State Of Play

Let’s start with the big 3 macro: economic surprises, Euro debt and leading indicators. Economic Surprises for the G10 nations show increasing evidence of having bottomed and entered a new uptrend:

Source: Bloomberg

Economic Surprises for Emerging Markets even more so:

Source: Bloomberg

Turning to Euro debt, overall PIIGS risk continues to ebb from its 2011 highs:

Source: Bloomberg / Scott Grannis

Homing in on the big two, Spain and Italy, we see 5 year CDSs having entered a consolidation the last few weeks. It is too early to say if a downtrend is emerging, or a pause in the uptrend:

Source: Bloomberg

Moving on to global leading indicators, here is a summary of the latest readings from the Conference Board, showing that we do not yet see general positive signs ahead for the global economy:

Source: Conference Board

There have however been four consecutive weeks of rises in ECRI’s leading indicators for the US. Whilst still negative, they have been trending upwards again:

Source: ECRI / Dshort

Drawing in US earnings, the earnings beat rate so far has been around 60%, fairly average historically, whilst the revenue beat rate has been around 48% which is some way lower than the average of around 60%. This continues to reveal that companies have maintained earnings rather by cutting costs rather than genuine growth, which in turn reflects the economic weakness that we have been experiencing.

So the key question remains whether we are now to see a turn up in growth. I maintain that we will, due to lower commodities prices in H1 2012, due to a natural upswing in growth, and due to a new round of global easing and stimulus currently occurring. That brings us to the Federal Reserve meeting outputs of tomorrow and the ECB meeting on Thursday. What should we expect in terms of further action? I suspect the Fed will reiterate its commitment to act without actually acting, but go with more dovish wording, whereas I suspect the ECB will deliver something tangible. Since Draghi propelled the markets last week with his ‘do whatever it takes’ wording, the markets are expecting something concrete. If we get nothing on Thursday, those gains may be retraced. Thursday is the full moon, and we would normally decline into a full moon. There is still the possibility of big declines the last 2 days into and on it, if the Fed and ECB disappoint, however it rather looks like we will make an inversion.

I have updated all the models this morning. We have a particularly tame 3 weeks ahead in terms of forecast geomagnetism. That provides a backdrop for pro-risk to rally. Presidential seasonality also supports this for equities:

Source: Bespoke

In addition, the oversold and overbearish readings for both the Euro and precious metals also provide fuel for a pro-risk rally and dollar retreat. Chris Puplava’s chart here shows that open interest and real interest rates both support an upward move for gold, with the US dollar apparently holding it back. A mean reversion in Euro-dollar therefore could sustain a rally in gold, which would be technically very important as it would mark an upside resolution out of its 9 month triangle.

Source: PFS Group

Agri commodities have consolidated a little, having reached overbought levels. Fundamentals are still currently supportive with more normal weather conditions perhaps returning as of September, which keeps harvest fears at the forefront for now.

Treasuries made a large reversal on Friday from all-time highs. It is too early to judge whether that marked a significant top. On the one hand, the overbought and overbullish parabolic recent move is ripe for an enduring reversal, but on the other hand the Fed is still a supportive player in that market.

OK, bringing it all together, the question on my mind is whether I want to take some pro-risk profits off the table here into the FOMC and ECB. For anyone new to my site, my portolio of positions is currently 100% pro-risk, with the biggest weighting long commodities (precious metals, agri, energy) then long equities (various global stock indices), then short treasuries in a much smaller weighting. I currently have no currencies positions. Drawing together the secular and the solar I anticipate a pro-risk rally in H2 2012 through to the solar maximum of 2013, but with equities wilting before we reach the solar maximum whilst commodities make their final blow-off secular top. Equities could therefore top out before the end of 2012 but not before they’ve had a pop to new highs.

Right now the picture looks more supportive of that general scenario that I have been promoting for some time. Economic surprises now look supportive, Euro debt is showing signs of coming off the boil again and US earnings are good enough. Leading indicators remain the area of concern, but if I am right in my reasoning for why they should begin to improve then I believe that provides the final piece of support for a move to new highs in pro-risk. Chinese leading indicators in particular are important for commodities. However, soft commodities have had a thrust due to global wierding and precious metals have the support of reinforced negative interest rates from the latest central bank interventions. Precious metals enter their seasonally strong period of the year as of August, with Indian wedding demand one factor, and global wierding remains supportive for soft commodity prices for the near future.  By solar cycles, inflation should peak around the solar maximum, and the price rises in softs that began in June should feed through into in inflation 6 months later. If they can further their rises and oil was to also rise on H2 growth (or supply issues) then we could indeed see that acceleration in inflation into Spring 2013.

So right now I am going to maintain all my positions and not take any profits. However, if pro-risk pushes up significantly more today and tomorrow before the FOMC outputs then I may trim back. I will let you know in the comments if so.

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6 thoughts on “State Of Play

  1. Hi John

    Thanks for the update.

    I was wondering what your opinion was of Robert Taylor’s Xyber9 market forecasts which he argues predict stock market movements using the level of gravitation? His site is here, and he has published a novel too, explaining his work:
    http://xyber9trends.com/
    http://www.paradigmbook.com

    He seems to be on to something – and he also believes he has solved the ‘inversion problem’ which troubles you, but my concern is that he seems to be claiming gravitation is the holy grail for investing, whereas your approach seems more measured. Taylor gets a critique here, by CXO Advisory, who seem pretty rigourous, but I know they don’t seem to fully grasp some of the lunar trading theories:
    http://www.cxoadvisory.com/2561/individual-gurus/robert-taylors-peculiar-definitions-of-up-and-down/

    So I’d be interested to hear your views on Taylor and what he calls ‘Taylor’s Law’:
    “The financial market’s expansion and contraction is qualitatively in direct correlation to the increases and decreases in gravitational fluctuations experienced at the human level. The increases in market price are in direct response to decreases in gravitational forces; the decreases in market price are in direct response to the increases in gravitational forces.”

    Many thanks

    Rob

    1. Hi Rob, thanks for this – it’s new to me – so I’ve just been having a look through. I’m open minded and CXO’s dismissal doesn’t mean it’s invalid. On the other hand I’m naturally skeptical of those selling their forecasts, particularly those with a stock market ‘secret’. That he wrote up his theory as a novel rather than a work of fact also seems slightly dubious. I went through his historic prediction charts for 2012. The charts look initially compelling because of the way the lines are drawn. But if you read the predictions (up from this date to this date, down from this date to this date) then it’s rather hit and miss. The lines are made to look more compelling by joining the top of one bar with the bottom of another etc. I checked xyber9trends review in google and the first return suggests it is scam related but I can’t find any more to back that up. How did you come across it?

      1. I just came across it on the web. I have only found a few reviews about it by other traders, who said it did work and it seemed to have some predictive ability, but wasn’t quite as accurate as Taylor suggests. He seems to be arguing that stock market movements are based on gravitation and that “Using…tidal fluctuations is a very effective method to predict gravitational increases and decreases into the future or back to the past. The National Oceanic and Atmospheric Administration (NOAA) produces astronomical measurement algorithms which predict precise tidal fluctuation.” (Taylor in FAQ).
        So it seems quite solid, but some of the marketing is a little off putting.

  2. Glad you’ve both taken a careful approach. I’m not much of an expert on all these interesting theories shown on this site and others, but I can see how easy it is for someone to claim they’ve cracked how to predict markets. One thing that will always make the future so hard to predict is the randomness of nature, so if any kind of correlation can be made between nature and markets, it needs to accommodate for the way that nature moves, independently from the will of theorists, instead of being spot on

  3. Post-FOMC: slightly more dovish wording and no action, as expected. The markets now turn to today’s ECB, and there they are looking for action, so let’s see.

    I remind you that today is the full moon and we would normally see downward movement into the full moon. Well, it’s not obvious on the SP500, but take a look at the Russell 2000 small caps index here (4th chart down):
    http://www.tsptalk.com/comments.html

    That shows a clear decline into the full moon. Some commodities moved likewise. So, I think we did get our normal lunar action rather than an inversion. What does it mean if small caps are so relatively weak, or large caps relatively strong? Well, it’s normally a warning flag if small caps aren’t supporting a rally. But this isn’t a regular rally. It’s one of extreme caution and bearishness (AAII and Wall St strategists and bond rates). So whilst there is some weakness to the rally, there is also the (contrarian) fuel to propel us higher.

    As of next week we should see lunar pressure and expected tame geomagnetism supportive of a rally. If we get a positive reaction to today’s ECB outputs then I think we are good to deliver that. But the market is expecting something substantial today so there is a risk of disappointment. I have not taken off any profits but kept all my positions in tact.

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