With John Hampson
There is downward pressure into this coming weekend’s full moon, and we see what look like topping formations on the Dax and Nikkei. However the US indices (bar the Nasdaq) have broken out on good internals, and the environment for stocks continues to be supportive, so I don’t believe we see a cyclical top here, but still believe this could be the start of such a process that lasts the whole of H1 2013. Treasury yields have pulled back a little and their trend is unclear. Commodities as a whole remain on the cusp of a breakout but equally this would be a suitable point to pull back.
More leading indicator updates came in from CB and the current picture is this:
Source: Conference Board
In short, weak global growth ahead, nothing too impressive, but no threat to pro-risk currently. To add to that, in the wider environment we do not yet see frothy inflation, overheating commodity prices or particular tightening of yields. They would all usually mark cyclical tops.
Economic surprises for the US have tumbled however and have just slipped negative. When a trend reversal occurred in this indicator in the past, the market made a swing top either imminently or within a few months.
Sentiment has also moved up into the top quarter on both II and AAII surveys. Historically this has often been both a sign of strength but of a top ahead, i.e. not a major top right away but perhaps a pullback then a push up again, before topping. That would fit the June final top I have referred to, if so. Here is the bullish percent over call/put sentiment measure:
Note how this measure oscillated in the high zone before previous notable tops in this cyclical bull market, suggesting we might be at the start of that process rather than at the end – particularly as I am expecting a cyclical bull top rather than a swing high.
Sentiment on many commodities has much further to run currently, so it is set up for commodities to outperform stocks for a period. But this remains theory until it occurs. A critical test will be how commodities perform if stocks do now pull back for a time. Supporting such a pullback in equities, a Demark buy exhaustion count has been reached this week. Plus there should be typical weakness around the full moon. However the geomagnetism forecast remains tame for the next 3 weeks, which could provide more positive pressure for pro-risk once we are through the full moon period. You can see this and all other updated models on my regular pages.