1. Chinese stocks are making another attempt at bottoming, and this one has promise. A falling wedge, positive RSI divergence and a potential fakeout beneath support as stocks rallied strongly yesterday and again today (today’s rise not shown), taking us towards 2100.
Underlying Source: Cobra/Stockcharts
2. The German Dax bounced yesterday at rising support. The technical situation is shown below – for my bullish case, the most important is to hold above the March 2012 highs – a previous resistance that should now be support. If the Dax can hold that rising support line then the next target is the cyclical bull highs to date of mid-2011.
3. The US SP500 index is already at new cyclical bull highs and so holding above that s/r line is again the priority for my bullish case. Again, it will be interesting to see if the index can hold the rising support and after a little small range consolidation around this weekend’s full moon, resume bullishly with that angle of trajectory. Recall that Presidential seasonality supports further gains all the way to the November elections, and whilst I wouldn’t specifically trade that phenomenon, it has been fairly reliable historically.
4. The Dow Transports continue to languish, but a little indecision at the bottom of the range could spell another reversal back into the range. It’s an important one to continue to watch.
Source: TSP Talk
Here is Ryan Puplava’s assessment of whether stocks are likely in a topping process here or not, and the Transports divergence is the only flag currently, he suggests:
- A shift out of risk assets and into defensive sectors. (false)
- Leading economic numbers and Fed surveys roll over (false)
- Transport or Industrial indexes not confirming each other in new highs (true)
- A lower high, or at least a break, in the market trend (false)
- Momentum failure (false)
- Flat/sideways market from support to break (false)
- Momentum divergence at a higher high (false)
- Distribution with 2400 or more declining issues on the NYSE in a given day (false)
Source: Ryan Puplava
5. Gold is also climbing a rising support and if about to face resistance close to 1800. It arrives here on fairly frothy sentiment, however, given its preceding 9 month range coiling and its peak seasonality period currently, I don’t place too much weight on the frothy sentiment. I rather suspect it will have a run where sentiment remains elevated. But let’s see how it deals with that horizontal resistance.
6. Euro-USD pulled back having reached overbought/overbullish, and could pull back a little further to rising resistance. The key question is whether it has made a medium term trend change given the renewed confidence in Euroland and the dollar-debasing US QE-without-end. We know that QE1 and QE2 announcements made for enduring rallies into pro-risk (after the initial spike and correction couple of weeks), which would suggest Euro-dollar, commodities and equities all rallying. There are no guarantees third time round, but market participants may lean more pro-risk, aware of that history.
7. The correction in pro-risk this week has done a reasonable job of deflating other overbullish/overbought indicators, in equities and crude oil amongst others. As previously noted, equities typically flirt with extremes for a period before rolling over, as opposed to hitting once and then collapsing, and we are generally looking at first touches. Indicators such as stocks above 50MA and bullish percent over call/put have reset sufficiently to enable stocks to rally again, if that’s the will of the market. The two US equity sentiment surveys of II and AAII both continue to show fairly neutral readings, and as I am looking for the next market top to be a cyclical bull market top, we really should see these reach extremes.
Source: Schaeffers Research / Investors Intelligence
Source: Bespoke / AAII
8. Natural Gas has been the stealth hit of 2012. Below is a weekly chart as of the end of last week and this week it has risen to 3.3. If you bought at the bottom in April, you would be up 75%. Well, my story is this: I was one to buy in long in 2010 and 2011 as it dipped several times below 4 (at what appeared excellent historic value and historic extreme cheapness versus oil), only to see dire performance continue and even worsen. Hence my aggregate position is still underwater but as the excess gas inventories have been declining it looks like it may eventually turn a profit. I consider this asset to really have been a good example of ‘the market can stay irrational longer than you can stay solvent’. My exposure was never that significant in my account, but it has taken a lot of patience to see a turnaround.
Source: TradingCharts
9. On the macro front, we saw a couple of bad US data reports this week, the worst being durable goods orders. As a result, US Economic Surprises has taken a sharp fall and although still positive, needs watching closely in case of a trend change. Due to aggregate leading indicators trending up, I don’t expect that to be the case, but let’s see ECRI’s latest reading later today.
Source: Sober Look / Citigroup
As can be seen from the Dhort chart (hat tip Antonio), there is a relationship between the durable good orders and the SP500 performance that makes the data dip alarming:
Source: Dshort
There is a history of volatility in the durable goods number but that dip is one of the most dramatic. It’s a flag, but not on its own enough to make me want to take profits on stock indices longs at this point. With the improvement in aggregate leading indicators, the positive technical picture for equities, the renewed global stimulus, and the Presidential seasonality, the balance is still bullish. But for that to remain, other forthcoming data (of a leading style) needs to return better. Something to watch next week.
10. US earnings season starts the week after next and there is a fairly compelling relationship between the ISM PMI and SP500 earnings year over year (hat tip Gary). As can be seen below, the latest data for August was just below 50, i.e. around zero growth. The expectations for this earnings season are for earnings growth over the same quarter last year of -3.4%, i.e. a drop. That does potentially set us up for earnings to come in between zero and -3.4, i.e. to be bad but to beat expectations, which would normally be enough to rally equities. Clearly, both the ISM PMI and the analyst expectations are only guides, but there is a potential scenario there to fulfil the technically bullish picture for stocks, in October.
Source: Calculated Risk
Have a great weekend everyone.
S O L A R C Y C L E S 
Thanks, John. GDP USA for 2ndQ, weak 1,3%, probably 3Q below 1% and 4Q negative? This is my outlook from many months.
I don´t think QE3 cause inflation, i bet FED implements QE3 to support the snowslide like oct08 with the QE1 and the Industrials dropped from 9.000 to 6.500.
target DOW at least, 9.000 may be may13/ ago13 +-
Thank you for your update.
ECRI says we are already in a recession. Consumer durables makes that look more probable. Gov’t response to a recession: Lower interest rates while flooding the economy with money. They have already done that and still are but the economy still stinks. What can they do now?
Money Moves Markerts posted an article on a pickup in growth of real M1 money supply, after a slowdown since 2009. The growth in this money supply could indicate greater willingness for consumers or businesses to spend, which could boost the economy about 6-12 months from now.
http://moneymovesmarkets.com/journal/2012/9/24/china-further-monetary-easing-overdue.html
Therefore, it’d be reasonable to assume some kind of rise in annual GDP growth and higher inflation in China. Lower interest rates since mid 2012 will also boost borrowing.
European countries show a sign of recovery based on M1 growth, but France shows a diverging trend relative to other EU countries. This could mean that whilst most of the Euro Zone recovers, France will continue to stagnate and even dip into recession. Even beleaguered Spain shows some kind of M1 recovery, whilst France is clearly weakening. Thus is probably due to the austerity only kicking in right now in France, compared to other countries.
http://moneymovesmarkets.com/journal/2012/9/20/dismal-french-economic-news-consistent-with-monetary-weaknes.html
More great analysis John, really appreciating these observations of yours….
It’s interesting that you mention the Chinese markets bottoming as it’s their ‘Golden Week’ holiday next week. In previous years the BOC has introduced extra stimulus over this period to combat a slowing economy but this particular year is important as the first transfer of power in a decade will be happening shortly. It’ll be interesting to see how things develop.
Question for you John- I am looking at the intermediate Rydex Nova/Ursa Ratio Sentiment Index, which since 2004 has hit its second high peak recently. Do you look at other sentiment indicators? Some of the few I have seen (for equities) are very different with regards to where positioning is. I know some measure sentiment via polls and some with actual positioning and some like the ICI data which looks at mutual fund flows. In any case, just wondering why you favor over another (is so).
I think the main bullish point to me here is China. If we can get the Shanghai higher, some stimulus from them, etc I believe this will support for the broader markets globally. We know what the Fed is doing and what the ECB is doing. The BOJ has already acted but now we need to see what (if any) the PBoC will do. I think with their political changes coming up, this could pose more risk to the market than it is pricing in (along with a war with Japan).
We will also get the RBA rate decision next week which is expected by most to be unchanged, however recent data suggest a cut of 25bp may be in the works. I can not see how they won’t cut down to 325bp based on coal and iron ore prices as well as weaker Chinese data.
I like individual names and not the broader market. There are some “cheap” names out there that have some high levels of implied volatility especially when you consider how low implied vols are across all financial markets – from stocks to bonds to currencies. I am selling puts in these “cheap” and am not concerned if they get put to me as I would own them at these levels, but as for the market in general, I do not see tons of value here.
Thank you all.
Ryknow, I’m aware that II sentiment, AAII and call/put are more widely followed than some of the others including Rydex Nova/Ursa. So I put more weight on them, but I look at the others too.