This Week

Since my model top of 22 Feb, stock indices have either begun a pullback or are digesting gains ahead of an imminent further leg up. My models predict a pullback into 9 March, so the former is my primary expectation. Supportive of a pullback here are a perfected DeMark sell set-up on the Dax, a potential Vix bottom in relation to US stocks and a historic extreme in the CS Fear Index (which suggests participants are insuring against perceived forthcoming downside):

Source both: Andrew Nyquist

Source: Bloomberg

If we do see a pullback this week and next, then recall Tom De Mark suggested it may be a correction that frustrates bears – lots of back and forth and overall shallow, before pushing on again.

Chris Ciovacco points to a 2004 rhyme and suggests the stock market needs to flatten out at the top following such a powerful up trend, before any significant correction:

And this fits with not having seen divergence in market breadth yet, which would normally signify an important topping process.

So if we picture something between shallow consolidation and shallow gains in the weeks ahead for stocks, then that sets the scene for commodities to outperform, and that’s what we’ve been seeing the last few sessions. Crude oil looks set to challenge its 2011 high of around $114. Gold and silver are at key levels, whereby a break above would likely attract significant money flows.

But if we consider the fortunes of pro-risk as a whole, a fly in the ointment remains ECRI, who reiterated their recession call (for sometime in 2012) on Friday, despite improvement across the board in leading indicators from Conference Board’s own to Money Supply to Financial Conditions Index to the stock market itself. I note they quoted flatlining GDP and retail sales in their defence (yet both these show recent improvement trends) and marginally improved WLI (which has actually risen from -10 to -3.5), so that makes me a little skeptical. Well, I don’t want to disregard them because of their track record, and Chris Puplava suggests it’s all compatible: that we have a growth window into mid-2012 before ECRI’s call comes good. He points to prices paid as a lead indicator for manufacturing, which shows that summer 2012 rollover:

Source: PFS Group

I would summarise like this: if the economy is to roll over by mid-year we will see various leading indicators roll over ahead of that, and not be reliant on the word of ECRI. Right now, we see leading indicators improving, and where I identified potential early casualties in the form of earnings and economic surprises (both at historic highs) we still don’t yet see a decisive tipping over. I maintain the expectation of a growthflationary finale into the secular peak, with the emphasis on inflation. So let’s see how things progress.


13 thoughts on “This Week

  1. hi again John!

    Actually I’m a bit frustrated here… you say that this year we should concentrate on commodities and that the stock market will essentially go sideways yet almost all of your updates are on stocks and not commodities… Would it be possible to give more infos on where commodities are heading and when is a good opportunity to buy into one or other commodities market? Thanks:)

    1. I intend to largely hold my commodities position into 2013. It is rather stocks that I will be trading in and out of, hence the consideration. But point taken, I will aim for more of a balance betwen the two.

  2. John,

    Question: why would a historic extreme in the CS Fear Index be supportive of a pullback? If you mean a shallow pullback rather than a deep correction, that makes more sense to me and would coincide with DeMark’s call for a significant rolling correction in sectors/securities albeit with the indices moving sideways. Also, I tend to agree with Hagen above re: LTRO. The tone of Draghi’s comments subsequent will be quite important in my opinion; when QE2 ended in the States mid-2011, the market quickly embarked on a meaningful correction. Offsetting this scenario is the potentially huge IMF fund resources that could be brought to bear should the G-20 agree to such a program.

  3. Noted on my comment a week or so ago ….my model suggested a subdued period of modelled pressure from the 10th to the 25th Feb and rising modelled price, therefore, upward pressure on real markets from the 25th to the 8th March. If the price weas to fall in this period it would be contra to my analysis……

  4. As John mentioned to Demark series for DAX index, I would like to add that we should wait and see the weekly close price and must see the next weekly candle stick to confirm sell-off signal because if index is very strong, it can print next Demark series that can count by 13.

    by the way, I like commodities same as John especially Gold, Silver and Oil. I am WTI between $115 and118 in MAR/APR and $133-140 between AUG and SEP.

    GOld at $2,100 in MAY and SIlver will outperform GOLD and I aim 50- 65 this year. 🙂

    For Stock Market, I think S&P index will keep moving higher and higher. 2012 target is 1,600 points and Dow Jones at 15,000 points

    we may see temporary peak cycle around Mid APR. so, be happy to play till APR before moving sideway for months and Sharp Correction in AUG and then, crazily rally in Q4 ( maybe can go up like 15-20%)

  5. Gold and Oil are pretty much the worst commodities to own right now. Major consensus trades do not result in strong performance gains.

    Oil has had a super run of almost 50% since October 04th low of $75. We currently have record bullish bets on Gasoline and close to record bullish bets on Oil. Daily Sentiment Index has record 94% bulls on Friday, which is only the thrid time in as many years. What follows after is at least a strong pullback. This is not a right time to be optimistic, this is a time to consider taking profits or at least buying sme puts to protect your gains up to now.

    Furthermore, Gold has had a super rally since December lows. I’m not despising that it cannot go higher, but to me at least. gold is going to consolidate in a range between 1900 on the upside and 1500 on the downside. After last years run up, we will be working of the gains, so you can forget about 2100 by May. Currently Golds Daily Sentiment Index hit 92% bulls last week, while fund inflows are very bullish and call buying is quite extreme right now. Let us not forget that Gold has had 11 up years in the row, and that is very dry rare of any secular bull market. S&P 500 never did that between 1982 and 2000. Gold could easily have a done year below 1500 this year too as an outside surprise.

    So the question is what to buy? The answer is AGRICULTURE! If you want to make some serious returns, one should look at buying Wheat, Cocoa, Rice or Cotton. grains remain depressed and are building a base that is about to break out as I write this. At the same time, Softs have been a major laggard since risk assets bottomed. Coffee is close to bottoming out while Sugar could start rallying after building a strong base. More importantly, from historical perspective, Grains and Softs are super cheap, compared to Oil and Gold.

    Crude Oil is up 10 times since the secular bull market began around 2000, while Gold is up 6 times. These two commodities have made all time new nominal highs. At the same time, Wheat is only up 2 times, while Coffee, Sugar, Cocoa and almost everything else remains below all time highs set in 1970s. Sugar is still 60% below its all time high. It is one of the cheapest assets out there. Buy agriculture and you will make a lot of money in 2012 and onwards.


  6. Its very interesting at the moment to read so many differing opinions – especially when they are well-reasoned and apparently equally valid. There is a very strong tendancy for those who own an investment to believe that it will increase in price, and those who don’t, to hope that the price will decline to a more attractive level.

    Anyone who has already invested in precious metals, energy and agriculture should not care too much whether gold, for example, reaches $2100 or $1500 first – if it reaches $8800 this time next year, everyone will simply wish they owned it…


  7. Mark: I own Agriculture as well as Precious Metals. Despite of what I own, I try to stay object based on market fundamentals, sentiment and price patterns. That is all.

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