One Week Later

As expected, we saw a reversal at the start of last week. Capitulative Breadth hit the 7-10 capitulation zone on Monday (and has since dropped back to zero due to the rallying). Monday began with more sellling then made an intraday reversal and daily hammer candle – another bottom signal. We printed the missing positive Nymo divergence between the lows of 18th May and 4th June, and positive RSI divergence between the two also. The week then progressed bullishly but Friday’s action in pro-risk, particularly in commodities and the Euro, looked weak for a while but by the close had reversed strongly. The media assigned rumours of a Spain banks bailout coming at the weekend to the reversal. This duly occurred on Saturday and we will see market reaction this coming week (Spanish CDSs had pulled back a little last week, we shall see if this can be sustained this week). Technically we were due an enduring rally in pro-risk, as per the many indicator extremes I posted in my last few entries. Central bank fuel for such a rally was mixed however. China and Australia cut rates. The Bank of England stayed put. The ECB did not cut rates. Bernanke did not telegraph further QE, as some had also speculated, but left the door open to do ‘something’ – or nothing – at the June 20 FOMC, subject to the latest economic developments. And now Spanish banks bailed out by the EU.

ECRI leading indicators for the US dropped to -2. Chinese data disappointed again this weekend (Chinese stocks made bearish technical action last week, contrary to most pro-risk, and despite the rate cut). Citigroup Economic Surprises languish and haven’t made a turn-up ahead of stocks bottoming, if that was a bottom, as they did in 2011 and 2009. So the economic picture remains weak and the question is whether central banks have begun another round of easing and aiding and stimulating, with last week’s announcements just the beginning, or whether they feel they can largely stay put and see how things develop. Well, suffice it to say that if the picture does not improve they will likely intervene more, but what we need to know is whether we will see more downside for pro-risk ahead if they don’t do more currently.

Let’s return to the techincal picture. Look back in my previous handful of posts to see the extremes reached in terms of overbullish/overbought treasuries and dollar and oversold/overbearish commodities, Euro and stocks. One thing missing for equities was an Investors Intelligence sentiment washout (whereas AAII had made such an extreme). Last week percentage II bulls finally dropped into the historic extreme low zone, but percentage bears did not, i.e. still quite a few neutrals. Accordingly, the bulls minus bears chart still doesn’t show a historic extreme:

Source: Shaeffer / Investors Intelligence 

Also, Chris Puplava notes the lack of panic selling compared to 2009, 2010 and 2011 major bottoms.

Source: PFS Group

On the other side of the ledger, equity fund flows have hit historic pessimistic extremes, matching real investor action with the sentiment shown in AAII. Also, treasury yields made an inverse parabolic move into the beginning of Monday that resembles other historic blow-off parabolic moves that normally don’t come again for some time. The action as of Monday was a v-bounce that could mark the reversal, and if so, that could spell an enduring move into pro-risk from here.

Source: Chris Kimble

The S&P500 looks pretty bullish. As per Chris Ciovacco’s chart below, we appear to have broken out and backtested important resistance. The question is whether stocks can go on to make a higher high than the end of May at the start of this coming week. If they can’t, then an inverse Head and Shoulders pattern could be in the making as long as stocks don’t exceed last Monday’s lows.

Source: Chris Ciovacco

NASA’s updated solar prediction still forecasts Spring 2013 for the solar peak, and still forecasts it to be a weak solar maximum historically. The sun is fairly active currently, which is bullish, and this should continue into next year. Some geomagnetism early-mid last week has pushed down a little on my short term model, but the message remains of a likely bottoming here, with seasonal upward pressure into July. Near term, there is the scope for upward pressure this coming week into the new moon of 19 June. I will update all models on Tuesday, with the extended NOAA forecasts, but here is the up to date Dax:

Expecting upward pressure into the new moon, I don’t plan to take profits on any of my pro-risk longs yet. The next couple of weeks give us the BofJ meeting, the Greek elections, the FOMC and other Euro meetings. Between them there is the potential to really give this rally some momentum and start to fulfil the historic positive seasonality in an election year from June to November. Or there is the potential to disappoint the markets and leave the focus on weak data and Eurozone issues.

Here is what I think. Pro-risk is overdue a counter trend rally here, a sustained upmove that provides some mean reversion for the stretched oversold/overbearish extremes. I expect us to to make that rally now. If pro-risk is heading for another lunge lower, to perhaps give us the missing II sentiment and panic selling extremes then I expect that to occur after we have made a decent retrace upwards for a few weeks. The clues will be in the health of that up move and the developments in economic surprises and leading indicators – i.e. if we rally up but all that deteriorates further then I’d be looking to take profits. However, rising sunspots, seasonally less geomagnetism, presidential seasonality all support mid-year upside. The blow-off move in treasuries suggests an enduring flow into pro-risk from here also. Extremes in US dollar COT and bullish sentiment, and the reverse in key commodities also support an enduring flow the other way. The secular position is closely linked to the solar cycle position, and we should expect a speculative push into pro-risk, with commodities accelerating into a final upmove. I consider us in a different position to 2010 and 2011 as we reach up into the solar peak less than a year away. I think it is more likely we print a strong mid-year this year, rather than a repeat of the last two years. I continue to expect a natural turn up in growth, as per the growthflation of historical rhymes, and a central bank invervention inspired turn up in growth also, at this point. Clearly though, I am frontrunning, and we need to see the evidence build to support that view. For now, we are tentatively trying to start a pro-risk mean reversion rally, and no more.

One last chart. An alternative view of secular cycling using consumer confidence readings, with my notes added. Consumer confidence topped out just before the secular stocks / solar peaks of 1968 and 2000, and bottomed out just before the 1980 secular commodities /solar peak. It made twin lows then, like it has in the current secular commodities bull, as shown by the circles. In keeping, consumer confidence should have made its secular bottom, and supporting this the nominal levels reached reflect the last secular lows. A pullback in confidence should be ahead into the secular commodities peak of 2013 and subsequent bear market, but within a new longer term uptrend.

Underling Source: Daneric / Sentimentrader

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10 thoughts on “One Week Later

  1. John, thanks for the update! Do you know where the charts of Citigroup Economic Surprises indexes for the US and major global economies are located now? I wonder what happened to them. Thanks for all your help!

  2. All models updated. There is a geomagnetic storm in progress. Some further incidences forecast ahead mean the short term models have a slight downward bias. Countering that, sunspots continue to make their general upward trend.

    The current geomagnetic storm plus yesterday’s hard reversal in pro-risk clearly isn’t bullish. However, statistically today should be an up day, so we need to see tomorrow’s action, as to whether that was an important reversal or whether the market was just blown off course by the news and corrected itself back to its path (i.e. it wasn’t ready for the breakout). With the Greek election at the weekend, I suspect we may range trade. The extremes in oversold/overbearish persist, supporting from underneath.

  3. One interesting observation I would like to put forward is that when markets decline as hard as yesterday on perceived good news, its clearly a downtrend. And in a downtrend, sentiment can and will get even more bearish and oversold levels can and will get even more oversold.

    Therefore, I have closed all SPY Calls at the open yesterday as already posted in the comments section of my blog yesterday morning. I have closed all SLV Calls and other positions at the open as already posted in the comments section yesterday morning too.

    I want re-enter risk assets as I tend to agree with John that risk is still overdue for a decent bounce / rally. So many a another lower low with divergence is needed, before it starts. However, I see the up-and-coming rally, if we do get one, as a bear market rally.

  4. This is not a good time to be out of the precious metals market. The uber-wealthy (think Rothschilds etc) and bullion banks are buying huge amounts of physical metal (pushing the price up sharply), and then paper-shorting it back down to the starting point and using the profit from the short bets to buy more physical.

    At some point, possibly even today, the shorting will become too risky and run out of steam – and anyone without a position runs the risk of watching a spectacular rally as an outsider.

    Today is also a major Bradley Turn – so expect a significant change in sentiment…

    1. No – my comments are an observation that anyone can consider as they see fit.

      But now you’ve asked, I will offer a suggestion – that you ask yourself some searching questions: is it just a coincidence that precious metals rallied today after you sold out of silver?

      Was it simply bad luck that stocks tanked after you called for them to rally after China’s recent rate cut?

      Was it merely coincidence that the USD staged a spectacular rally just after you rather arrogantly “corrected” a commenter on this site that the USD “is not bottoming – it is topping…”. And that was at a time when your own excellent charts were signalling strong USD bullishness.

      I notice that you like to vaguely associate youself with legends like Marc Faber and Jim Rogers (eg. “…one thing I learned from Dr. Marc Faber…”); but ask yourself if guys like these ( or the Rothscholds, for that matter) are selling out of a long-term bull market like silver? Your self-professed strategy is too buy on dips during longer-term bull markets, yet here you are doing the opposite.

      And you could consider what signal you have sent to readers of your own blog by removing the “portfolio performance” section, now that you have given back most of your original gains.

      Please don’t feel that you have to answer these questions in public – I’m suggesting them for your own consideration.

      1. Mark, It looks like you are possibly talking about a long term trade in Silver and Gold, and Tiho may be trading Gold/Silver short term. Looking at the 1 year and weekly chart of Silver and Gold we still have not gotten positive divergence which may come from a higher or lower low. Gold/GLD looks like it’s trading in a triangle where 148 should be the floor, if it falls below it could head lower, but looking at the price action and other factors I don’t believe we will see a lower low….

        The inverse relationship with Treasuries and risk assets are at an inflection point. Gold/Silver have been trading sideways to down for the last year while treasuries have had a good run up, with the “Operation Twist” as a good instigator. Depending on what is announced by the Fed action or no action, treasuries look ripe for a sell-off, in fact they look like they are already impulsing down (Elliott wave term for downtrend). Another rebound could likely yield a lower high in treasuries, a higher low in metals, and possibly a lower low in equities. But soon after we may start to get a rally in risk assets…

        I follow financial astrology and the Uranus Pluto square on the 24th and the Sun opposition to Pluto, square to Uranus on the 29th have negative affects to the market and I will be waiting to see how they play out. Take a look at John’s solar chart, there is still downward pressure into the beginning of July….

        The Dow already surpassed my downside target of 12080 and the S&P below 1295. There is still an outstanding H&S target of 720 on the Russell that has not been met yet…

        I believe Tiho is right, the price action on Monday is very bearish. When there is no follow through on positive news, there is more uncertainty in the markets that needs to play itself out…

      2. Hi Mark,

        I think you deserve an answer, since you seem to be very “in touch” with what I do and yet it is not all correct. As they say, assumption is the mother of all fuck ups, so it’s not good to just assume things.

        First of all, I have not sold out of Silver, but just short term trades I had through Calls. If you read my website, it still states that I hold a core silver position purchased on the December low for awhile now. This has been on my website for months and months. You obviously missed it and/or assumed otherwise.

        Second, I believe we are in a stock bear market, so while I am trying to trade the long side, I’m prepared to exit at any point for any quick profit, as I believe it’s against the trend. I am still waiting to short stocks on any rebound. Both of the Calls I purchased in recent times were very profitable as of Mondays gap, and since it was a massive gap on good news (bail out) I closed my positions. I believe that was a smart move for me personally and looking back on it, it was.

        Moving along, yes I have been a US Dollar bear from January 2012 onwards, when I shorted the Dollar against the Franc middle of that month. I believe many other traders also followed the same triangle which I followed, including John here on this blog. The dollar never broke down as I expected and instead broke upwards. I admitted being the wrong (it’s just part of business), just as many others have also, than covered my Dollar / Franc short (for a very small profit actually due to a good entry in mid jan) and now remain neutral on the currency.

        I don’t assosicate myself with anyone in the terms you have posted. I actually look upto good traders and constantly converse with them, including John here over private emails. As for Marc and Jim, I also look upto them and post their videos on my blog as I am a fan, not on the sam level (first of all I am not close to a billion dollars of wealth or more).

        Also to note once again, I have not sold my Silver position and still recommend buying into secular bull market. For me, I’m trying to buy THE LOW and since the Dollar triangle broke up, I have a feeling we might not be there yet, as previously thought. Therefore, I remain patient on the matter and expect possibility of lower prices, at which to buy again.

        Finally, in regards to my portfolio performance, the massage you got from it, is your own. I cannot change that. I guess, just like everyone else, you also expect things for free. Correct me if I am wrong, but I do not see you running a blog and posting any of your trades, charts, write ups, data etc etc for free in real time. Don’t feel bad about that. The truth is no one does.

        John does not post his performance nor does he post his entries in real time. Other people I know who do it, charge for it. I subscribe to some of those services, as they have given me free subscriptions and those traders have recommended me to do the same. They think I was ludacris for giving it out for free, but I am not interested at this point in doing anything like that.

        My blog has always been free, with a lot of decent content and acts as a trading dairy to what I am doing with my own money. For every person that writes an massage or email the way you have, as you expect freebies, there are a lot more people who write to me personally stating they enjoy what I do. Either way, your comments are definitely welcomed as feedback.

        Tiho

  5. Well I don’t know about everyone on here but I’ve been a purchaser of gold and silver over the past 4 weeks. For me the prices over the past month or two are the lows and I feel we are heading for a period of out-performance especially when you consider what is happening here in Europe. Spain is going to need some serious help…. forget the $125bn. This is just the start! Then Italy will be next. It’s almost like seeing a pack of dominoes fall in slow motion. And there is only one solution….. PRINT. PRINT PRINT.

    More and more paper money in the system, more and more sovereign debt, it can only end badly and most certainly with much higher inflation levels. Inflation in China jumped last month as the world’s third largest economic bloc slowed down.

    Investors who want to beat inflation are left with fewer and fewer options. Central banks cannot print gold, they can only buy it themselves as an inflation hedge and help to push up the price. Silver is a tiny market that will follow and outperform gold as a sister monetary metal.

    There are few win-win scenarios for global investors in these markets, expect more and more investors to jump on this train. That is why prices are going higher.

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