So far it’s been a leap year for the account – which I hope is the case for you too. First, I profited from the big up trend in stocks, and took a large part off in profits. Now commodities are outperforming and I am benefitting from a full set of long positions there. Based on a rather unscientific indicator, when things are going this well, there’s usually some ‘less well’ around the corner. So let’s get a bit more scientific about whether some protection of gains here might be wise or not.
Firstly, silver broke out yesterday. Unless we see a swift reversal today, that looks pretty compelling for the bulls.
The US dollar could potentially have started a multi-month downtrend, which would be supportive for commodities.
Source: Chris Kimble
If we consider the (energy-heavy) Commodity Ishares fund’s relative performance to stocks and to bonds, it suggests significant relative upside should be ahead for commodities and energy in particular – that is IF the secular commodities peak is still ahead. I maintain that it is.
Commodity Ishares : Stocks
Commodity Ishares : Bonds
However, sentiment for the US dollar is now into the overly bearish zone, suggesting a near term pull-up might be imminent.
Source: Daneric / Sentimentrader
Sentiment for crude oil is also into the bullish extreme zone, suggesting oil might need some respite.
Source: Shortsideoflong Blogspot / MBH
And actual and forecast geomagnetism has now flattened out. With greater seasonal geomagnetism normal in March and April, I expect my model to tip over or at best stay flat. I also maintain the expectation that some consolidation or downside will be realised into around March 9th. The RJ CRB commodity index in near and medium term views:
Turning to stocks, the Vix still appears to be making a bottoming pattern, whilst the CS Fear index remains at an extreme high, which together suggest a pullback in stocks may be imminent. The Summation index also appears to be rolling over.
Source: Chris Ciovacco
Citigroup Economic Surprises remain in an uptrend for major economies as a whole, but are perhaps now in retreat for the US, which as previously noted might spell overall sideways action for stocks.
We see divergences in Mclellan momentum and Dow theory. Overall though, equities remain in a tidy uptrend without screaming sell signals.
So what to do?
I have enough evidence to want to protect some gains, but whilst expecting that any near term reversal in the US dollar and commodities will only be a counter trend move before momentum resumes towards in favour of commodities and against the US dollar. If I’m right in my assessment of a secular commodities peak ahead, likely 2013, then commodities should outfperform stocks going forward. So, I’m on the look out for a push up and reversal intraday in pro-risk, and maybe either LTRO or US GDP announcements today could provide that. I will be looking to exit some or all of my remaining (small) stocks longs positions and to just trim my commodities positions lightly, with a view to refilling to the full long commodities position, potentially week commencing 12 March.