Current Markets And Macro

Yesterday during the US session I was watching the support/resistance line on the Nasdaq shown:

It marks the March/April 2012 highs, and the battle below and above that level in August and September is clear to see. Having broken out above it in September, the market is now retesting the breakout and yesterday, marked by the arrow, saw the index briefly break down beneath it only to rally strongly into the close and hold above it. I believe that may be significant, and today’s out of hours action (Europe morning) is so far bullish. But, there remains the possibility that we are making a bear flag in a protracted correction, and the SP500 (below) and Dow are higher above the March/April peaks with more room to consolidate downwards.

We have a 2 week period of low forecast geomagnetism and upward pressure into the new moon now, and given last week was the seasonally worst week of the year together with a full moon, damage to pro-risk was contained. Supportive of pro-risk pressing upwards here is a particularly bullish correction formation in gold and a bear flag on the US dollar:

Source: TSP Talk

However, there are some warning flags for equities. This chart shows that when the Fear and Skew indices spiked together with a low Vix, equities were approaching a top.

Source: Sentimentrader

And this composite of Put/Call, Market Vane and Sentiment Surveys also suggests equities should be approaching a top.

Source: Technical Take

Note that with both charts, there is the scope for equities to top out now, or to keep rallying for another couple of months and then top out. So with that in mind, we can return to the top two charts of the SP500 and Nasdaq and watch to see whether they break back down below the March/April highs – which would make the breakout a fakeout and give more weight to a market top – or whether they can push on now this week and next and make the breakout backtest successful, which should mean a period of longer gains ahead as they move into clear air. My leaning is towards the latter because we don’t yet see the usual cyclical bear market topping signals or process.

We can look wider for more to gauge the environment for pro-risk. The key question is whether we are reflating or tumbling into recession. I previously noted the improvement in Conference Board global leading indicators but we have to wait until mid-month for new updates both in these and in OECD leading indicators. We have other data to keep an eye on though, starting with ECRI US leading indicators which rose again last week. It should be clear from the chart below that the action in the indicator does not resemble that in previous recessions:

Source: Dshort

RecesssionAlert caculate the probability that the US is in recession currently as 6.4%:

Source: RecessionAlert

Nowandfutures measure, which requires yield curve and CPI adjusted monetary base both to go negative, only has one in the territory:

Source: NowandFutures

Here are the latest global PMIs combined:

Source: World Bank

There is clearly some recent improvement, particularly in Europe. The key question is whether they are in a recovery trend, or just an oscillation in a continuing downtrend.

This is how I see it. There is some clear improvement in leading indicators globally. We have had 6 months of rate cuts and renewed stimulus. I expect the reflation. Solar and secular cycles support the reflation. But I’m not jumping the gun. I want to see more evidence of improvement. Clear upward trends. So it’s one day and one piece of data at a time. But I don’t see reasons to take profits on pro-risk longs at this point.

Dr.Copper is behaving bullishly of late, as is Dr.Kospi, and the Shanghai index was potentially breaking out of its wedging downtrend on a Demark buy signal and RSI positive divergence, prior to the Chinese holiday week – something to watch next week. Treasuries regained some ground as beneficiaries of last week’s correction in pro-risk, but by QE history should begin a more enduring downtrend – unless of course you believe this time is different.

In summary, there is tentative evidence of a global reflation that should provide the backdrop to a secular commodities finale, but I want more evidence. I see stocks at a crucial point technically, either backtesting their breakout succesfully, or failing, and my leaning is the former. There are some technical indicators for stocks flashing a top in terms of complacency and overbullishness, but as yet a lack of other supportive topping indicators. Because those flashing indicators could remain at those levels for a while longer, and given Presidential seasonality, I think we can push higher yet into November. In terms of my solar and secular timings, a topping out of equities as we turn into 2013 would be reasonable, so I believe we are approaching that stocks peak, but are not there yet.

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14 thoughts on “Current Markets And Macro

  1. I totally agree though that compared with the last stocks bear, we’re around 1978-1979. Perhaps 2013 would see stocks have a rounded top and then 2014 would be the year of the crash. 2013 could see the Dow just scratch its all time high, but then the energy for the current bull would expire, as stocks hit their bear market price ceiling.

    If stocks peaked early 2013, we could see an echo of 1973, with stocks dropping throughout 2013 by about 20%. Stocks might stagnate in 2014, as gold goes parabolic, and then peaks by 2014-15 at the earliest. If another US recession took place around 2014, whichever party who is in office, whether they be Democrat or Republican, would most likely have had their reputation torn to shreds, and so 2016 would see a swing to the party in opposition.

    My overall guess is that 2013 might be more of a 2007-style year, with stocks making a rounded top, then lurching down in 2014, and then bottoming in 2015.
    If an all time high is made in the next year or so, we will be at 1980, and then the lurch down in 2014 would be comparable to 1981, and then the sharp rise out of the lows and into new highs in 2015 would be like in 1982. Just a guess but would like to see what people think of it.

    1. Not far from my own forecasts, so it’s a yes from me. One thing on my mind is that if reflation does come to pass, then we are only just getting started with it, so it would be unlikely that pro-risk peaks too soon.

  2. “tentative evidence of global reflation” What have they been doing to epic extremes for the last 4 years? Gannglobal agrees with you. Flannagan had thought the Master Time Factor (60 yr cycle) had bottomed in late Aug but now thinks a secondary low in Nov will precede an 83% commodity run into 2014. He expects the stk mkt to correct slightly with the commodity correction into Nov 21st.
    Bear mkt rules vs bull mkt rules. In a bull mkt a medium term momentum buy signal is a great signal as acceleration is really just starting. In a bear mkt, it is a sell signal as that as as much strength as a mkt can muster. That is the question. Is the strength in auto sells, housing prices, commodity prices, and the market a break-out or a sell signal?

  3. A great series of posts and thought provoking as always. I have been doing my own research into cycles and will share the results when I get to a suitable point. I believe that we are in the 1977/78 area currently which corresponds to 2012/13 but as you have mentioned before the 30s/40s represents the best historical reference compared to current times.

    I have been buying this year and am expecting a sell off next year. This is all my opinion currently but I intend to have something more concrete to share in due course. I see a commodities top around 2015 which I know is different to your expectations, although i think we may see a 22-24 month interim cycle top in gold/silver next year.

    Vive la difference!

  4. Thanks guys.

    US ISM non-manufacturing made a leap – see the current action in this indicator versus the previous recessions, quite different:

    And US ISM manufacturing turned up – this one needed to turn up and isn’t in a clear uptrend yet – but for now it also doesn’t look like the previous recessions:

  5. The world economy languishes, Us economy will be in recession on the end of the year, can you see a peak in 2013?

    Can you see the Oil chart? What is the meaning?

    Or the copper chart? Or the steel chart?

    China, Brazil, emerging markets with the red ligth months ago?

    Have you seen their respectives charts?

    Otherwise, in this 17 years cycle roofs, after a drop about 50% and a recovery about 100%, 2-3 years un and 1 or 1,5 and half down.

    This is the rule for more than 100 years, can you see the past.

    Always for the Industrials and prospections for the British charts before the US.

    All the recession are similar.

    Now, it´s time, well, it´s late, in my opinion, but time to drop the 30-35% in the Industrials from now to may-summer13.

    Nice trip, Jhon, if you visit St. Sebastian, tell me.

    1. Hi Antonio, going further afield than Europe on this trip, but appreciated thanks.

      There are some oppositions out there e.g. US equities versus Chinese equities; DJIA versus Industrials; Baltic dry and Iron Ore versus some other commodities, and so on. The question is which is wrong – which is going to catch up the other? I side with reflation, and see evidence the Shanghai and Baltic Dry are bottoming, rather than the others topping. One day at a time of course.

  6. Antonio Pérez Algas you seem to think very clearly in my opinion and I tend to agree with a lot of your comments over the last several weeks. Do you run a blog by any chance?

  7. Thanks, Tiho. No blogs, no information, nothing, only my point of view in John´s blog and in other of the US.

    I´m working in markets many yeras ago and i have my conclusions, i work for me, only for me.

    Until 2011, I moderate an do my analysis in a spanish web an a forum for 5 years, but it was a waste of time, everybody wants be rich in two days.

    I have studied cycles of the Industrials and basic materials an operate in basis of my studies, like John, but my conclusions are pretty different than him and i tend to make to see him what i see.

    Solar cycle. All my respect, but if you see the long time charts, i only see a drop like 1978 or 1918.

    Sorry for that itromision, John, i apreciatte your work.

  8. As stocks make a top before a bear market finale, money might rush mostly into the more obvious things like gold, silver and bonds, but I have a suspicion that oil speculation could return in 2013-14

    Right now, oil is slightly choppy, whilst stocks have remained fairly buoyant. My guess is that, as John suggest, stocks will make a top next year, and as solar activity rises, human excitability and an increase in risk will lead to people looking to other assets, and if conditions start to become tough and violence increases globally, people will rush to things like oil, which in turn will raise inflation, sending other people into PMs, exacerbating the problems we already have.

    With this in mind, I would say the window for peaks in assets could be as follows:
    1.) Stocks: between April-October 2013
    2.) Oil: between May-August 2014
    3.) Gold and Silver: between March-September 2014

    As for economic conditions (US situation assuming fiscal cliff avoided)
    1.) China recovers: 2012 to 2014
    2.) US: continued growth through to 2013, with a recession starting in 2014
    3.) UK: recovery into 2013, following US into another recession in 2014
    4.) Eurozone: stagnation in 2013, slipping into full-blown recession in 2014

    By 2015, commodities will be overpriced, and will burst, and this will lower inflation for a world economy where the largest economies are in recession. Equities start to recover, and growth picks up by 2016. By 2016, equities will have started soaring to all time highs, ending a bear market that lasted 17 long years, and the news will be littered with articles about the end to an era of turbulence.

    If none of the above has happened by 2016, I guess we should start to get very worried. A game-changing series of events will surely have happened within 4yrs to bring us closer to the secular inversion. If not, it was worth a try, to predict what could happen!

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