More Opportunities

I’ve added to long stock indices positions this morning (SP500, Dax and Hang Seng). My original position was fairly small. Here’s why I’ve added.

AAII bearish sentiment has moved to the levels seen at last year’s market bottoms. In other words, bullish sentiment has very rapidly evaporated.

Source: PragmaticCapitalism / AAII

There is a positive divergence on the Nymo, which has historically signalled a bottom.

Source: Cobra / Stockcharts (plus my green positive divergence lines)

To reiterate my view: I expect equities to track overall sideways with volatility into next year’s solar peak, something like the action in the box below. That means I’m looking for opportunities for shorter term moves, up or down, where the indicators line up.

Source: Charles Githler

Economic Surprises continue to languish, Euro debt continues to fester. However, OECD leading indicators paint an overall positive picture ahead. The period into the solar peak is typically one of growthflation. I reiterate that I expect a natural pick up in growth or one with central bank assistance. There is some evidence here that we may swing up naturally ahead.

Source: OECD

Opportunities

More selling yesterday, but then intraday reversals that produced hammer candles (stocks, oil). Hammer candles often mark bottoms, but capitulative breadth still didn’t trigger. Ryan Puplava compiles some oversold indicators and divergences that are suggestive of an imminent rally, but he also notes that market breadth has weakened.

This is how the SP500 stands. There is a trio of supports coming together around 1341, if we head lower, and that would potentially put us sub RSI 30.

The Russell 2000 has either made a triple bottom or is playing out a large head and shoulders to a considerably lower target.

Source: StockSage

Stocks are reaching towards overbearish but sentiment could drop lower yet before a reversal.

Source: Stockcharts

Stocks are heading towards oversold, but could also drop further yet to reach extreme.

Source: Indexindicators

The Chinese stock index needed to make a higher high to confirm a new bull trend since the start of 2012 but has pulled back at a double top, shown. If it can break out, it will be suggestive of China growth and associations with commodities.

Source: Bloomberg

10 year treasury yields are back to all time lows.

Source: Stockcharts

30 year treasuries back to all time highs.

Source: Stockcharts

I have added to short treasury positions. Doug Kass is bearish on treasuries here (hat tip Juan), calling it the trade of the decade.

The US dollar remains in a range, despite the Euroland troubles. As yet this is not resolved.

Source: Stockcharts

Spanish CDSs have nudged back up, but other than Greece CDSs, Euro debt hasn’t catapulted up again in this fresh round of fear.

Source: Bloomberg

Right now, it looks like 2010 and 2011 again – mid year pro-risk retreat with Euro debt back to the fore and slowing growth. I find it hard to believe we will see the same again, as the market always likes to surprise. So what if not that? Well, the run up into the solar peak is typically one of growthflation. The mid year should be lower geomagnetism, by seasonality, which is supportive. Sunspots should continue upwards, which is supportive. And stocks generally fair well mid year in US election years. I suggest therefore that we need either a natural pick up in growth here (economic surprises ticked up for all regions yesterday but we need to break the downward trend; China and emerging markets could take over as the driver) or we need central bank assistance, such as ECB action to deflate Euroland issues again, and the Fed to replace Twist in June. But either way, I rather expect we will see a more pro-risk friendly mid-year.

Gold miners’ cheapness relative to the gold price, overbearish sentiment and oversold RSI sub 30 make them still a great opportunity here, I believe. I added to long gold miners.

Source: Stockcharts

Source: Andrew Nyquist

Silver is sub RSI 30 and overbearish sentiment. I added to silver longs.

Crude oil is also oversold. I added to oil longs.

Orange juice has halved in price since the turn of the year due to ample supplies, but is now oversold and extreme overbearish. I opened a long OJ position.

Source: TradingCharts

Nothing (so far) has shifted me from my view of how things will play out into 2013, namely a commodities surge, and even if I were wrong, oversold AND overbearish assets eventually mean-revert. If we move further to extremes in commodities, treasuries pricing and sentiment in the sessions ahead I will add again. These are great opportunities, in my view. The picture for equities is more in the balance, with some indicators of a bottom but some reasons to expect further selling. Developments in the macro picture need close monitoring, as evidence of a pick up in data or government intervention could cause a surge, or equally, continued deterioration could cause a big sell-off.

Models Update And Commodities Peak

I have updated all the short, medium and long term model pages.

A quick recap. By solar cycles, commodities should make their secular peak close to the next solar maximum, expected Spring 2013 (within the following 6 months fits with history). In the run up to that point, we should see commodities outperform stocks by some margin, and we should see commodities pull away from the geomagnetism/lunar model. I am positioned for that, with a ‘full’ set of commodities longs.

Yet, so far in 2012, it is stocks outperforming commodities, and US stocks pulling away from the geomagnetism/lunar model, whilst commodities are closely following the model, which has recently been trending down.

Below I have boxed in black the outperformance of stocks into the last solar peak of March 2000. On the far right of the chart we see developments right up to date and observe that commodities have not pulled away in the same way yet, with just 12 months or so to go, in fact, stocks have pulled away in the last couple of months.

The purple box above shows the last episode of full commodities mania whilst stocks pulled back. This is what I expect into the solar peak. By history, stocks should track overall sideways from here into the solar peak, falling away towards the end, whilst commodities should accelerate into a final mania. That purple box lasted just 6 months, and drawing on history again, we might indeed expect commodities to accelerate as of 6 months before their peak, and go truly manic as of 6 weeks before their peak.

Right now, certain commodities display contrarian oversold and overbearish readings. That makes for a fairly compelling buy if I am correct about outperformance and mania ahead in 2012/2013. Gold should be the leading commodity in this Kondratieff Winter, and it is one commodity showing excess pessimism, with gold miners likewise.

Source: ActingMan / Sentimentrader / Hulbert

The reasoning behind secular asset peaks merging with solar peaks is that sunspots drive human exciteability which translates as speculation, buying and inflation in the markets and economy. Sunspots have been a little underwhelming in Q1 2012, but just lately picked up. If sunspots start to make new highs, then I expect commodities to begin their outperformance. But putting sunspots aside, let’s recall what happened in late 2007 and early 2008 when commodities went the opposite way to stocks.

Oil was the driving commodity. A decline in reserves, peak oil worries, Middle East tension, monetary inflation all played their part, and eventually a feedback looping of speculative greed dominated, until the global slowdown became more accute and commodities popped along with everything else.

Food prices rose to records, as oil is dominant in the process. Plus increasing demand from emerging markets and global wierding affecting harvests both shrunk stocks. Gold rose as an inflationary hedge, as a safe haven and as a hard currency.

In 2012, we still have low reserves in oil and agricultural commodities. Global wierding has been less extreme in recent months, depressing food prices as record harvests are expected from record plantings. Nature has the ability to deliver that, or to sabotage it and put low inventories back into focus. Oil inventories have been rising as global growth has gone through a slow patch, but emergency reserves remain low. Geopolitical concerns remain, but right now are more muted than, say, during the Arab Spring of 2011. Rising sunspots into the solar peak have historically correlated with protest, revolution and war, so again, nature has the ability to cause trouble here and affect oil prices.

There is a close relationship between food prices and the gold price (a chart I recently published), there is a correlation between oil and food, as oil is everywhere in the process, and there is a correlation between oil and gold, as oil drives inflation and gold hedges inflation. Farmers also switch plantings (foodstuffs, biofuel) depending on prices, adding to the interrelations. So, if we get a trigger in either energy, precious metals or agriculture, we may see the feedback looping begin in all three.

In summary, I reiterate my expectations for commodities to surge into the solar peak of 2013, and I maintain my trading positions to match, but patience is required as we could potentially not see true acceleration and outperformance until Q3 or Q4 of 2012. However, we see contrarian overbearish or oversold extremes in certain commodities now, providing a base from which to begin an uptrend, and a recent pick up in sunspots that has the potential to inspire speculation and potentially geopolitical disturbance which could drive up oil or gold.

Sunday Update

Quite strong selling on Friday, but Rob Hanna’s Capitulative Breadth indicator stayed at zero, suggesting the selling in stocks is not likely over.

Source: Andrew Nyquist

Commodities took a hit as well, particularly oil, as attention turns to slowing growth. The economic surprises for the developed economies continue to tumble at an alarming rate.

Source: Bloomberg

Compensating to some degree we see China is overall looking positive ahead (though still tentative in some areas).

Source: Yardeni

US earnings finished last week with 3 bad days of results, taking the overall beat rate from 69% down to 61%, quite a drop. No longer a very impressive beat rate. ECRI US leading indicators came in at zero this last week, a further drop back and now threatening to turn negative again.

Money has poured back into US treasuries, taking the yield back down towards the previous lows. But Spain and Europe CDSs have paused, not contuning their climb for now.

In Zeal LLC’s latest essay they suggest stocks will make another push up before rolling over properly, and this echoes the lack of major topping indicators at the 2012 highs to date. My own historical comparisons suggest an overall sideways range for stocks into next year’s solar peak, so I’m on the look out for opportunities short or long, when indicators align one way or the other. Short term then, I am expecting some more selling to take out the April low, in the early part of this coming week, and will be looking for bottoming indicators to reveal themselves. Upward pressure should emerge again as we move towards 21 May, around the new moon. If we do make another push up to highs in stocks, perhaps after that, then I will be looking for negative divergences and topping indicators.

Gold did its best to defy the selling on Friday. We still have those contrarian buy signals in precious metals, miners and certain agricultural commodities. It’s possible that we could see commodities outperfom stocks here if China data continues to improve whilst Western economic data languishes. However, if selling gains momentum it is more likely all will fall together. Gold could potentially rise alone as a safe haven, particularly if participants become more expectant of QE based on poorer data. The next FOMC is June 20. That gives them 6-7 weeks to assess further trending in data. It is also when Twist expires. If data continues to decline, and the Fed does deliver a stimulus programme of some kind, then maybe that would set up the final commodities launch that I am expecting into 2013. Well, let’s see how data trends develop into June.

Extremes

The Spanish stock index is back at its 2009 low, and out of its lower bollinger band.

Source: StockSage

Gold miners are out of their lower bollinger, at an extreme of pessimistic sentiment, and gold miners to gold ratio is at a major extreme.

Source: EC De Groot

And two from Tiho: investors extreme bullish positions on US dollar and public opinion on silver extreme pessimism.

Source both: Shortsideoflong 

Extremes typically mean opportunities, especially when they ‘fit’ together. There are several contrarian opportunities to choose from here. But patience is often required (the market can stay irrational longer than you can stay solvent).

The downside that I was expecting into this coming weekend’s full moon eventually materialised. Once we are through that, I will consider new trades from these areas. Regardless of the outlook, a period of mean reversion eventually comes to pass.

In Charts

US equities sentiment is not at an overbullish or overbearish extreme.

Source: Shaeffer Research / Investors Intelligence

US equities are also neutral by intermediate overbought / oversold indicators.

Source: Index Indicators

We need to look elsewhere therefore for clues about direction.

US earnings this quarter have a beat rate of 69%. That makes it one of the best of the last decade, if applied on this historical chart.

Source: Bespoke 

Forward guidance has been good too, so that’s all positive for equities.

Yet, economic surprises continue to plunge.

Source both:  Bloomberg

The last time we saw such a plunge from the high extreme swiftly into negative territory, equities range-traded for a couple of months and then dropped sharply (July 2011). It was a time when Euro debt came to the fore, and Spanish debt has done so again.

Source: Bloomberg

Euroland economic data is currently bad. Asia is looking brighter, although there is some mixed data out of China. Nevertheless, the Shanghai Composite has made a higher low, broken above the down sloping resistance and now needs to make a higher high above the horizontal resistance to make a compelling new bull trend.

Source: Bloomberg

The Australian ASX is at a key point, the merging of both long term down sloping resistance and horizontal resistance.

The Hang Seng made a bullish breakout, as shown yesterday. Plus as also previously noted, commodities display some technical and sentiment reasons for bull moves ahead.

All together that makes a mixed picture. Some key bullish / pro-risk developments, and some important bearish / safehaven developments. Recall that historic parallels (solar cycle secular commodity conclusions) showed overall sideways action in equities with volatility whilst commodities broke away to their bullish conclusion. The current mixed picture would support that overall sideways action in equities, but we perhaps need some other development to give commodities acceleration. That could be through further central bank intervention, in response to persistent Euro debt trouble, continued falling economic data or to replace Twist with something when it ends in June.

For now then, I continue to watch leading indicators and developments in the key areas noted above, and await assets moving to extremes in sentiment or overbought/oversold readings.

Update

The Dow made a new high yesterday but closed beneath it. The other indices did not yet see new highs.

The Hang Seng has made a pretty compelling breakout – a successful backtest of a bull flag and then a pop today with China data good again and the Shanghai Composite performing well.

The threats of declining and negative Economic Surprises, weakening US leading indicators, and Spanish CDSs close to record highs, all remain. But for now, equities look technically bullish. I continue to expect some weakness to occur into this coming weekend, so let’s see how today unfolds.

The latest POMO schedule was released here and shows a programme of both buys and sales, not making much of a push or pull either way.

Commodities look to have potentially made an important trend break here.

Source: Chris Ciovacco

Certain commodities are still at extremes of pessimism or bearishness. However, yesterday’s positive US data and hawkish Fed tones have pushed up the dollar and pulled back gold. The commodities complex may struggle if that holds. Euro PMIs today may affect sentiment one way or the other.

In short, good reasons to fancy commodities here (China growth signals, excess pessimism), but as always patience may be required.

The latest solar maximum prediction from Nasa was released and continues to forecast a solar maximum in Spring 2013.

Source: NASA