This Week

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.

Source: IndexIndicators

Source: TheTechnicalTake

2. We approach Fib resistance

Source: Afraid To Trade

3. CS Fear Barometer has potentially topped ahead of the market:

Source: Bloomberg

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.

Source: McOscillator

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).

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19 thoughts on “This Week

  1. Hi thank you for your thoughts it is an interesting reading. I have a question is gold commodity or money? This guy http://caldaro.wordpress.com/2011/07/05/gold-should-double/ sees peak around 2014 based on his observation http://caldaro.wordpress.com/2010/11/04/politics-and-secular-bullbear-markets/ I have followed him since 2008 and he was mostly right, I have followed you since November 2011 and you were right too. Is it possible to see a peak on gold around 2014? I do not want an advice, just your opinion on it, both you and Tony make sense 🙂 I know no one has a Crystal Ball.
    Thank you for your work it is an education form me.

    1. Hi VoDo – the commodity of hard money. 2014 for a gold peak would be consistent with the history shown on my Timetables page – between 3 months before and 17 months after the solar peak (forecast for Feb/Mar 2013). I favour 2013 based on the wider data in that table, but we can revisit as time progresses and clues appear.

      1. Thank you for your honest answer. It is really interesting how different technique can get similar output. I focus on fundamental analysis, geopolitics and makro and I see peak around that time too, I prefer 2014 just because of low interest rates in the USA, time will tell.
        Sorry for my english I am not a retard 🙂 it is not my first language.

  2. Hi John,

    I don´t understand the early/late indicator of Crish puplava, how can I calculate it? or what a kind of indicator is?

    Thank you

    1. Hi Hagen, his indicator is the relative performance of early cyclical stocks to late cyclical stocks advanced by 9 months – so the comparative performance of the different sectors is a lead indicator for the wider index, according to CP.

      1. thank you John.

        What are the early cyclical stock and what are late cyclical stock?

        Thank you again.

        I like the desing of this new web

  3. We are in the debt-deflationary regime (Schumpeterian depression) of the Long Wave Trough, which historically has occurred coincident with the weakest 9- to 10-year Jugler cycle (business investment) and 3- to 4-year Kitchin cycles (inventory) coincident with the downwardly converging Kuznets cycle (real estate and infrastructure) and average trend rate of real GDP per capita.

    We should thus experience more volatility or cyclicality of real GDP, stock prices, and price inflation over the next 2-9 years, i.e., more recessions and bear markets than during the preceding secular bull market, as well as an ongoing deceleration of real GDP per capita.

    Moreover, the annual change of the price of oil and gasoline as a share of US GDP is at the level of past recessions since the 1970s. Rather than accelerating business conditions and rising commodities and stock prices, the historical pattern precedent suggests that a top is occurring now and a cyclical trough will occur at the 4-year cycle lows in ’12 and ’13.

    Note that post-’00 trend US real GDP has decelerated from 3.3% long term to 1.56%, reducing growth that otherwise would have occurred by 17-18% and 25% per capita. At the trend rate of population and post-’00 real GDP, the US by ’20 will have cumulatively lost 30% of real GDP growth and 35-40% by ’20 (same as Japan since ’90) from the long-term trend, which is an economic depression by any objective measure, albeit a slow-motion variety.

    Additionally, on the basis of the three-year average of reported earnings, the S&P 500 is currently at a P/E just under 23, which is at or above the P/E peaks of secular bull markets in the 1880s-90s (dividend and “deflation” adjusted), 1900s, 1929, 1935-37, 1964-66, and 1973. There has never been a positive 3-, 5-, 10, OR 20-year return following such a high valuation.

    Finally, US corporate profits to GDP are at a record of nearly 10%, whereas the historical average has been 6% and 4.5% at recession and bear market troughs. The cyclical precedent implies a crash of 50% or more for corporate profits over the next two years combined with an average P/E of 10-11 for third bear markets during secular bear markets, suggesting the risk of the S&P 500 falling to the 400s-500s during ’12-’13 or sometime during cyclical bear market lows over the next 2-9 years.

    Therefore, seasonal and cyclical stock market risk is now EXTREME, even as sentiment is as bullish as one ever sees it.

    1. Very impressive Mr Time_Traveler_2047. I was simply going to say oil prices peak about the same time the economy peaks or the recession begins. Which could already have happened or is happening.

  4. Regarding the reference to the employment report, US daily withholding receipts reported by the US Treasury indicate that there has been no acceleration of employment or income growth from Jan. to date; in fact, receipts are contracting sequentially and are back to the levels of Apr.-May to Aug. ’11. Employment in the US is not experiencing a net acceleration from last year’s peak, and any reported data to the contrary is merely an artifact of seasonal adjustments and perhaps some selection-year mischief on the part of the BLS.

    Private data suggesting improvements in employment are virtually exclusively associated with temporary hiring in manufacturing.

  5. The state of US employment is becoming very interesting, and could indeed become a critical factor in how 2012 pans out. The real rate of unemployment in the US is around 22% (shadowstats.com) – the discrepancy with the official rate of 8.3% is due mainly to “discouraged workers” (defined as those not actively seeking employment) not being included in the official statistics.

    A newly unemployed person in the US is only entitled to benefit for the first 26 weeks of unemployment (according to the US Department of Labor); after that they are removed from the statistics, and are only re-counted if they make the effort to periodically re-register. The rest, the “discouraged workers”, simply disappear from the unemployment register.

    This is probably why Blackhawk Ben has been increasingly pessimistic on employment, even though the official figures have been showing improvement. I expect more of this pessimism, or even a change in the way the statistics are calculated, as the US administration needs excuses to continue printing money during this election year…

  6. Recessions usually start about the same time oil peaks. The chart above shows it peaked well into the recession. So oil could already have peaked or is peaking now.

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