The Fed delivered more than expected, with the big gains in pro-risk evidence that it wasn’t all priced in. Some key differences to prior: (i) QE delivered at market highs rather than lows (ii) Fed commitment to be accomodative even after recovery is entrenched (iii) specific targetting of improving jobs situation (iv) open ended (v) negligible rates out to 2015. With ECB bond buying and Fed QE, pro-risk has some key support going forward.

The RUT, Hang Seng and silver all broke out, and the dollar broke down. The Nas, SP500, Dow and junk bonds all broke further free. Treasury bonds had a mixed session, but that’s to be expected. Initial support for bonds, as the Fed will be a direct buyer again, should give way to a sustained move against bonds, per previous QE:

Source: Scott Grannis

Stock market breadth improved. Corporate insider buying/selling is at a level more consistent with market bottoms than tops.

Source: Istockanalyst

But today we do find various assets into both overbought and overbullish indicator extremes, such as precious metals and the Euro. The SP500 new highs/lows indicator also suggests overbought:

Source: Cobra / Stockcharts

Sentimentrader’s research post yesterday’s session suggests a consolidation may come to pass over the next couple of weeks before further gains. This fits with my own take. Technical breakouts in assets together with double QE (Europe and USA) are bullish, but overbought and overbullish indicators are to be respected. A consolidation over the next 2 weeks, the period into the next full moon, to relieve those indicators whilst maintaining the technical breakouts, would make sense.

My account is currently 30% up for the year, now on track for my 40% target. Clearly I am delighted with that and don’t want to jeopardise the gains, particularly as the bulk of the positions are open. But I don’t find reasons to pare back positions currently. The biggest risk remains global leading indicators. Yesterday CB produced the latest data for Korea which came in at zero, a 3 month high (which Japan and UK also managed). Today Spain came in at -0.6 (following -0.3 last month and -0.6 the month before). So Spain still weak, but some potential positive trends elsewhere. We need more data, over more time, to assess. But with regard to my forecasts of an overthrow in stocks to end their cyclical bear (accompanied by increasing inflation and treasury yields), and then a parabolic finale in commodities and inflation, I see an increasingly supportive picture. Euro debt settling down, economic surprises repaired, 6 months of rate cuts across the world by central banks, US and ECB QE, technical breakouts in stocks and precious metals, inverse H&S on treasury yields and probability of fulfillment, US dollar breakdown, and recent new highs in grains to deliver food price inflation as of Q4 2012. Weakness in leading indicators does not offset all this.

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.

Markets Update

Commodities have made a bullish breakout, with copper the latest to join.

Source: Chris Kimble

As we stand, soybeans, wheat, gold and silver have all reached levels of overbullish sentiment. A consolidation may therefore be ahead.

The US dollar broke down beneath rising support, and the Euro broke up. That’s supportive for commodities.

Source: Seeitmarket (plus my dollar support line)

10 year Treasury yields continue to make an inverse Head and Shoulders pattern.

Gas and crude oil inventories continue to fall back towards their longer term averages. Although both are still out of their historical ranges, the trend in both is of a shrinking of stocks.

Sources: IEA and Bespoke

That perhaps reflects an improving US economy, as evidenced by ECRI leading indicators and Citigroup economic surprises both moving into the positive:

Source: ECRI

US economic surprises – source: SoberLook

The key question is, is the US about to roll over and join countries such as China, Germany and Japan in economic weakness (coincident and leading) or are the latter about to turn up and make for a global reflation? Conference Board and OECD data later this week will provide more clues on that, but the trends in certain key stock indices, commodities and currencies are currently pointing to reflation. Also, by solar cycles, growthflation is the norm into the solar peak – both growth and inflation – therefore a reflation would also fit.

The improvement in the USA does not prevent the Fed from delivering stimulus this Thursday. It has a dual mandate and they are clearly not happy with the jobs part. The markets are anticipating QE3 (likelihood from Bloomberg indicator now 99%) and this is because the last two Fed communications have more heavily hinted towards it.

I believe that QE anticipation, together with the upward pressure into the new moon, and the technical breakouts of late last week, all should support pro-risk leading into this Thursday’s FOMC outputs. What I am looking to see is, do we arrive there overbought and overbullish. If we reach those levels in stocks pre-FOMC-outputs, I will be looking to take some profits.

Looking at sentiment, bullish percent over put/call ratio has a little room to move higher, compared to previous peaks, and to oscillate in that kind of region for longer.

Source: Stockcharts

SP500 stocks above 50MA can also push a little higher, and oscillate there for a period.

Source: IndexIndicators

Sentimentrader indicators at a bullish extreme could also rise a little higher yet.

Source: Sentimentrader

All three show stocks at bullish sentiment levels, but not quite at extremes that would signify a reversal. Tom De Mark’s target for the SP500 is now 1478. I suspect that by that kind of level we would see these sentiment readings at historic extremes, and combined that would make a strong case for profit-taking.

Whilst the SP500 broke out, the Dow and the Russ 2k are still flirting with quadruple tops, so it is not a done deal that stocks accelerate upwards here. Whilst the Dow Transports showed continued bullishness yesterday…

Source TSP Talk

…the Nasdaq reversed most of its breakout gains and is delicately poised, suggestive of either a successful backtest of the breakout or a breakdown back into the range, leaving a bearish fakeout that is the opposite of the Tran fakeout shown above.

To sum it up, I am sat on my long commodities, long stocks indices and short treasuries positions, with no compelling reason to exit any of them currently. Of the three, I am still looking to exit long stock indices as priority, as per my secular/solar projections. I believe stocks will be supported into this thursday’s FOMC, and I believe the greater likelihood is of Fed stimulus at that meeting. However, given the high levels of expectation, there is the risk of disappointment and a sell-off. I am watching to see how pro-risk fares the next couple of days, and waiting for the latest global leading indicators and will then judge whether to take any profits into the FOMC. If the Nasdaq were to break down today/tomorrow, back below the yearly highs and making for a failed breakout or fakeout, I would judge that as significant, and may trim back. If on the other hand stocks push higher, the remaining US indices break up, and we hit the Demark price and sentiment extremes zones pre-FOMC, I would also be looking to take some profits.

Solar Cycle 24 Peak

NASA’s latest solar cycle peak timing projection now puts the likely peak at Fall/Autumn 2013. This was previously Spring 2013.

Source: NASA

SIDC’s forecast currently remains for a Spring peak:

Source: SIDC

If NASA are correct, this has implications for my market forecasts, as everything is pushed out by 6 months.

This is the timetable that you have seen before, based on a Spring 2013 solar peak:

If NASA’s new prediction is more accurate, then the top line in the table changes to this:

It would mean that commodities may not make their parabolic finale until late 2013 or early 2014. Working backwards, commodities could therefore begin to truly accelerate from as early as Spring to as late as Fall/Autumn 2013. The post solar peak recession would be pushed out to starting likely 2014. (Remember, this is a guide based on the previous three secular commodity bulls and associated solar maximums – outliers are possible). This shift would not affect my commodities strategy: hold long until we get to a parabolic ending move, and add on any major weakness. I will be looking to exit commodities on evidence of (i) an unsustainable parabolic move (ii) overbought and overbullish extremes and (iii) extremes in stocks:commodities and realestate:commodities ratios.

Based on this new September (approx) 2013 solar peak, here are the US stock index charts again showing our current secular position based on historical repetition, updated. The first shows the SP500 in the 1970s secular bull. Stocks rallied from here into the solar peak, i.e. for another 12 months, but with a lot of back and forth, and then stocks fell right after the solar peak, as high commodity prices helped bring on a recession.

Next we see the 1940s secular commodities bull period and the Dow Jones. Apologies but it is split across two charts. From the current point, stocks would be peaking, making a swift 20%+ fall, and then tracking sideways into the solar peak, and thereafter taking some time to pick up momentum. I believe the 1940s is the closest mirror of our current secular commodities bull, due to the shared ultra low interest rates environment.

And below we see the 1910s secular commodities bull period. Stocks rallies from here for a couple of months and then fell back again, falling around the solar peak, as commodities peaked at different times.

Below is our current secular bull period. Note the two bottoms that I have labelled, and see that all the 3 charts above share the same two important bottoms. In all 3 secular periods above stocks did not return to those kind of levels i.e. any third low was some way higher up. I have suggested before that since the 2009 low we are in a gradual process of repair. From financial system meltdown to something less armageddon-like and then something less bad still. We still have many issues, but once we have few, the new secular stocks bull will already be mature. For me, there is slim chance of stocks breaking down to 2009’s lows, as evidenced in these charts. Based on these historical mirrors, the next cyclical bear should be 20-80% higher than the 2009 low, i.e. 800-1200 on the SP500.

Underlying Source All Charts:

The three historical precedents don’t provide a united picture for where stocks go next, over the next 12 months. One went up, one down, one up then down. If the solar maximum occurs in Spring, rather than Fall/Autumn next year, per SIDC’s continuing forecast, then the ‘we are here’ markers shift along 6 months. In all 3 previous secular comparisons that would put us more into a sideways range period, making stocks neither a buy nor a sell.

However we have other means to identify when stocks are making a cyclical bull top:

(i) overbullish and overbought indicator extremes

(ii) a back and forth range in price (a price topping process) whilst negative divergences appear, particularly in breadth.

(iii) tightening of interest rates, either by central banks or by the markets pushing up bond yields.

(iv) leading indicators falling

(v) economic surprises falling

(vi) earnings falling short

(vii) inflation rising to over 4% official, or thereabouts

(viii) yield curve abnormal or inverted

All these have historically marked equity cyclical bull endings. A separate post would be needed to go through these in detail with chart evidence, but suffice it to say that currently we don’t see enough of these flagging red.

Yesterday’s developments very much strengthened the case for more gains ahead for stocks. A voluminous technical breakout to new bull market highs for the SP500 and Nasdaq and a reversal back up into the range for the Dow Transports (looking like a fakeout breakdown the day before). Plus, not only did the ECB delivered a bond-buying action to the market’s satisfaction, but China approved large scale infrastructure plans in a bid to revitalise the economy, which has propelled Chinese stocks this morning. This kind of stimulus is good news for the commodity bull case.

Treasury yields moved higher, adding to the H&S formation. Gann Global suggest that treasury yields will not revisit their lows of mid 2012, that the secular bull in treasuries ended here, based on historical mirrors. That fits with the chart I presented yesterday suggesting treasuries should fall over the next 12 months and also my cyclical bull ending criteria that rates should rise. It would also provide the backdrop to a commodities finale. Gann Global also project that commodities will pullback soon and provide a last buying opportunity before beginning their run away move.

Back to equities, I suggest we have some room to add to gains and consolidate the breakout, into next weekend’s new moon. Generally speaking stocks are not yet overbought and overbullish, but we are heading towards those levels. So a bit more upside yet, plus the potential announcement of QE or some other stimulus at next week’s FOMC. I will review how things stand heading into that.

Roundup into the ECB

1. Copper has popped above resistance, in a similar manner that gold did:

Underlying Source: Trading Charts

2. The Chinese stock market has reached a Demark buy set up:

Source: Market Studies (hat tip Gary)

3. The Dow Transports broke down yesterday. Ed Yardeni rationalises the relative weakness of the Transports to the Dow (Industrials) as it has two main components, Railroads and Air Freight. The railroads index broke to a new high, reflecting the stronger US economy, whereas the Air Freight is what’s dragging down the Transports due to the weakness elsewhere in the world.

Source: TSP Talk

4. Meanwhile, the small caps index has caught up and is displaying a bullish cup and handle formation:

Source: TSP Talk

5. The latest global country P/Es reveal that much of Europe is at secular bottom valuations, whilst USA remains one of the most expensive markets in the world:

Source: Megane Faber (valuations as at end of August)

6. The US dollar is at support. Today’s ECB meeting outputs and next week’s FOMC outputs could either generate a dollar bounce or a breakdown.

Source: Stockcharts

7. The bigger picture for the US dollar shows a currency still very much languishing near the lows.

Source: Stockcharts

8. The easing of European debt concerns continues and is supportive for the Euro.

Source: Scott Grannis

9. Treasury yields still show potential for a H&S bullish break up, having pulled up the last couple of sessions:

Underlying Source: Stockcharts

10. The bigger picture for treasuries reveals that the recent run up echoes previous important peaks that led to sharp falls over the next 12 months for treasuries back to the lower support.

Underlying Source: Stockcharts / James Craig

In summary, a bottom for Chinese stocks and a breakup in copper would perhaps foretell improvement in that part of the world, which in turn could resolve the Tran issue. Euro debt has settled down, making the number 1 issue the weakness in the non-Western economies and particularly China. Despite that, US and European stocks have consolidated just beneath new 2012 highs, and technically look ripe for a breakout. Treasuries could potentially fall over the next 12 months, providing the backdrop for the secular commodities finale that I project. Gold and silver have broken out and are into the positive period of seasonality for the year. The dollar is at a cross roads. If the Fed announces QE3, or some other currency diluting initiative, which appears increasingly likely, then I expect it to breakdown and also help fulfil the commodities finale. There remains the potential for disappointment, both by the ECB and Fed, and in turn for these assets at important junctions to resolve the other way, but I maintain the weight of evidence is pro-risk currently. Lastly, various European country stock indices are at secular low valuations. For the long term investor, buy and hold of these indices should return handsomely with a 10 year view.

Final Third 2012

One third of the year left to go. As of a couple of weeks ago the SP500 was up 12% for the year, whilst the average hedge fund was up just 4.6%, with just 11% of hedge funds exceeding the SP500 return of 12%. 2011 was also a tough year for hedge funds, compared to previous years. In my personal experience, 2011 and 2012 have seen certain reliable analysts calling it wrong, some usually reliable indicators pointing different ways rather than in alignment, up/down moves of shorter length, and some degree of disconnect between some usually connected assets. In my opinion, this is all due to the transition period that we are in, from K-winter (gold, bonds) to K-spring (stocks, real estate), bringing about come confusion in assets, indicators and analyst calls. The transition is gradual – the nominal bottom in stocks and real estate likely already occurred, the inflation-adjusted low likely ahead, the secular bottom in treasuries is perhaps occuring right now, the secular top in commodities I project next year. A messy, gradual transition rather than a clean switch.

I have found 2011 and 2012 trickier than previous years for those reasons listed above. Having to go against analysts that I respect, having to choose between indicators, having to make sense of assets going different ways. Ultimately, secular and solar anchoring has seen me through I believe, and will continue to do so. I am currently 20% up for the year. My target, as every year, is 40%, which makes me behind target with 3 months to go. Usually I try to steer myself to towards the year-end target as best I can (over-exposing and under-exposing, bigger and smaller risks). I achieved my 40% in 2008, 9 and 10 in that manner, but fell short trying last year, making only 15%. This year I don’t have the same approach, because I am looking out to what I project to be the secular peak in commodities in 2013, a potential opportunity for parabolic gains. My plan then is to maintain my bulk long commodities positions into 2013, rather than trying to partially close down and trade shorter term into year end. If my projections are correct, then commodities should continue to rise in Q4 2012. What I consider most important to my year end tally is calling when to exit equity longs. At some point I want to exit the bulk of those, and that may be before year end 2012.

On Friday at Jackson Hole, Bernanke added weight and justification to his easing bias, whilst falling short of committing to it. The reaction was pro-risk, and US stock indices still look like they are in a bull flag preparing for a break out over the year’s highs, as shown below. Currently, we are back up to the top of that flag. I have also marked the new and full moons. We saw one lunar inversion at the beginning of July, but otherwise the typical lunar oscillation has been in play. On Friday we made a bottom with the full moon and can now potentially make a high around the new moon of Sept 16.

The potential is there, both by technical picture and lunar phase, for stocks to break out. If they can break out then a melt-up would be likely, providing great returns for equities longs. We have the ECB meeting on Thursday this week, with the potential for interest rate cut and bond buying programme announcement, and we have the FOMC on the 13th September with the potential to announce QE3 or some other novel measures. Of course, both provide the potential for disappointment too. A lack of action could lead to a siginificant sell off. Also on the flip side we currently have a geomagnetic storm in progress and more geomagnetism is predicted for today and tomorrow.

The Dow and Nasdaq are in similar positions, but a quick look at the Dow Transports shows a more precarious position. Dow theory says this is a negative divergence. Let’s see if the Transports can catch up here, or alternatively breakdown.

Source: TSP Talk

Sticking with the USA, economic surprises continue to rise in an uptrend, ECRI leading indicators turned positive on Friday, and Presidential seasonality suggests upside into November. The US economy continues to perform better than most in the world and that should mean support for the US dollar.

Source: See It Market

As can be seen above, the US dollar is now at support and an important junction. I suggest that the FOMC outputs next week could influence which way this goes. A lack of QE should mean support for the US dollar due to the better US economic data. However, QE3 should rally the Euro at the expense of the dollar, and the technical chart for the Euro provides weight for that occurring:

Source: Chris Kimble

For my projections of an overthrow in equities in the final part of 2012 and then a parabolic finale in commodities in 2013, announcement of QE3 would really seal the deal I believe. Money would pour into pro-risk and commodities would benefit from the weakening dollar. Let’s see.

A look at treasuries shows us that the stronger hints of QE have reversed yields in the short term but also set up a potential inverse head and shoulders.

Underlying source: Stockcharts

Both QE1 and QE2 led to prolonged periods of rising treasury yields, after the initial move the other way, as money poured out of bonds into pro-risk. So again, QE3 would likely provide further fuel for pro-risk. It is on my mind that previous cyclical stocks bulls ended with treasury yields rising to levels where interest rates stifled the economy. Whilst we have the kind of ultra low rate levels here that echo the 1940s, I would still expect them to rise into the end of the cyclical bull to some degree. Currently, they are moving the other way, so let’s see if this large H&S now plays out.

Ed Yardeni produced a chart showing the SP500 has diverged from its fundamentals since June this year. My geomagnetic-lunar model charts also show stocks going opposite ways since June (all models updated this morning).

Source: Yardeni

Together that would ordinarily provide a good cross-reference for a short. However, speculation increases into the solar peak, and as per my Peak v Peak page, at the last solar peak we saw stocks break away from the geomagnetic model for some time before returning to it post solar peak. It is not something measurable, but I can point to each secular parabolic peak in stocks and commodities occurring close to the solar maximums as evidence that this occurs. I therefore look at the divergences in Yardeni’s and my own models and suggest this may be occurring.

Sentimentrader have produced two new charts that add weight however to the bear case:

Source: Sentimentrader

Hopefully those two charts are self-explanatory. As per my last post though, Technical US Stock Indices, there is evidence supporting the bullish case too. And so we return to my opening comments about indicators pointing opposite ways.

Looking wider, we continue to see poor technical performance in emerging market stock indices. There is a significant divergence in European and US indices versus Asia and Latin America, reflecting the weak leading indicators in those regions. On the plus side, economic surprises for emerging markets continue to rise in an uptrend:

Source: Bloomberg

So are the economies of China and Korea and Japan (and Germany) to improve? If not, can US leading indicators really continue to trend upwards without being infected? All eyes on the next round of global leading indicators these next two weeks from OECD and Conference Board.

Euro debt accuteness remains contained and well off its highs of H1 2012, so for now that remains supportive for stocks. The US fiscal cliff looms at the end of 2012, and once the US election is out of the way, presidential seasonality is no longer supportive. The ruling party has the option to implement unpopular policies in the first two years. It may therefore choose fiscal policy which increases recession risk. I maintain the projection of global recession 2013-2014 as per solar/secular history, and this could be one factor, together with parabolic commodity prices and bond yields rising. China may also de-rail to provide a backdrop to a new secular commodities bear starting next year. The question remains whether China can remain strong enough to fulfil the commodities secular peak before that occurs.

In summary, I am looking for my exit point for stock indices longs (not commodities), as by time I believe this could occur any time as of now into early 2013. The technical picture is mixed and indicators are mixed, but US stock indices are within touching distance of a breakout to new highs. For now I am going to stay put, and await ECB and FOMC decisions this week and next, along with the latest global leading indicator data. Market tops are usually a process, so more evidence should build whilst stocks range trade, if this is to be a major top.