Month: August 2012

Technical US Stock Indices

Posted on Posted in Indicators, Stocks15 Comments

1. AAII bullish sentiment this week has fallen back to 34.7. It can be seen that bullish sentiment in this recent rally did not hit the kind of extreme levels of 50+ that previous signified a top.

Source: Bespoke / my update

2. Investors Intelligence sentiment showed a marginal increase in bulls this week but, again, sentiment has not reached bullish extreme levels that previously signalled a top, as evidenced in the chart below.

Source: Schaeffers Research

3. Bullish percent over call/put ratio similarly has not reached the kind of extreme of important market tops, which would be up at 110+.

Source: Stockcharts

4. SP500 stocks above the 50MA has pulled back a little, but also did not reach into the upper extreme band yet.

Source: Index Indicators

5. NYSE advance-declines are at new highs for this cyclical bull, showing that breadth is strong. As marked in red, the previous cyclical bull top of 2007 showed a negative divergence in this indicator which is currently absent.

Source: Cobra / Stockcharts

6. Commercial hedger net short position is the biggest current threat to the bullish positon for US stocks.

Source: Sentimentrader

7. But this can be contrasted with penny stock speculation which is suggestive of the opposite – a low in the markets should be here.

Source: Sentimentrader

8.  Drawing the broader range of Sentimentrader indicators together it can be seen that there are more indicators at bearish extremes than at bullish extremes, but the percentage at bearish extremes is not calling for a top here. Previously bearish and bullish extremes hit 30% before marking an important reversal.

Source: Sentimentrader

In summary, technical indicators point to markets more bullish than bearish and more overbought than oversold, but in both sentiment and price not at levels that would signify a top. Plus breadth is supportive. Concerns a few weeks ago over defensives leading stock indices upwards and a lack of small cap participation have been rectified in the last couple of weeks where rotation has made for a catch up in those underperformers.

There is no doubt a level of expectation regarding Jackson Hole and a clearer message regarding QE, but what the technical picture reveals is that even in the event of disappointment, stocks could still go on to breakout upwards here before signalling a top, as it is normal for these indicators to hit extremes before a reversal, and we are not  there yet.

Secular Solar Conclusion

Posted on Posted in Commodities, Indicators, Lunar Cycles, Solar Cycles, Stocks12 Comments

A brief macro and technical update first. Euro debt continues to ease on the whole. Economic Surprises for G10 and emerging markets continue to trend upwards. Leading indicators continue to be the problem area, with a mixed to negative picture, but tentative signs of improvement: ECRI leading indicators in a 6 week uptrend to break even, and CB Eurozone leading indicators in a 3 month uptrend also to breakeven. China and its local trading partners remain a particular problem area, reflected in the continued Shanghai index downtrend. Western stock indices and commodities remain in bullish trends, having consolidated their recent gains just below key resistance levels for US indices and precious metals. Some overbought/overbullish readings in both commodities and stocks had been reached, but not the kind of comprehensive and extreme readings to signal a top. I therefore maintain that this is a pause before a breakout, supported by presidential, secular and solar cycles, and have maintained all my long positions. The full moon is this Friday, which is also the Jackson Hole Fed meeting. Whilst the latest Fed minutes suggested a greater likelihood of QE, Jackson Hole is not a policy meeting (a FOMC) so we may get no action plans, just more supportive words. The usual lunar oscillation would see the consolidation / correction persist into this Friday and a sell-off on disappointment is not out of the question. As of next week though lunar positive pressure should re-emerge and I expect stocks and commodities to break upwards.

The anchoring of this expectation is in secular / solar cycling. I expect stocks to overthrow and make their cyclical bull peak, whilst commodities accelerate and make their parabolic secular finale. The stocks peak should occur before the secular commodities peak – with stocks foretelling recession by 6 months or so, and commodities (oil and food) playing a key part in tipping the world into recession. Here is the timetable again:

Bear in mind the forecast for the solar peak – currently March 2013 – could change, and also that the forecasts along the top row are ranges based on the last 3 solar cycles but we could potentially print slight outliers to these ranges.

Growthflation, speculation and revolution/war have been three key themes into solar peaks. I therefore expect leading indicators to pick up in H2 2012, enabled by the global central banks recent easing / stimulus and a natutral upswing in growth. I expect inflation to pick up, and this should be the case as soft commodities took off in June 2012 and this typically feeds through to the food price index 6 months later. I expect speculation, particularly in commodities, to accelerate, and for there to be a supply side push in commodities, not just from climate/weather but also from war-related disruption. At some point commodities should de-couple from stocks.

Looking back to 2007/2008, the last time commodities de-coupled from stocks, and also 1979-1980, the last secular commodities conclusion where commodities de-coupled from stocks, there are similar themes. In 2007/8, climate disruption, perceived supply threat (peak oil, geopolitical), the intercorrelation of commodity prices (food switched to biofuels, oil being key input in food process, precious metals hedge for inflation) and an upward spiral of speculation drove commodities to peaks beyond the fundamentals. In 1979/1980, the Iranian revolution, Iran-Iraq war, curtailment of oil supplies, and a spiral of speculation (particularly in silver) did likewise. In both cases, the parabolic rises began from conditions of easy money, inflation and growth – emerging markets increased demand for food played a role in 2007/8 and increased global oil demand a role in the 1970s. So if we are to see a parabolic conclusion in commodities in 2013, as I expect, then we should see leading indicators pick up in H2 2012 and provide the ‘positive’  backdrop against which commodities can begin a parabolic climb, then coupled with other factors, namely climate a supply-side push on agri (as we are seeing), revolution/protest/war disrupting energy supply (such as the Iran situation boiling), and then the intercorrelated factors. These intercorrelated factors would be increased inflation from commodities rising inspiring more money into commodities as a hedge, increased energy prices pushing up food prices, precious metals rising as a hedge, switching between commodities in line with price rises then bringing up the laggards too, and lastly a spiral of speculation which should take over from everything else into the peak. I might also draw in 2011 whereby we also saw food price acceleration and revolution both driving up commodities into short term parabolic moves, as expected rising into the solar maximum, but also noting that the food price acceleration was a key factor in bringing about protest and that the subsequent region disruption then drove up oil prices. So once again, an interconnected spiral.

For the ‘purest’ solar-secular peak, commodities and inflation would peak close to the solar maximum, projected to be March 2013. The economy should tip into a recession following that. Working backwards, stocks could therefore start to turn down as of October 2012, whilst commodities make their parabolic move. Commodities should begin to truly accelerate as of 6 months before the peak – roughly Sept 2012 – and make their mania move as of 6 weeks before the peak. However, note this is only an idealised timeline – the table above provides the reality. Still, it gives us a guide. If stocks can break up to new highs soon, then I am looking for an overthrow move to extremes of overbought and overbullish together with negative divergences and a topping process (a messy up and down range period) into this Autumn/Fall to provide a suitable coming together of timing and technical indicators to exit equity longs. Whilst that occurs, commodities should take over as the outpeforming class.

The greatest thorn in the side of these projections is the weakness in China. As the world’s largest commodity consumer, a hard landing here would surely de-rail a broad acceleration in commodities. Is China decelerating to a hard landing? I suggest it isn’t. Leading indicators point to a mild upswing in H2 2012. If China were to add further stimulus or easing to this, it may provide the necessary conditions for commodities to make their move, together with the other factors that I listed above. One analyst that I read believes that China has the ability to push the economy once more, but getting less bang-for-buck each time that would likely be the last before a true recession. If that were so, that would fit well with commodities making their grand finale before recession 2013-14 and also a new secular commodities bear erupting (as China derails for a while from breakneck growth).

 

Updates

Posted on Posted in Commodities, Indicators, Stocks19 Comments

1. Twin highs in the SP500 and Nasdaq in 2012 roughly 6 months apart are similar to the mid-year action in 2010, highlighted below. In 2010 when the indices revisited the high, they needed a couple of weeks to consolidate before making a second attempt and successful breakthrough. So let’s see how the current action shapes. Next Friday ‘s Jackson Hole has the potential to be a catalyst for a breakout roughly 2 weeks later (if QE intentions announced) – or of course a disappointment.

2. Below I show how Conference Board leading indicators have developed in recent weeks. Japan and Korea are bad, sticking below -1. Euro are as a whole has remained at -0.3, but within that Spain picking up and Germany dropping. Australia has improved,  US and China have oscillated, but the latest table has doubled its ‘greens’ to 4. It’s still a more negative picture than positive, but the key is whether a positive global trend can emerge.

24 August:

31 July:

17 July:

Source: Conference Board

3. The gold price in Euros has popped over its multi-month declining resistance.

Source: Goldprice

New Highs or Double Top?

Posted on Posted in Bonds, Commodities, Currencies, Indicators, Lunar Cycles, Macro, Solar Cycles, Stocks11 Comments

…for US equities? As we stand, the SP100 already made new highs. Apple has since broken upwards to new highs. The Nasdaq, Dow and SP500 are all back at their March 2012 highs (the SP500 including dividends is now at an all time high). Either it’s time to get out of all US stock indices longs, or the melt up is just about to begin. In stark contrast to the US stock indices predicament, the Chinese stock index is at 3-4 year lows.

Source: Bloomberg

Supportive of US equities breaking upwards from their March highs, we have (i) global and US economic surprises still in an uptrend, (ii) Spanish and Italian CDSs still in a downtrend, (iii) money exiting US treasuries as 10 year yields have risen from 1.4 to 1.8 in just 3 weeks, and (iv) ECRI US leading indicators trending upwards, almost back to positive:

Source: Dshort / ECRI

Turning to global leading indicators, this last week’s data from the Conference Board delivered positive readings looking forward for USA and Spain, but badly negative readings for Japan and Korea. So it is unlikely that US and European equity advances are based solely on hope for QE in those two regions. This East-West divergence is likely to be resolved one way or the other: Asia and emerging economies turn up, or US and European equities top out. So which is it to be?

I deliberated on Friday at the new moon about whether to take some profits, but decided against. Geomagnetism is currently tame and it means the lunar-geomagnetic model currently has a mild uptrend into mid-September (all models upated this morning). Furthermore, the occasions historically when lunar phasing tends to fail in trading  are usually when there is a strong up or down trend. Clearly lunar phasing is not the only influence on trader sentiment, so in times of strong momentum one way or the other lunar phasing may be overridden. The current crawling up the upper bollinger band on US indices is reminiscent of the strong uptrends of the last two years that followed mid year consolidations. So I am suggesting there is a chance we are in a similar sweet spot for stocks.

I maintain that two developments would bring about a melt-up: (i) breakouts to new highs, into clear air and (ii) a turn up in leading indicators. German leading indicator data has just been released this morning, coming in at minus 0.8. That’s worse than last month’s reading and adds to the muddy picture in global leading indicators. So whilst a breakout to new highs in US equities looks technically more probable than a double top here, we can’t say we have the support of the global leading indicators. For this reason we see certain global stock indices still festering, and the likes of copper still languishing, rather than a full risk-on party.

What if global leading indicators didn’t turn up? Is it possible we could still see my forecast come good of an overthrow peak in equities in late 2012 and then a secular peak in commodities in 2013? Something like in 2007-8 where stocks first outperformed and then peaked whilst commodities took over and peaked longer and higher?:

Well, looking back to the last secular commodities peak of 1980, both stocks and commodities did make such moves even though leading indicators had been trending downwards for some months. In other words, speculation drove them on despite the worsening fundamentals, and this fits with my theory that increasing sunspots into the solar peak brings about speculative climaxes in risk taking and buying.

Getting technical again, US stock indices do not yet show overbought or overbullish readings. Were they to reach those levels, I would be much keener to offload some longs and take profits. The Euro is also showing signs of solidifying its base above 1.2 versus the US dollar. Gold is similarly building up its base and as can be seen below could be close to a break out of horizontal resistance, having successfully broken and backtested falling resistance.

In summary, at the moment the general overall picture is supportive of my forecast and my long pro-risk positions. Whilst there remain issues and areas of doubt – as there always are – I feel comfortable sticking with my trades as they are for now and continuing to watch indicators and data for further developments. We are at another siginificant point however, in whether US stock indices (and gold) can breakout or are sold back. Whilst a failure (in both) would be a set back for the bulls, it may mean more time is required, rather than it isn’t going to happen. But for equities bears this is the last stand and if this is to be a major double top then we should look for overbought and overbullish readings coming to pass as well as increased negative divergences supporting the exiting of longs.

Roundup

Posted on Posted in Bonds, Commodities, Currencies, Indicators, Macro, Stocks22 Comments

These are Gann Global’s projections using Gann methodology (mirrors in time, historical rhymes). Stocks to melt up into October 2012:

Source: Gann Global Financial

Commodities to make a parabolic move to new highs into late 2013:

Source: Gann Global Financial 

Gold to climb back to its previous highs by this September / October:

Source: Gann Global Financial

They also forecast that grains will now make a consolidation and retreat a little before advancing again to new highs, plus that treasuries have begun a new sustaining declining trend. This week’s action in treasuries and yields has the hallmarks of a significant trend change, but let’s not forget the Fed continue to tinker with this market.

Source: Stockcharts

In short, Gann Global are largely in agreement with my own predictions, and the other analysts that I read and respect are generally also more with than against. Marc Faber predicts that stocks may run up here to 1450-1500 before turning in the Fall/Autumn. Chris Ciovacco believes stocks are technically bullish and highlights the risk of a melt up. The Puplava brothers at PFS point to the rotation into pro-risk sectors, the lack of recession evidence, the intermediate term indicators for precious metals and the pick up in economic surprises as supportive for another pro-risk rally. Scott Grannis suggests the divergence between stocks and treasury yields is now being resolved in favour of stocks, and that the key risk is that we see better economic outcomes ahead than priced into treasuries. Tiho’s continued bearishness aside, I largely have those that I respect in tune with my own forecasts, and clearly I don’t consider that a contrarian alignment.

There are several crunch points in the remainder of August which will help determine overall momentum pro-risk or pro-safety. The resolution of the large multi-month triangle on gold. ECB intervention and/or Fed announcement of action at the Jackson Hole meeting 31 August. Whether the Euro can base here above 1.20, and by association pull the US dollar back. Whether leading indicators can pick up and fill in the missing macro support for pro-risk, and in particular whether China can either pick up or deliver stimulus, reflected in the key resistance tests shown below for Hong Kong and China stocks.

Source: Chris Kimble

In the very short term I remain as per my last post – holding my positions until the end of this week, into the new moon. At the time of writing stocks have made little movement since my last post. Chris Puplava highlights today’s Philly Fed news as a likely mover, expected to the upside. Rob Hanna’s study suggests that these last few days of tight range historically resolve to the upside. I personally believe that with the Nasdaq, Apple, SP500 and Dow all within touching distance of their previous 2012 highs, they will go tag those highs. If that were to occur, then we would be looking at the bears’ last stand. However, there is a weekly Demark sell signal on the SP500 and with lunar down pressure erupting as of next week, I am open to the possibility that stocks may consolidate before attacking those highs. But let’s see the action today and tomorrow. As before, I will notify if I take some profits.

I figure you may be interested in a list of all my current open positions:

Long FTSE

Long Dax

Long Hang Seng

Long Nikkei

Long Nasdaq

Long SP500

Long Market Vectors Gold Miners ETF

Long Gold

Long Silver

Long Crude Oil

Long Natural Gas

Long ETC Agriculture (general soft commodities ETF)

Long ETC Wheat

Long Chicago Wheat

Long Coffee Arabica

Long London Cocoa

Long New York Cocoa

Long NY Cotton

Long NY Orange Juice

Long Oats

Long Ultrashort 20+ Yr Treasury Bond ETF (i.e. short treasuries)

In a nutshell, I have significant long positions in precious metals, energy and agricultural commodities, as well as global stock indices. I have a smaller position in short treasuries. I expect to peel out of stock indices first, expecting them to top in late 2012 / the turn of 2013, and then to peel out of commodities into a parabolic finale into mid 2013. I expect to hold short treasuries for the longer term.

Precious metals are the key laggard in my account currently, but I expect them to eventually become the best performer, looking out into 2013.

Natural Gas was for a long time the dog of the account, and my aggregate position is still under water, but in 2012, having exhausted buyer interest, it finally turned as it reached historic extreme cheapness versus oil and the stocks of gas started to come back towards historical averages (second chart below):

Source: Trading Charts

Source: EIA

Crude oil inventories have also begun to move back towards the historical average range and together with the shortage in emergency supplies this has given oil a rewnewed thrust in recent sessions:

Source: Bespoke

And lastly, the climate stats for July have been released and show global temperatures for July on land coming in at the 3rd hottest July since records began, and the hottest in the Northern Hemisphere since records began, continuing to support soft commodity prices:

Source: NOAA

Developments

Posted on Posted in Bonds, Commodities, Currencies, Indicators, Macro, Solar Cycles, Stocks15 Comments

Back from hols and it was a good week for pro-risk and my account. Can pro-risk go further? I maintain that it can. By solar and secular cycles, we should see a blow-off top in pro-risk, with stocks overthrowing (H2 2012) and then wilting (end of 2012 / start of 2013) whilst commodities make a parabolic secular finale (into the solar peak of Spring 2013 and terminating around summer 2013). So do the technicals, indicators and macro data support this?

Firstly, we see the SP100, soybeans and corn at new 3 year highs:

Source: Stockcharts

Soybeans – Source: Tradingcharts.com

Corn – Source: Tradingcharts.com

Those developments give more confidence that commodities did not already make their secular peak and that other equity indices could break out. However, it’s tentative for now as these new highs are marginal and until other pro-risk follows suit. Furthermore, we continue to see opposing indicators that present a confused picture. Here are four indicators from Sentimentrader.

Commercial shorts on the SP500 suggest a market due a pullback – although the two occurrences in 2010 and 2011 led to more gains before a pullback. The Farrell sentiment index suggests the SP500 is a buy. Economic uncertainty has reached a level that also could imply a buy. Lastly, risk appetite is up to the kind of exhaustion level that could mean pro-risk needs to pull back – although in 2006 and 2009 we saw stocks push higher whilst risk appetite spent more time at this kind of level.

Source all: Sentimentrader

Drawing those indicators together, it is a mixed picture, but bullish developments in the weeks ahead have the edge.

As previously noted, the rally in equities has been more defensive than a normal healthy rally, but there is potential evidence that this is turning:

Source: Ryan Puplava

US equities have not reached either overbought or overbullish yet.

Source: Technical Take

Source: IndexIndicators

Both show there is room to push higher yet. Meanwhile, overbought and overbullish indicators for the German Dax are a little higher but also room for more gains yet.

Grains had reached levels of overbought and overbullish but have spent the last 3 weeks or so consolidating and relieving those indicators. The fundamentals support further gains ahead.

Gold and silver remain at the low extremes of sentiment (public opinion, Hulbert), suggesting the breakout move will be upwards out of the mutli-month triangles. This is supported by the recent acceleration in soft commodities, recovery in the oil price, and renewed global efforts to maintain negative real interest rates.

Treasuries have pulled back, and there is a good chance of this continuing, due to the parabolic unsustainable rise coupled with having reached overbought and overbullish extremes.

Turning to global macro, Euro debt has continued to pull back from accute:

Source: Scott Grannis / Bloomberg

Citigroup economic surprises continue to maintain a rising trend for the US, emerging markets, and G10 nations (shown below).

Source: Bloomberg

However, global leading indicators continue to languish. China trade data on Friday was particularly bad. The latest OECD readings show a precarious global economy. ECRI leading indicators for the US look reasonable. Conference Board leading indicators for the key nations are below and show a picture that is notably more negative than positive:

Source: Conference Board

US earnings this season have come it at around a 59% beat rate, compared to a 62% average since 1998. More of a negative than a positive.

Geomagnetism has been fairly benign the last 3 weeks and the forecast for the next 3 weeks is likewise. That has finally given the geomagnetism models an up turn.

The SP500 remains significantly above the geomagnetism model, and this is reflected in the SP500 being one of the most expensive global indices by p/e valuation. So at some point we should expect the SP500 to correct, but when? Well, I maintain not yet – that stocks should first go on to make new highs in a cyclical bull overthrow finale. I believe the SP100 is the first to lead the way.

Into previous secular/solar peaks (secular asset peaks align with solar maximums), increasing sunspots had the effect of inspiring speculation excess in human behaviour. I believe that’s what we are seeing unfolding here, but it’s not directly measurable. We need to look for the signs. Pro-risk assets going to new highs. Risk appetite high and staying high. Pro-risk assets leaving behind the geomagnetism models (for a period). Excessive speculation in the context of the current economic situation.

There is some evidence for each of those, but we are just getting started. We need to see more stock indices move to new highs. We need to see gold and silver break out upwards. A period of Euro outperformance versus the dollar. And most likely additional fuel by global central banks.

In short, I have no current reason to doubt what I have maintained for some time will come to pass (as per the first paragraph in this post), but it will become much clearer one way or the other as the remainder of 2012 plays out. The current picture is mixed, but there is increasing supporting evidence.

For now, I am looking once again to lunar phasing for a near term position tweaking. Namely, the new moon is this Friday, which suggests positive pressure into the end of this week, supported by tame geomagnetism. If pro-risk pushes higher into this Friday, I may trim back my overall pro-risk positions again, and will notify you if so. However, I will be looking for evidence of overbought/overbullish and technical resistance. I will also be looking at developments in leading indicators or central bank  action between now and then. September and October is typically a more difficult time for pro-risk, however this has not historically applied in a US election year, plus this is the run-up into a solar peak.

Opposing Indicators

Posted on Posted in Indicators, Stocks8 Comments

A lack of concrete action from Draghi yesterday and pro-risk sold off accordingly, making for an appropriate full moon low. However, there was a little recovery into the close and this has been continued this morning (Europe time), suggesting the markets were holding up on more than Draghi’s promise. Gold is back into its large triangle meaning the breakout, for now, was premature. By lunar phase and geomagnetism the pressure is upward for pro-risk as of next week, so for me it is back to watching and waiting. My focus remains on leading indicators which I see as crucial to market fortunes now. ECRI for the US today and then the next 2 weeks give us the latest Conference Board and OECD leading indicators for key countries around the globe.

There is an interesting opposition of indicators for equities. First AAII sentiment says the stock market should go up from here.

Source: Sentimentrader / AAII

But second, Rydex involvement in the market says the market should go down from here.

Source: Sentimentrader / Tiho

Yet, third, Wall Street strategists equity allocation recommendation says the market should go up from here.

Source: Business Insider / BofA (Hat tip Gary)

And fourth and last, open interest shows that large specs and commercials are short and small specs long, which can be read as smart v dumb money, suggesting the market should decline from here.

Source: Cotpricecharts / Bill L

It’s rare to find normally reliable indicators at such odds with each other. What does it mean? I noted that this current rally isn’t a run-of-the-mill rally. Small caps are underperforming – although Quant Edges and Sentimentrader have now both run studies which suggest this is historically actually bullish for the market ahead rather than bearish. I suggest the market action will morph into something more typical – either a full involvement rally or a regular decline. But which is it to be? Putting my wider views aside (secular and solar supporting a bullish resolution) I would suggest the opposition of the indicators above suggests the market may struggle to move decisively one way or the other – at least until one of these indicators starts to shift the other way. So I will be watching for what shifts and which way.

I am on hols next week so there will be no posts and no model updates until w/c 13 August.