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