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:
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
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).
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.