Developments

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.

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15 thoughts on “Developments

    1. That’s true – if you look at the past 4 years then it is suggesting the market should pull back. However, if you look further back the Vix has had periods where it has ranged lower, between 10 and 15:

      Also volatility decreases towards the end of a stocks secular bear market. So might we range between 10 and 15 again in the near term? I think it’s possible. But yes, the Vix, when considered just in terms of the bull market since 2009 would now be signalling a pull back.

  1. A pullback?

    Sounds like complacency is a major part of this post and has high correlation with the reading of VIX itself. Let us try and be honest here. Each time VIX went below 16 in recent years, markets didn’t just pull back, they had a crash. There have been periods when the VIX ranged between 10 to 15, but they reflect investor optimism during “good times”. Your link of the VIX chart speaks for itself only if you actually researched matters. VIX was low after 1991 recession, because a new boom started and investors felt good as economy performed. Similar story can be linked to the 2001/02 recession and the boom that followed.

    Period between 2003 and 2007 were the good old days when VIX was low because there was no reason to worry. Don’t you remember? China was growing rapidly above 10%, construction was creating massive demand for steel and cement, Japan was exporting machinery at high rate, Germany manufacturing was booming, Oil industry was making a pretty penny itself, global credit was flowing like downstream river, retail luxury spending was the talk of town from London to New York to Shanghai, house prices were super high from Spain to Ireland and from US to UK, austerity was an “unknown” word at the time and bankers were parting with high class prostitutes at Davos parties and snorting cocaine with $100 US bills.

    Are we in the good times, sir? Do you see a new boom starting tomorrow, sir? I do not think so. I would expect more than just a pullback myself.

  2. Let’s make it simple: If you believe the S&P 500 can move up another 10%, then we are back to 2000 and 2007 levels. If you believe the S&P can lose another 10%, then are back to end of May 2012 levels.

    Where is it the easiest for the market to move to? That’s where I am placing my bets.

  3. We need to consider what the markets have gone through since the start of the Credit Crunch. What the markets have done since 2007 is all to do with the ability they’ve had to factor in various negative aspects about the global economy. Various problems have, in effect, already been priced into the markets.

    The rise in commodities (oil/crops etc.) and the rally in stocks we’ve had since June took place merely because new easing measures were expected. It’s a sign that just a whiff of positive news can recharge markets, but it also proves it’s incredibly unpredictable and volatile, and just as this rally has happened, so could a crash also happen if a barrage of negative news floods the markets. In my view, it’s only worth selling if there is proof behind the rumours, as opposed to believing the hearsay of a few traders who are obsessed with the idea of an enormous crash every single year. The crash of October 2008 was preceded by at least a year’s worth of weakening US economic figures, but the situation isn’t the exact same for the US in 2012.

    The markets have already priced in the problems associated with the Euro Zone troubles. The crashes of 2010 and 2011 have already been forgotten by the US, as their markets power ever closer to the 2007 peak. What might really cause a crash is if the US starts to slow down. It’s still the largest economy in the world, and as they say, the US can’t get ill, without the whole world catching a cold. The latest US figures remain reasonably positive, with growth slowing a bit, but the overall picture is that of an economy which is still performing quite well considering it has huge debts and that one of it’s main western trading partners is under performing.

  4. Excellent, thought-provoking stuff, John!
    It certainly helps me avoid an emotional response to the latest media waffle.
    Perhaps the US election and a possible last-minute cure for the US financial cliff will avoid the Armageddon that our Puritanical souls desire?

  5. John, The Israeli rhetoric has picked up quite a bit on an Iran attack. Does your studies suggest any time frame. Most were only expecting it to happen after the US elections but now some believe that it could happen earlier. Chintan

    1. The 3 years of maximum sunspots correlate historically with protest, revolution and war. So either side of the solar maximum, currently forecast for Spring 2013, but can’t be more precise than that.

  6. Hi John
    Is there any particular reason the S&P100 will lead a rally?
    It will take a lot strength to move further which needs a good percentage of the S&P500.
    Regards
    bobc

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