Technicals Into The FOMC

This has been the story of my 2012. Took profits on stock indices longs from 2011 in the first couple of months of 2012, whilst retaining my secular commodities longs. Endured some pain as commodities fell into May. Bought stocks and commodities aggressively around 9-18 May as oversold and overbearish indicators aligned. Both then bottomed out and have since rallied. I took maybe 10% off in profits and have retained the rest.

I use the CCI commodities index above as it is equally weighted.

So, as things stand, all is well and I’ve got some very profitable positions (thanks to a little leverage), but with continued significant exposure. Do I want to cut some exposure, to mitigate a reversal in either class, or do I want to hold firm and play for continued upside in pro-risk for the remainder of the year? Here’s how things stand technically.

The Dow has broken above quadruple resistance and joined the SP500 and Nasdaq at new highs.

The Dow Transports appear to have completed a text book fake-out move, now breaking out the other way.

Source: TSP Talk

The Russell 2000 is at resistance.

The Hang Seng is also at resistance.

The Dax is challenging cyclical bull market highs.

10 year treasury bond yields continue to make an inverse H&S formation, which is bullish for pro-risk.

Source: Stockcharts

Junk Bonds have just broken above resistance.

Source: Bespoke

Silver is at resistance.

Source: Chris Kimble

The US dollar has reached levels of overbearishness.

Source: Sentimentrader

Equities sentiment is overly bullish by NAAIM (shown below), but not so by AAII (36% bulls, versus historic extreme zone 45+) or by Investors Intelligence (shown below).

Source: Sentimentrader

Source: Schaeffersresearch

In summary, it’s finely poised into today’s FOMC action (or non-action). The bullish breakouts in the Nas, SP500, Dow and Junk bonds are reversible at this point, as they are  only just at new highs. The bullish reversal in the Trans is positive. I suggest the edge is for a breakout in the Hang Seng triangle, rather than a breakdown, due to the Shanghai index having made a Demark seller exhaustion count, but continued ranging in the triangle’s nose is possible. Silver sentiment, silver resistance and dollar sentiment are suggestive of a forthcoming counter-trend move, i.e. a pullback in silver whilst the dollar pulls up.

Turning to leading indicators, CB produced the latest data for Japan and the UK this week. Japan came in at -0.8, still negative but a 3 month high. UK came in at +0.1, also a 3 month high. So a little encouraging, but I need to see more global LIs trending positively. The OECD’s latest global indicators come out today.

PIIGS CDSs and bond yields continue to ease. The German legal approval of ECB bond buying an important step.

So, to today’s FOMC. High expectation of QE, though unlikely fully priced in if delivered. If we get QE, I expect the US indices to pull away, and the indices at resistance to breakout. Furthermore, I believe it would seal the deal for my secular/solar projections into 2013 of inflation, dollar decline and commodity acceleration to a peak.

On the other hand, the Fed may choose to stop short of a new QE programme, acting to extend low rates, making an open-ended commitment to regular purchases of securities (Robin Harding), or choosing something unorthodox to tackle its main problem, jobs. Something stimulative but short of full QE could lead to a short term sell off which is then reversed on digestion.

Lastly, the Fed may choose to bide its time, carefully choosing words rather than concrete action. US leading indicators are on the rise and recent commodity price rises are likely to increase inflation down the line. If no action if forthcoming, I would expect a significant sell-off, and that sell-off would likely reverse US indices and junk bonds back  beneath their breakouts, making for bearish fakeouts.

Of the three scenarios, I rate the last (no action) as the slimmest likelihood. The Fed’s last two communications have been more heavily-hinted towards action. Plus I view things a little unorthodox: I expect the secular/solar projections to come good – I expect market participants, economists and central banks to unwittingly fulfill them (in this instance that rising sunspots make humans more speculative and pro-risk – QE is both).

There is room in equities sentiment for a push higher, and to reach Demark’s 1478 level on the Sp500. We are also in a bullish window heading into this weekend’s new moon, with negligible current geomagnetism.

I believe probability is on my side, and so am going to retain all my pro-risk positions into the FOMC (subject to OECD leading indicators not having deteriorated significantly – due noon UK time). This is the bears’ last stand. Not the bulls. A retreat in stocks and commodities would put us back into the  trading range. Whereas, a jump today in equities and precious metals and junk bonds would seal the breakouts and put pro-risk into clear air.

Advertisements

7 thoughts on “Technicals Into The FOMC

  1. Here are the OECD LIs:
    http://www.oecd.org/std/leadingindicatorsandtendencysurveys/CLI_EN_Sep12.pdf

    The composite picture is one of weak growth, with mixed fortunes at the individual country level. As some show growth and some retraction, and some are turning up whilst others turn down, it’s not the decisive help it might have been. The global picture is weak, for sure, and if OECD are correct, then we’re not going to see a broad global pick-up in the near future. That would suggest that pro-risk may pullback soon, pending improvement. But it also suggests that central banks will keep the easing and stimulating bias, which can of course rally the markets.

    1. I will just watch for rest of today’s session and most of tomorrow to let the markets digest the news. Patience is always required following such announcements. Medium term it’s great news for my projections and the long case for PMs, but PMs are already into overbullish and overbought territory. If I could hazard a guess, it would be that they rise in reaction to the news, get more extreme overbought and overbullish, and then take a consolidation period with the news out of the way.

  2. News from ECRI – they still maintain the US is in a recession.

    See interview here: http://www.bloomberg.com/video/u-s-economy-is-in-a-recession-achuthan-says-ey7VB61IT_C~3e4bp4YO_w.html
    and more written detail here on their website:
    http://www.businesscycle.com/ecri-news-events/news-details/economic-cycle-research-the-2012-recession-are-we-there-yet

    Seems they believe the GDP figs so far this year will be revised downwards. Clearly they need two revised down into the negative to be right.

    They draw comparison with mid 2008 stating that later with hindsight we found that the US was in recession since the end of 2007. OK, but look at their own WLI in 2008 and compare it to now:

    The WLI trend in 2012 has been upwards and now into the positive, the WLI trend in 2008 was downwards and deeper into the negative. They state today that their WLI does not show recovery. Bizarre. Ah well, we shall see with time, starting with their updated WLI data tomorrow.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s