With John Hampson
I’ve been toying with selling a little more from my stock indices positions over the weekend. By both overbought and overbullish measures, stock indices as a whole are frothy. Furthermore, we saw a potential lunar cycle inversion, with stocks ultimately rising into Saturday’s full moon. Combined with the previously noted 5-model alignment for a January swing top and economic surprises having possibly topped out, I have a case here for stocks now reversing. However, Friday produced a bullish breakout in the Dax, treasury yields and Euro-USD, which would need really to be reversed today/tomorrow if the weekend was to mark a swing top. Furthermore, leading indicators are still overall supportive for pro-risk (ECRI US rose again, as did CB US leading indicators, and Markit PMI readings for US, Europe and China all rose), and narrow leading money points to economic strength into Spring. As I have previously stated, I do not believe this is the cyclical stocks bull top, but that a pullback then a push on to a higher high on weakened internals and negative divergences is needed, likely by mid-year.
Some charts to demonstrate. Here we see two overbought and overbullish indicators for US stocks:
Source: Index Indicators
The excesses are clear and I suggest the rally is on borrowed time. However, note in both cases that the two indicators for previous swing tops first oscillated and rounded out in the extreme zone before stocks topped. I therefore wonder whether stocks will continue to rally for a further 2 weeks in the new moon, or whether they might even continue through to March/Spring, with some back and forth en-route. I don’t know.
If we draw in the FTSE, it is on an unsustainable trajectory, and the Shanghai Composite appears to be rolling over for a consolidation ahead. Plus the Nikkei tried to break out at the end of last week but remains within the zone of a continued potential rounded top.
Chris Puplava suggests stocks and major economy economic surprises should top out by Spring, using oil prices as a lead indicator.
Based on stock market history I have previous predicted a price overthrow to end the cyclical stocks bull. Here is the SP500 chart and the overthrow in 2007 above the cyclical bull resistance line can be seen. In the current cyclical bull we are at such a resistance and I am suggesting an overthrow beyond it is likely to complete the bull.
However, of course that resistance is another reason why stocks could take a breather now before making such action. If the overthrow occurs, then Laslo Birinyi’s work models it at around 1600, and Will Preston gets 1580. That would make a marginal secular nominal high for the SP500 secular stocks bear and there is some allure in that to fooling investors once again that we are in a new long term bull market before a cyclical bear actually occurs. It’s a target clearly within reach now either in a continued advance to Spring, or a pullback here and then a final high around June time.
OK, I decided to stay put with my positions and not make any sale this morning. I see good reasons for a pullback here with the dual-frothiness but also reasons to push a little higher yet. We may have made a lunar inversion top at the weekend, or we may squeeze out further gains into mid-Feb. I don’t see the cyclical bull top here so I’ll take my chances and if we see a swing top here I expect stocks to come again into mid-year.
Precious metals and miners continue to be depressed, though there remains evidence for a base in both (oversold, overbearish). The gold chart below shows a large triangle, and it’s important for gold not to lose the lower trend line.
I believe this is all part of the last wash out of weak hands before the secular finale, in a patience-testing coil. To aid gold’s case, a pick up in inflation would put real interest rates further negative. As oil has made a decent up move recently, we could be at the start of such a process. But we still need that momentum move into wider commodities, and for commodities to start to outperform equities, for an acceleration in inflation and a scamper to hedge in precious metals.
I will respond to comments and emails over the next few days. Currently in Yala, Sri Lanka, but moving to a resort for a few days on the south coast.