Technical Equities

This is the technical picture for the Nasdaq, the leading index. In a very tidy channel since the bull market began in 2009, it has made a series of advances and consolidations. I have marked the horizontal supports for the consolidations – in each instance the market retreated to the previous bull market high and successfully backtested it without dropping below it. This has happened again in 2012, with the market holding above the 2011 highs. In short, the bull market is very much in tact from a technical perspective. The Nasdaq is currently at the bottom of its bollinger bands, suggestive of an up-move ahead, however there is scope for the overall consolidation to be extended deeper into 2012 without compromising either channel or horizontal support.

Source: Me

Barry Bannister send me his latest macro deck and I pick out this one chart below which shows his expectations for where stocks are headed. He forecasts reflation for H2 2012, like myself, to push up stocks. He quotes four phases to a cyclical stocks bull in a secular bear, and accordingly anticipates a kind of overthrow move to complete this cyclical bull (similar analysis and forecast to Laslo Birinyi).

Source: Barry Bannister

Now I’m going to contrast the above with Jan’s charts that show the key cycles on the Norwegian index. What both show is a decline into 2013. He expects the decline in equities to begin now or at the very latest October.

Source: Jan Benestad

Eurodollar COT one year advanced suggests a rally in equities into the US elections. Presidential cycles also predict a rally from here into November. The next major Bradley turn is 28th July, and after that 22nd December. I concur with those commenters that Bradley turns can be highs or lows and the siderograph is just a ‘best guess’ for which are likely to be which. Geomagnetism, by seasonality, becomes more intense in September and October, before lessening into year end, whilst sunspots should continue their waving up towards the solar peak, still forecast to be Spring 2013.

So the question is, can we unite all the above?

The best fit is that stocks bottom out as we turn into August, and then rally into year end (Eurodollar, presidential, Bradley turns, sunspots, Bannister, Birinyi).

The alternative is that stocks top out as we turn into August and fall into the US elections (Jan’s cycles, geomagnetism, Bradley siderograph). By Jan’s cycles we would in fact keep falling into mid 2013.

As previously noted, I believe that we will see a pick up in leading indicators in the weeks ahead, which will inspire the best fit to come good. As I expect stocks to top out before the solar peak (and associated secular commodities peak) it is still possible that they then fall into mid-2013 in line with Jan’s cycles. Let’s see if equities rally or fall out of this next week’s Bradley and FOMC. By my shorter term models, we should fall into the FOMC, and then bottom out to rally.


5 thoughts on “Technical Equities

  1. The current bear displays a 6-yr cycle, with lows in 2003 and 2009 respectively. In this case, we’re where we were in mid 2006, with a May crash, and a little sideways movement in the summer holidays. Higher highs could be expected by October and year’s end. The bull could start to lose momentum as it did in 2007, however, peaking by June or October 2013. Then it could crash by 20-25% in 2014 much like the crash in 2008, between January and September 2008, but no deeper.

    The US stock market’s been making new highs with barely any zest, making a more rounded top than you’d expect in a proper bull market. A 20-25% crash in 2014, from 14,000 in the Dow to 10,000 would shake off the excess, recharging it for a new secular bull market starting in 2015.

    Inflation is the word for 2013, as food prices could rise by 3-5% over the next year, vindicating an inflationary year to come.

  2. I agree John – the picture is quite ambiguous. But my bias is that there could be more downside for US equities. This is for two reasons.

    1. Fundamentals: Around the time of the last two commodity cycle peaks (1948 and 1980) the Schiller P/Es for equities were both under 10 before the new bull phase in equities commenced, whereas they are at present still at 21, which suggests more downside:
    However, as you have mentioned, European equities P/Es are already at low levels. But don’t you feel that US equities are still overvalued using Schiller’s ratio?

    2. Long term technical chart: I appreciate that long-term technical charts may not be that valuable, but Kimble has an interesting chart of the Dow, which suggests the Dow needs to move towards the bottom end of it’s long term channel, as it did before in the late 40s and the 80s:
    Do you think these charts are of any use for trading?

    If the Dow declined to this point on the long term chart, then I suspect the Schiller P/E would most likely be under 10! This would match the historical cycles of the previous commodity peaks.

    So for these two reasons, I am more bearish. But I can also appreciate your view that equities moved sideways and slightly up into the last few commodity peaks so we should use history as our guide. So this may be the way things develop.

    A key measure I’m watching to answer this question is my long term charts of global equities with their triangle patterns, which you posted up in May:

    So far, for most global indexes, these triangle patterns remain tantalising intact.

    Downward breaks from these huge patterns due to a crisis (Euro crisis, Iran War, Chinese hard landing for example) would confirm my bearish bias, and lead to Schiller P/Es below 10 and Kimble’s Dow chart thesis being realised.

    However, upside breaks from these huge patterns (due to increased sunspot bullishness and QE) along with a bit of sideways action or pullback – would support your thesis nicely and prepare the way for a new bull phase. As you mentioned back in May, the US indexes have already broken out, so this would again support your view. The other global charts are approaching their triangle pattern apex soon, so the market will let us know the answer to these questions shortly.

    1. Japan finished the last secular bear at p/e 20, so not all have to go single digits. But ultimately I expect another cyclical bear ahead in 2013-14 which will indeed shrink p/es further. I just expect we have another decent pop in equities before this cyclical bull gives way to that cyclical bear.

  3. On the lunar phase – interesting to see how the next few days plays out. We had an inversion on the 21st May which then lead to a bottom on the next full moon on 4th June. Then recently we had an inversion on 3rd July and now we continue into next Thursday’s full moon. All pretty strong today but things can turn.

  4. Citi had an interesting report a week or two ago about a “terminal high” in equities in which they said the market should see a “significant high” between end of July and early August, but maybe as late as October. All technical analysis work on the Dow dating back to the 30’s or 40’s. Basically, it appears that they are calling the top in equities.

    P/E 10 and the Q-Ratio would indicate that equities are overvalued by roughly 35-40% from its historical mean however when it’s gets “out of whack” to the upside as it did in the 1900s, 1920s, and the mid 60s, the reversion was well below the mean.

    If you take a look at the Dow or S&P 500 dating back to the early 1900s (Quarterly or Yearly chart) and throw a simple RSI Wilder indicator on it, a divergence between momentum and price has occurred starting back to the tech bubble days.

    A look at the parabolic move in the ratio of the S&P 500 and the 10-year yield ($SPX:$TNX) would tell you that something has to give. I am of the belief that both yields will rise and equities will fall in the near future. Maybe not this year, but sometime soon. This would be, in my opinion, driven by maybe the “fiscal cliff” debacle or more downgrades of the US credit rating. If this is not the case, then it is my belief that inflation will take hold and equities may rise slightly however yields will begin to lift quite quickly.

    However, its hard to try and short this market when jawboning is still working. I will feel comfortable going mostly short whenever I notice not only jawboning, but action taken by governments and/or central banks cease to work as intended.

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