Weekend Update

As I’m not here next week, here is an additional update following Friday’s falls.

Economic data really disappointed again. The only positive is that Surprises are reaching towards a level of historic reversion. As data worsens, analysts move the bar lower, and eventually the data starts to positively surprise.

Source: Bloomberg

Jobs data was particularly poor, perhaps boosting the chances of Fed action given their dual mandate includes maximisng employment. US ECRI leading indicators came in at -0.6, still fairly neutral but echoing the weakening trend.

Euro CDSs continue to climb. Spanish at new record highs. Policy response expected soon.

Source: Bloomberg

The June calendar looks like this:

6 June: EU meeting to resolve failed banks

7 June: ECB rate meeting – expected 50bp cut – and Bernanke Testimony to Congress – Danske Bank expect Bernanke to already state his QE intentions at this testimony

13 June: Germany growth pact meeting

17 June: Greek elections

18/19 June: G20 summit

20 June: FOMC

I believe the markets are going to get satisfaction in June through policy response, both in the US and Europe, but also China could help stimulate too. The recent commodity price falls and weak jobs data give the Fed the legroom and reason to stimulate again in some way. Obama’s chances of re-election will only improve if the markets and economy turn up again.

Policy response aside, I believe we may also see a natural turn up in growth ahead enabled by lower oil prices and lower commodity input prices on the whole, a cheaper Euro enabling more export led growth in the Eurozone, plus the natural turn up in activity historically occurring as sunspots ramp up into the solar maximum. So I continue to expect a combination of central bank intervention together with a natural turn up to provide the growthflationary finale into next year.

Turning to the market action. Dax stocks above the 50MA are now at zero.

Source: Underlying Dax

A Demark weekly buy set up is in place following Friday’s falls to new lows. The chart below was taken on Thursday.

Source: Andrew Nyquist

We now have the positive Nymo divergence that was missing at the last low.

Treasury yields have made a blow off bottom.

Source: Stockcharts

Thanks to Tiho for this summary of other extremes:

Dow Jones is down 18 out of 22 days and DSI just hit 10% bulls – US equity market experienced a “90% down day” yesterday – Crude Oil is down 21 out of 22 days and DSI just hit 8% bulls – US Dollar is up 21 out of 25 days and Euro DSI just hit 7% bulls – US Treasury 10 / 30 Yr yields are at 220 year record with DSI hitting 95% bulls.

Capitulative Breadth hit 5 on Friday but is expected to reach true capitulation levels on Monday. Panic has reached towards the extreme but could also top out higher on Monday.

Source: SigmaTradingOscillator

Vix has also reached the kind of overbought level associated with stock bottoms, but could also nominally jump higher on Monday.

Underlying Source: Cobra / Stockcharts

With Monday being the full moon and peak downward pressure, I believe the evidence is pretty compelling that we may bottom out on Monday. Capitulation is close at hand, and further falls on Monday could bring about an intraday reversal and hammer candle. If not, then Tuesday for the snapback rally to begin.

The alternative scenario of a Puetz crash window beginning on Monday and lasting a couple of weeks I believe is now remote due to the extremes and capitulation-at-hand evidence. I am therefore looking to make my last additional pro-risk buys on Monday, unless some surprise good news at the weekend means we break upwards from the outset on Monday.

I have updated my short and medium term models. Commodities are well below. The SP500 remains above but the Dax below. As the Dax is cheaper by p/e and the cheaper Euro should help German exports, maybe we will see a period of outperformance in the Dax. Seasonal geomagnetism should be less into July, which means the models should start to turn upwards.

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