2014 with acceleration beginning now, and this is echoed by Gann. Leading indicators of leading indicators predict improvement in Q1 2013, the lag of central bank actions this year. If equities made a cyclical bull market top here and now, I’d find it hard to square all that. I would rather expect growthflation (particularly with growth in China) brings about a surge into pro-risk and out of treasuries, with equities making an overthrow top first before commodities make their parabolic secular finale.

Back to the near term, I continue to expect some kind of satisfaction to the fiscal cliff, even if just postponement, will bring about a rally. But there are no guarantees. A failure could sink equities, as we saw in the steep cliff-nerve related put of hours falls of last week. The meeting is set for Sunday, which means one of the two scenarios on Monday.

I’m now in Central Thailand for a week near Phitsanulok. I shall mull all this over and assess whether I want to act today in any way. Any input or thoughts from you guys of course welcome.

Bali

The Bali experience has left me with a bit of a conundrum: where is going to be as good as that?! Travel is a personal thing, but you can perhaps relate at least in part to my take on an idyll: safe, friendly, rich in culture, beautiful nature, beautiful man-made, great climate, and a cheap cost of living for a bonus. Bali delivered on all fronts.

Bali is peculiar to Indonesia because it is Hindu, rather than Muslim, and the Bali form of Hinduism permeates everything here (95% of residents follow). Tiny offerings and statues of gods everywhere, at least three temples per village and in every building a shrine. 500 new shrines and temples are built every month – the religion is as current as it ever was, with the youth fully involved. A tremendous amount of rituals and ceremonies means the Balinese are often seen in traditional dress, with flowers a key part of the look and the offerings. The extension of Hindusim into Balinese behaviour is ‘ritualised self-control’, which in practice means modesty and restraint. In short, the religion is all-involving.

The religion merges into the culture as their religious devotion is echoed in their devotion to arts and crafts (on a large scale) and to architecture. The architectural themes of gated entrances, pavillions, water features, and of course shrines and statues have been studiously reflected in the hotels and villas on the island, giving the whole island a consistent feel, and beauty. The man-made beauty across the island is all the more impressive given that existence here is tough for many. Tourism now accounts for 80% of the island’s income, but 80% of Balinese still work in agriculture. Working in tourism pays little, working in agriculture less. Hence, it is not uncommon for parents to sell a rice field and send their kids to tourism school. Labour is cheap here – you could live here and have a maid, cook and driver all for $200 a month.

Despite the meagre earnings, the Balinese are a happy people and could not be more friendly. It’s not possible to be a faceless person on the island – all are involved, and this extends to tourists. Tourism has clearly had an impact on the island, but not in the kind of ruinous way whereby the original reasons for coming are slowly devoured. There is no problematic friction between locals and tourists (on which note, the Bali bombings were carried out by a Muslim terrorist group), and the Bali culture remains strong and dominant, rather than diluted and then packaged up for visitors in a less authentic way. To complete the picture, the nature is lush green, with tiers of paddy fields amongst the palms, and there are beautiful beaches, wild chickens and lizards galore.

Negatives? There are quite a lot of ill looking dogs around. The Balinese largely consider them scavengers in league with evil spirits, and as a result they have a difficult existence. There is a caste system, in line with Hinduism elsewhere, meaning not all are equal. You will see swastika symbols – but this is nothing sinister, in fact it means in harmony with the universe and precedes Nazism. And of course, as with anywhere that might be considered idyllic, greed naturally steps in, and some long-time visitors to Bali bemoan this. There are a few opportunists in the most touristy south (often coming over from neighbouring Java), big luxury hotel resorts have edged out old backpacker Bali, and Jakarta has taken its slice through shortening visas and applying a departure tax. As a first time visitor, I would say this: the mature Bali remains very attractive: crime remains very low, trust and friendliness reign, and the beauty and culture of the island rival anywhere I have been.

The majority of visitors to Indonesia go to Bali and Bali alone. On my current trip, that is also the limit of my dip into the 4th most populous nation on Earth too. So I will leave this post as a little Bali travel summary and not attempt a wider analysis of Indonesia and its markets. Some pics to finish then:

A Bali temple ceremony.

Ubud Temple

Rice field terracing.

P1030311

There is no limit to what a motorcycle can carry here.

P1030013

My wife gets a head massage.

Gabi Monkey 2My son relaxes at the beach.

P1030153

Friday Drama

I’ve suffered poor internet access this week, but have it now, so let me catch up on developments since last Friday. I will respond to comments and emails in due course, but first, analysis.

Conference Board leading indicator updates have been mixed. USA, France and Mexico slipped negative. Germany improved to flat and the general Euro area jumped into the positive. Australia also moved into the positive and China put in another good month. The summary table currently looks like this.

21dec20121Source: Conference Board

So a continued picture of mixed fortunes, but with a rotation in leaders, and overall a picture of weak growth ahead, rather than recession. ECRI leading indicators for the US advanced from 3.5 to 4.4 last week and US economic surprises have picked up again the last couple of weeks:

21dec20122Source: Ed Yardeni

Euro debt, which bothered the markets from mid-2011 to mid-2012, has deflated as an issue, to much more benign levels.

21dec20126

Source: Acting Man

The Dow theory divergence of mid-year, which was a potentially bearish signal, has been resolved, with Transports since resuming strength:

21dec20123

Source: Ed Yardeni

And cyclical stocks in the US continue to perform strongly, with breadth also healthy.

However, sentiment for US stocks has reached into frothy bullish territory in both NAIIM and AAII surveys:

21dec20129Source: Sentimentrader

21dec201210Source: Bespoke

Investors Intelligence and bullish percent over call put ratio both however remain in neutral territory, but overall risk aversion has reached very low levels:

21dec201211Source: Big Picture

Meanwhile, the Shanghai Composite has pulled up in a more compelling bottoming fashion, as the drop beneath shown support now looks like a fake out.

21dec20125

Source: Cobra / Stockcharts

Treasuries have declined and yields have added credibility to a W-bottom:

21dec20124Source: Stockcharts

Copper remains in a triangle, unprepared to give a diagnosis on the global economy at this point:

21dec20127Source: Stockcharts

And crude oil ditto:

21dec20128Source: Trading Charts

November’s global climate stats from NOAA came in at the 6th hottest on record, making the year to date (minus December) the 5th hottest on land since records began. That’s a continued support for agri longs, as extreme conditions persist. Yet, soft commodities are, as measured by a broad agri commodities ETF, just range trading of late. Despite China’s improving fundamentals, and the Euro strengthening against the US dollar (USD technically weak formation shown below), commodities as a whole are failing to ignite currently.

21dec201212Source: SeeitMarket

The most surprising underperformer is gold, which currently looks like this:

21dec201213

It just dipped beneath the 200 MA, which has largely supported the secular bull since 2000. Is that a worrying development? It’s not great, but it is doing so on oversold RSI and a daily sentiment index reading of sub 10. Furthermore, gold miners have reached a bearish extreme in public sentiment. I still suggest that gold broke upwards out of its 11 month consolidation in August this year and has resumed its uptrend, albeit tentatively at this point. Gold seasonals, solar/secular history and negative real interest rates all support gold bouncing here and making that tentative renewed uptrend more concrete, but once again it is finely poised. I am happy with my exposure both to precious metals and to miners, but if i were underexposed I would choose now to buy both, based on the reasons I have aggregated here. In other words, I believe gold will bounce here and reclaim its 200MA (with the weak hands shaken out).

Today is the Mayan apocalypse, the Mayan hinge point, a miscalculation, or a falsehood. Tomorrow is a Bradley turn, which would mean today (due to market opening days). I do not buy in to the Mayan blogosphere phenomenon, and have found Bradley turns more miss than hit, but that said we do have some drama today, with fiscal cliff nerves helping bring about a big sell off this morning which at the time of writing has been semi-reversed. I place more weight on lunar cycles, and next week’s full moon typically spells downward pressure into it. However, this is balanced by positive seasonality which goes hand in hand with favourable geomagnetism at this time of year – the updated model shows an uptrend into early January:

21dec201214It’s the morning session in Europe at the time of writing, and I don’t pretend to know how today is going to turn out, given the dramatic market action in the early hours. However, my stance is to stay put on my pro-risk portfolio currently. 1. Weakness in precious metals, 2. indecision in copper and oil, 3. frothy sentiment in US stocks, and 4. complacency in risk aversion, are all current flags. But I would contrast with: 1. oversold and overbearish readings in precious metals and miners, 2. improvement in China, leading indicators and renewed dollar breakdown, 3. good breadth and cyclicals performance, better technicals in European and Asian stock indices, and 4. money pulling out of treasuries which should seek out pro-risk assets (by solar/secular/cyclical history). Broken down into my 3 areas on involvement: I don’t want to exit stock indices longs yet because we do not yet see sufficient congregation of cyclical bull market top indicators; I do not want to exit commodity longs yet because I maintain by solar/secular history the parabolic peak is to come 2013/2014; and I do not want to exit treasury shorts yet because I believe a new secular bear market in treasuries is getting underway and a rise in yields (of some note) should be one feature of the end of the cyclical stocks bull.

Next week is usually a quiet week in the markets globally, due to Xmas, but there is the fiscal cliff deadline at the turn of the year, and so this period could be more volatile. My expectation is that agreement will be reached to prevent the fiscal cliff, and that markets will enjoy a relief rally when that occurs. However, there are no guarantees, so let’s see how things unfold. Next week I will be in Bangkok.

Current State Of Play

Hi all, in a cafe with Wifi, due to storm-damaged internet access at our second hotel (neat Ubud, Bali), so will get down to it.

My trading boils down to this. I am long commodities, attempting to time the secular bull market top. I am long stocks, attempting to gauge the cyclical bull market top. And I am to a smaller extent short treasuries, believing us to have made a secular bull market top in treasuries this mid-year. Currently I believe all these still look good.

Treasuries are still ‘potentially’ making a W-bottom. By Gann they should have bottomed mid-year, and ditto by solar/secular history, which predicts yields should now rise into a stocks cyclical bull top. Still very tentative, more time is required to judge this one.

14dec20122Source: Stockcharts

Regarding the cyclical bull market in stocks (within a secular bear market), there are several ways to assess its likelihood of continuation:

1. A topping process lasting months with reversals of reversals of reversals – as the Hang Seng, Dax and now the FTSE have broken out of their long term triangles I don’t think this is happening yet, though US stocks show the most potential.

2. Overbought and overbullish extremes – we see largely neutral sentiment readings and only short term overbought readings (which I believe has produced the pullback of the last two days).

3. Breadth divergence – NYSE breadth has just made an all-time high, which is bullish.

4. New lows confluence prior to top – we haven’t seen this leading into the US Q3 highs.

5. Defensives outperforming cyclicals – again not seen, cyclicals have been strong.

6. Major distribution days near the highs – we did see these near the US Q3 highs, but since we have seen major accumulation days, which are bullish.

7. Rising inflation, tightening yields, yield curve flat or negative – we don’t yet see these macro developments

8. Rolling over of leading indicators and recession model alerts – we see evidence for growth into Q1 2013 – more below.

The latest CB global leading indicators revealed positive strong for Spain and Korea, but slightly weak for UK and Japan. The latest OECD leading indicators show weak growth but overall above long term trend for the OECD nations:

14dec20123

Source: OECD

Note the horizontal lines are the long term growth trendlines, rather than expansion/contraction divide. Drawing out the narrow money supply leading indicator, the forecast is for global industrial output to increase into Jan/Feb 2013:

14dec20124Source: Moneymovesmarkets

HSBC’s flash PMI for China today came in at 50.9 for December, a 14-month high, adding weight to an upturn in China, and Chinese stocks continue to attempt to make a bottom, with a further 3% jump today at the time of writing.

Economic Surprises have recently weakened for both the US and Asia, but both remain positive. One to watch, as a trend change in this indicator has previously led a trend change in equities.

14dec20125

Commodities have been weaker than equities this last couple of weeks, but I believe they will catch up, with support from an improving China, an improving Euro-USD, depressed sentiment in certain commodities and gold miners. We just passed through the new moon, but with very tame geomagnetism there is support for commodities to rise into year end, as shown by the new model uptrend here:

14dec20128

Finally, a look back at history reveals that the closest mirror for US equities from history is 1967, with a 90% correlation. I find this interesting, because 1968 was the secular equities top and the solar peak – around November/December 1968. In other words, equities are behaving very similarly, as we head into next year’s solar peak, which I anticipate to be a cyclical stocks peak and then secular commodities peak.

14dec20127Source: MCRI

In short, I see no current reason to change my outlook that the secular commodities bull and cyclical stocks bull will continue into the start of 2013. I continue to watch all the measures and indicators outlined above, and believe my first move will be to close of out of the bulk of equities longs, but as yet we do not see typical topping indicators nor compelling divergence in leading indicators.

Currently we are planning to spend a further week and a half in Bali. The rest of our trip is looking like this (subject to change of course, as we are booking and ‘feeling it’ as we go): Thailand, Philippines, Hong Kong, New Zealand, Fiji, Australia, Sri Lanka and maybe Maldives. There are other countries and continents we would dearly like to visit, but we have to draw the line somewhere as time is limited.

Have a great weekend all.

Friday Roundup

Breakout in the Dax:

7dec20121Source: Stockcharts

The FTSE is currently pushing for breakout too.  The US stock indices have made a little consolidation for a potential inverse head and shoulders.

7dec20123Source: Stockcharts

Break out in high yield corporate bonds:

7dec20122Source: Stockcharts

Commodities have not been as strong this week, but the collective CCI index uptrend initiated mid-2012 is still in tact. I am aware that I have hardly mentioned crude oil all year, even though I continue to hold a significant long position in this energy, but for 2 years now it has been range-trading around $100, and there has been little to say therefore about the chart action. However, the longer term picture still shows a secular bull in play since the turn of the century with an extreme episode of greed and fear around 2008, and if that trend is still valid (I believe it is) then we should see crude oil re-take $100 soon.

7dec20124Source: IndexMundi

The Markit / JP Morgan global services PMI was released this week and shows an uptick, as with the manufacturing PMI of the last post.

7dec20125

Combining the two looks like this:

7dec20126Source: Markit

Positive developments in stock indices match up with improvement in PMIs and leading indicators, and I believe we will see pro-risk advance further into year-end.

Lastly, below we see developments in industrial output in the last secular bear of the 1970s have been mirrored very closely in this secular bear. A continuation of the parallel would see a recession in late 2013 / 2014, shallower than in 2008. That would all fit with my solar/secular expectations. Of course, the parallel may fail, but I suggest that the overlay adds weight to my timings as to where we are in the overall cycle.

7dec20127Source: Moneymovesmarkets

Have a great weekend all. My current outlook in Southern Thailand (just trying to work out where we are heading next…):

Panwa

Final Month Of 2012

Certain key assets are finely poised as we enter December. The UK FTSE is once again attempting upside breakout from its long term triangle.

4dec20124

The German Dax is also back attacking key resistance. Yesterday it was repelled at this key level. I suggested yesterday it may need a couple of sessions’ consolidation before a breakout – and this is because it has already travelled a fair way since mid November on ‘one leg’.

4dec20123

The Nasdaq (and equally the Dow) is attempting to reclaim its 200MA (the SP500 is clear above). The Nasdaq remains in its neat cyclical bull channel, and stocks in general continue to display good breadth and cyclicals performance that are not suggestive of a top.

4dec20125

That said, a combined failure in the FTSE and Dax at upper resistance and the Nas and dow at their 200MAs would open up the possibility of a renewed leg down, and for the two US indices that would then look more like a major top had occurred.

I maintain a bullish outlook for equities into year end, due to positive seasonality (including Presidential), tame forecast geomagnetism, a lack of common cyclical bull topping indicators in the US indices, and renewed breakout attempts in the FTSE and Dax (typically resistance caves in under repeated attacks, the Hang Seng has already led the way, and by solar/secular history an upwards breakout at this point would be normal). We have a period now into and around the new moon of 13 December which should also be supportive. So let’s see if I am correct and all these indices break upwards.

Let me just list one or two other ‘important’ dates into year end. The Puetz crash window extends into the end of this week. The Mayan global transformation / apocalypse is 21 December, the last major Bradley turn is 22 December. The last full moon of the year is 28 December and the fiscal cliff deadline is the end of December. Out of those five, I am not convinced of the first three, but it does no harm to maintain awareness.

The finely poised position in key assets extends to commodities and Euro-USD. The broad CCI commodities index is at downsloping resistance in a potential bullish head and shoulders formation. Ditto the Euro-USD.

4dec20121

Source: Bloomberg4dec20122

Combining stocks, commodities and Euro-USD, we have two clear paths forward: one, pro-risk breaks out (the correction in October / November was a correction in an ongoing cyclical bull), and two, pro-risk is repelled here and resumes downward (the rally in the second half of November was a relief rally in a new downtrend). As is usual when the markets are finely poised, some confusing and teasing action could occur this week, with both bulls and bears prematurely claiming victory before true resolution comes to pass.

Besides the reasons above, one other key reason why I favour a bullish year end for pro-risk, is the improvement in global leading indicators. Markit released many individual country PMI reports yesterday, including fresh growth in China (whether looking at official or HSBC data). Below is the combined global picture, and the theme is fairly clear: a distinct up-tick. This is echoed in Conference Board global leading indicators. The general improvement is not in doubt, the question is whether this is just a temporary relief rally in a continued downtrend, or whether leading indicators have bottomed out.

4dec20126Source: Markit

And here we get to the real key issue. By solar cycles, a growthflationary finale should occur into next year’s solar peak. By stock market history, cyclical stocks bulls end with excessive inflation and overtightening of rates. A cyclical stocks bear here and a tipping into global recession at this point into 2013 would mark an anomaly in both those historic indicators. It would be evidence that central bank actions in cutting rates and applying stimulus have been impotent in this cycle, and that too would also mark an anomaly in history, because historically interest rate cuts have had a positive impact on the economy between 9 and 24 months after cutting cycles, and Quantitative Easing has so far been shown to work its impact through in the two years following asset purchases. The two charts below show the renewed easing and stimulating efforts over the last 18 months – not as dramatic as in 2008-9 but nonetheless a fresh round of pro-action and intervention.

4dec20127

4dec20128Source: Action Forex

If the mechanism is not broken, and such action is not impotent, then we ought to see economic improvement occurring now and into next year. I believe this is the case, as currently global leading indicators are improving, PMIs are improving, and growth in narrow money suggests global industrial output will increase ahead. It is possible that we therefore do see that growthlationary finale next year and we do get normal cyclical stocks bull termination under conditions of excessive frothiness and an upswing in market rates. But one step at at time – first we need to see a couple of months of continued improvement in leading indicators to be confident that this is a new up trend and a normal positive impact lag to central bank actions together with normal buying/speculating/risk-taking behaviour into the solar maximum. If this does not occur and instead we topple over again in terms of leading indicators and key assets, then either (i) the triple historic anomaly would have indeed come to pass (‘it’s different this time’) or (ii) yet further central bank action and unorthodox policy tools are deployed soon ahead before we finally do get that growthflationary finale not too far from the solar peak.

Until evidence points otherwise, I side with it not being different this time and that we will see normal behaviour into the solar maximum, aided by lagged impacts from central bank actions, and normal conditions to come to pass for a cyclical stocks bull end. I believe the current technical action in risk assets is supportive of this, in that we see certain key stock indices pushing to break out, an absence of normal cyclical stocks bull topping indicators (such as breadth divergence and defensives outperforming) and gold in a renewed up trend back above its 200MA following an 11 month consolidation.