Last week we saw leading indicators ticking up for Korea, USA (both ECRI and CB) and Spain. Evidence is accumulating for a new business cycle upswing. Looking back at previous such cycles, 6-9 months is fairly typical for such a cycle to play out, and this next chart suggests a 9 month upswing may be ahead this time.
Source: Chris Puplava
Drawing in my previous analysis on how events have unfolded into solar/secular commodities peaks, we have a potential sequence of events here. Growth and pro-risk advance as a whole before excessive inflation and commodity mania. Stocks do well into late 2012 before turning down as commodities diverge towards the end. Commodities rise into the secular peak of Feb-Mar 2013 before excessive oil prices help bring on a recession, with stocks turning down several months ahead of the recession as a leading indicator.
Underlying source: Dshort
What are the threats to this scenario? Well, the business cycle upswing is still tentative at this point. Leading indicators for some countries are still negative. China had to lower its reserve ratio this weekend to stimulate lending. Sovereign debt could flare again, and Greece remains unresolved at the time of writing, with the March payment deadline approaching. However, I expect resolution on Greece ahead of the deadline, and I expect leading indicators for the laggard countries to turn up in the weeks ahead. At this point, emerging from an extreme in global anti-risk appetite reached at the end of 2011, and with a natural business cycle upswing supercharged by the range of central bank counter-responses over the last 6 months, I believe the weight of evidence supports a growthflationary finale from here into the solar peak, in line with history.
Shorter term, I still expect a pullback in equities, for the following reasons.
1. We continue to flirt with overbought and overbullish readings.
2. We approach Fib resistance
Source: Afraid To Trade
3. CS Fear Barometer has potentially topped ahead of the market:
and 4. We have a DeMark sell set up (the conditions in place for a period of retreat, if not the momentum).
We don’t have a full set of top indicators, but we have ‘enough’ for a pullback.
Now to add to this, POMO sales could add to the likelihood of a pullback from here into the end of Feb.
Plus, we have a new moon tomorrow, my models suggest a top the day after, and a geomagnetic disturbance is in progress again, shown by the arrow, adding weight to a seasonal pick up in geomagnetism, which is a headwind.
For now, economic surprises remain in an uptrend for the major economies, but perhaps topping out for the US. As a mean reverter, it is a matter of time before we start to see more disappointments versus estimates than beats. Some are predicting a US jobs figures major disappointment on the first Friday of March. As we enter March, geomagnetic seasonality should pick up yet more.
So, tomorrow and Wednesday I will be looking at potentially taking profits on my remaing stock indices longs, and will report if/when I do. However, I do not see this as a major top that I wish to short, but rather of an overbought/overbullish pullback. I maintain the expectation of commodities beginning to outperform, and will not be taking profits in commodities but rather holding into the solar peak (unless the picture radically changes).