The Alternative Scenario

What if commodities already made their secular peak in 2011, as potentially shown by the equally weighted commodities index?

30jan20136Source: MRCI

If they did, then what should lay ahead (by solar/secular history) is an ‘echo’ bounce, whereby commodities rise again but fail to make a higher high. Barry Bannister modelled it so:

31jan20131Source: Barry Bannister

If this is a K-winter and the leading commodity class is precious metals, then silver fulfilled its remit to deliver a secular parabolic finale with a subsequent collapse down the other side in 2011:

31jan20132Source: Trading Charts

By solar cycles, this could be an acceptable scenario if sunspots already peaked, as per the ‘SM predictions’ alternative shown by SIDC below:


Source: SIDC

It would mean a solar peak occurred at the turn of 2011 into 2012, and that would make a 2011 secular commodities peak within a historically normal close time range.

The Dow-gold ratio has not hit the extreme of the last secular commodities peak (circa 1980), but could be considered to have reached low enough for a secular conclusion: out of the green band below. The low to date was reached in 2011, which fits the scenario I am outlining.

31jan20134Source: Sharelynx

If commodities already made their secular peak back in 2011, then we should be in a new secular stocks bull. So what if the final cyclical bear (with the secular bear) and secular p/e low valuations already occurred and is not ahead?

A couple of charts from October last year showing how that could be so. What if the secular bear pentagon for the Dax needs redrawing as per the red line – that the market broke out in 2011 then retested the nose level of the pentagon later that year (in a final cyclical bear at that time), reaching a final single digit p/e valuation of 9?


Ditto for the Hang Seng here, ending with a p/e of 8:

31jan20136Clearly p/es of 8 and 9 fit the remit for a secular bear single digit p/e cheapness conclusion. But what about the SP500? It only reached a p/e of 13 at that point. Well, at the end of the last secular stocks bear (circa 1980), although multiple country stock indices reached single digit p/es, not all did. The Nikkei bottomed at a p/e of 20.

Furthermore, if we widen to consider CAPE valuations, Greece hit the lowest ever seen of around 2 last year, i.e. a secular cheapness extreme never before reached (Thailand held the record with 3 during the Asian financial crisis). If we consider price to book valuations, Japan reached below 1 and Russia also. So again, if we are looking for evidence that the secular bear washed out equities sufficiently, then we can make a case.

If  the sharp falls in equities in 2011 represented the last cyclical bear of the secular stocks bear, then there should be some telltale pointers. For it to be a cyclical bear, it should take at least 20% off prices. For multiple indices this was so, with both the Dax and the Hang Seng dropping 30%. That cyclical bear should precede a recession, and such a recession occurred in Europe and Japan, amongst others, in 2012 (in a ‘double dip’). That cyclical stocks bear should have begun from a situation of excessive rising rates and inflation. We saw both sharply rising European yields in 2011 and a rise in inflation because of commodity prices.

If this alternative scenario is correct, then the implications would be significant. It would mean that the point at which to load up on equities already occurred in late 2011, and that what we are seeing currently is new secular bull momentum. It would mean that commodities, as a whole, should now make a lower high in a last chance to sell out of them before they are mired in a secular bear. It would imply that the current pick up in global growth is the real deal, and that growth will now sustain going forward, with central banks unwinding their support.

So what are the problems with this alternative scenario?

1. The consensus between Nasa, Sibet and SIDC (CM) is for a solar peak ahead later in 2013, so I rate a peak in the past as lower probability.

2. Although silver achieved the parabolic and the collapse in 2011, gold appears to have coiled near the highs in a more measured fashion which does not look like a secular top.

3. In the post-gold-standard world, a lower secular finale dow-gold ratio than 7 might be expected.

4. There has perhaps not been wide enough falls into secular cheap CAPE and p/e valuations, not enough country indices outside of Europe. Ditto the Q-ratio valuation for the US market.

5. Although we did see rates and inflation up in 2011, bond yields outside of Europe were conversely ultra low, and inflation did not exceed the 2008 peak.

There are a couple of ways we can judge the validity of this alternative scenario going forward. If sunspots suddenly make a sustained rally to a new high then we are likely still rising to a peak. Conversely, if stocks continue to outperform commodities and we don’t see a reversal in leadership then we are more likely in a new secular stocks bull, which would be confirmed if commodities top out at a lower high.

Kent raised a version of this scenario 12 months ago, and Barry Bannister clearly has also considered it. It is frustrating that 12 months later both this scenario and my primary scenario (solar peak and secular commodities peak ahead) are both still in play, with no clear winner, but therefore important to stay cautious. For my positioning – which is long equities but significantly longer commodities – it makes me a little nervous about the latter. If the primary scenario turns out correct then that ample commodities exposure should produce bumper profits, but if the alternative scenario is correct, the key is to identify the top of the ‘echo bounce’ or lower high in commodities, and not get stuck with tumbling positions that are unlikely to recover for a long time.

Would be interested in your input on this. If you have additional evidence for one scenario or the other, I’m all ears.


Secular Commodities Finale

The rally in equities persists. The momentum continues but the warning flags are increasing, in a fine balance. When we eventually pull back, I maintain this should then be followed by a further higher high, but with divergences and weaker internals, to make a topping process. UBS have echoed this in their chart here:

30jan20131Source: UBS

I have predicted a scenario ahead this year similar to 2007-8, marked by the box below. When stocks made a topping process in late 2007, similar to the distribution patterns shown above, commodities only made their parabolic acceleration once the equities topping process was underway.

30jan20132Both energy and basic materials are late stage cyclicals, which mean they are typically amongst the last sectors to rise and top out, and are reflective of commodities gaining momentum usually later than equities.

I am suggesting that there is a possibility therefore that we need first to see equities entering their multi-month topping pattern before commodities truly accelerate. Once stocks pull back, after this current rise, I believe that process will have begun. The question is how far and how long equities can rise in the mean time, and it’s a difficult one to call. If the pullback were to begin today I could point to a handful of indicators supporting that. Yet, as noted in the last post, both overbought and overbullish readings can persist for a little while before a pullback. So I watch and wait.

But back to commodities. Oil is the outstanding performer of the moment, most other commodities are lacking momentum. I previously studied commodities peaks and solar peaks in detail (here), which revealed that commodities should typically begin an acceleration around 12 months before the solar peak, which is currently forecast for around September of this year, but that commodities typically make their parabolic peak after the solar peak. Drawing that analysis together with the above, I would suggest that commodities, as a class, are overdue a momentum move, but could need equities to lose momentum and begin their topping pattern before commodities take over.

There is historically a close correlation between commodities. Below are shown food and oil. If oil can maintain its recent strength, food should follow (oil is a key input in the agri process).


Source: MD Briefing

Food and gold prices also have a close historic relationship, as shown in this previously posted chart:


Source: Casey Research

Yet there has been a disconnect in the last 18 months between gold and general commodities, shown here:

30jan20133Source: Scott Grannis

This helps to explain why gold in particular is struggling to advance, as other commodities need to catch up (or gold pull back). So let’s see if oil is taking a role as the leader here, and that foodstuffs will join in the rally, and then precious metals.

Gold miners made what looked like a high volume capitulation at the end of last week, which together with very negative sentiment puts them in a good position to reverse trend here. But a reversal in gold itself is of more importance, and aside relations with other commodities, we can also look to the US Dollar and central bank balance sheets as a driver. Here is Euro-USD and Fed balance sheet modelled together versus gold:

30jan20135Source: Nordea / Bloomberg

In 2013 the Fed balance sheet is forecasted to expand significantly, based on its QE plan, and currently the Euro is technically bullish versus the dollar. So here is a potential catalyst for gold.

Real interest rates are also important for gold. With treasury yields rising currently but inflation fairly tame, the real interest rate trend is going the wrong way (even though real interest rates remain negative). However, a rising oil price has the potential to push on inflation and turn that trend back. Rising agricultural commodity prices would also push on inflation, and this brings us back to the feedback looping between commodities. Essentially, we need oil to maintain momentum, or, say, agri commodities to join in the momentum, for the whole complex to begin the feedback looping which should result in a parabolic finale.

A reminder of other factors. The solar maximum later this year should inspire more speculation into commodities, but also protest and war. Rising food prices typically play into the latter. The NOAA climate chart that I displayed last week showed a trend that, if still in tact, could produce a record hot year this year. If so, that would be a big push on agri commodities. And by history, the secular commodities bull should end in a parabolic mania of some degree. Below is the equally weighted commodities index – did we see that mania into the start of 2011, or is it still ahead?

30jan20136Source: MCRI

I have marked on the chart an inverse head and shoulders pattern, formed throughout 2012, that could potentially catapult commodities upwards and out of the triangle to give much greater weight to the ‘peak ahead’ camp. Alternatively, a break beneath the secular support line would make the ‘peak was 2011’  view the convincing one.

I believe the conditions are still right for the secular commodities finale to occur in 2013, potentially making a final top by as late as H1 2014. Economic data, leading indicators and US dollar fortunes all need monitoring in order to nurse those conditions forward, but it really comes down to whether commodities can now gain momentum  in that relatively supportive environment and then build to a speculative climax. I am itching for that collective momentum, but as outlined above, we may need to be patient a little longer whilst equities ease out of their momentum and into a topping process, handing the batton over to commodities and the late cyclicals.

Monday Morning Update

I’ve been toying with selling a little more from my stock indices positions over the weekend. By both overbought and overbullish measures, stock indices as a whole are frothy. Furthermore, we saw a potential lunar cycle inversion, with stocks ultimately rising into Saturday’s full moon. Combined with the previously noted 5-model alignment for a January swing top and economic surprises having possibly topped out, I have a case here for stocks now reversing. However, Friday produced a bullish breakout in the Dax, treasury yields and Euro-USD, which would need really to be reversed today/tomorrow if the weekend was to mark a swing top. Furthermore, leading indicators are still overall supportive for pro-risk (ECRI US rose again, as did CB US leading indicators, and Markit PMI readings for US, Europe and China all rose), and narrow leading money points to economic strength into Spring. As I have previously stated, I do not believe this is the cyclical stocks bull top, but that a pullback then a push on to a higher high on weakened internals and negative divergences is needed, likely by mid-year.

Some charts to demonstrate. Here we see two overbought and overbullish indicators for US stocks:


Source: Index Indicators

28jan20132Source: Bespoke

The excesses are clear and I suggest the rally is on borrowed time. However, note in both cases that the two indicators for previous swing tops first oscillated and rounded out in the extreme zone before stocks topped. I therefore wonder whether stocks will continue to rally for a further 2 weeks in the new moon, or whether they might even continue through to March/Spring, with some back and forth en-route. I don’t know.

If we draw in the FTSE, it is on an unsustainable trajectory, and the Shanghai Composite appears to be rolling over for a consolidation ahead. Plus the Nikkei tried to break out at the end of last week but remains within the zone of a continued potential rounded top.

Chris Puplava suggests stocks and major economy economic surprises should top out by Spring, using oil prices as a lead indicator.

28jan20133Source: PFS Group

Based on stock market history I have previous predicted a price overthrow to end the cyclical stocks bull. Here is the SP500 chart and the overthrow in 2007 above the cyclical bull resistance line can be seen. In the current cyclical bull we are at such a resistance and I am suggesting an overthrow beyond it is likely to complete the bull.

28jan20134However, of course that resistance is another reason why stocks could take a breather now before making such action. If the overthrow occurs, then Laslo Birinyi’s work models it at around 1600, and Will Preston gets 1580. That would make a marginal secular nominal high for the SP500 secular stocks bear and there is some allure in that to fooling investors once again that we are in a new long term bull market before a cyclical bear actually occurs. It’s a target clearly within reach now either in a continued advance to Spring, or a pullback here and then a final high around June time.

OK, I decided to stay put with my positions and not make any sale this morning. I see good reasons for a pullback here with the dual-frothiness but also reasons to push a little higher yet. We may have made a lunar inversion top at the weekend, or we may squeeze out further gains into mid-Feb. I don’t see the cyclical bull top here so I’ll take my chances and if we see a swing top here I expect stocks to come again into mid-year.

Precious metals and miners continue to be depressed, though there remains evidence for a base in both (oversold, overbearish). The gold chart below shows a large triangle, and it’s important for gold not to lose the lower trend line.

28jan20135I believe this is all part of the last wash out of weak hands before the secular finale, in a patience-testing coil. To aid gold’s case, a pick up in inflation would put real interest rates further negative. As oil has made a decent up move recently, we could be at the start of such a process. But we still need that momentum move into wider commodities, and for commodities to start to outperform equities, for an acceleration in inflation and a scamper to hedge in precious metals.

I will respond to comments and emails over the next few days. Currently in Yala, Sri Lanka, but moving to a resort for a few days on the south coast.


There is downward pressure into this coming weekend’s full moon, and we see what look like topping formations on the Dax and Nikkei. However the US indices (bar the Nasdaq) have broken out on good internals, and the environment for stocks continues to be supportive, so I don’t believe we see a cyclical top here, but still believe this could be the start of such a process that lasts the whole of H1 2013. Treasury yields have pulled back a little and their trend is unclear. Commodities as a whole remain on the cusp of a breakout but equally this would be a suitable point to pull back.

More leading indicator updates came in from CB and the current picture is this:


Source: Conference Board

In short, weak global growth ahead, nothing too impressive, but no threat to pro-risk currently. To add to that, in the wider environment we do not yet see frothy inflation, overheating commodity prices or particular tightening of yields. They would all usually mark cyclical tops.

Economic surprises for the US have tumbled however and have just slipped negative. When a trend reversal occurred in this indicator in the past, the market made a swing top either imminently or within a few months.

23jan20132Source: Ed Yardeni

Sentiment has also moved up into the top quarter on both II and AAII surveys. Historically this has often been both a sign of strength but of a top ahead, i.e. not a major top right away but perhaps a pullback then a push up again, before topping. That would fit the June final top I have referred to, if so. Here is the bullish percent over call/put sentiment measure:

23jan20133Source: Stockcharts

Note how this measure oscillated in the high zone before previous notable tops in this cyclical bull market, suggesting we might be at the start of that process rather than at the end – particularly as I am expecting a cyclical bull top rather than a swing high.

Sentiment on many commodities has much further to run currently, so it is set up for commodities to outperform stocks for a period. But this remains theory until it occurs. A critical test will be how commodities perform if stocks do now pull back for a time. Supporting such a pullback in equities, a Demark buy exhaustion count has been reached this week. Plus there should be typical weakness around the full moon. However the geomagnetism forecast remains tame for the next 3 weeks, which could provide more positive pressure for pro-risk once we are through the full moon period. You can see this and all other updated models on my regular pages.

Macro Update

The latest Conference Board leading indicator updates were Japan at -0.2 (improvement on last month), UK at +0.2 (improvement), Korea at +0.2 (drop back). Other country updates ahead this next 7 days.

The latest OECD leading indicators show all round improvement, summary here:

17jan20131Source: OECD

Fidelity’s recession risk scorecard for the key economies show a mixed picture:

17jan20132Source: Fidelity

ECRI’s US leading indicators remain in an uptrend and positive:

17jan20133Source: Dshort/ECRI

Global narrow money as a leading indicator continues to show growth into the Spring but thereafter it could weaken:

17jan20134Source: MoneyMovesMarkets / Thomson Reuters

Global equity fund flows show too much frothiness in shares currently:

17jan20135Source: Humble Student / Nomura

Note that in March 2000, such excesses pinpointed the cyclical/secular top for stocks, whereas in 2007 it did not highlight a cyclical top. As we do not see a congregation of other cyclical stocks topping indicators at this point, I believe this is a warning flag rather than a sell-all signal.

Economic Surprises look like this for the USA and Europe respectively:

17jan20136Source: Ed Yardeni

17jan20137Source: Alphaalcove / Bloomberg

Europe surprises (white line above) are finally moving into the positive, whilst US surprises are dropping fast.

Lastly, US earnings came in at a 65% beat rate for the first week, but we need to await more to be confident of a theme.

If I draw together all the above data, the picture is one of weak global growth ahead into the Spring, with mixed fortunes and rotating leadership. The differences between major countries and between leading and surprises continue to suggest a picture that needs watching closely. I suggest there is slim chance of a global recession right now, but will be looking for evidence of countries uniting in weakness ahead to bolster that likelihood. On the flip side, I will be looking for a more united picture of improving fortunes across the globe ahead to provide evidence that we can push for the growthflationary finale into the solar peak that my solar/secular research predicts.

One more chart to finish. NOAA’s global climate report revealed that 2012 was in the top hottest years globally on record. But within that it was the hottest year on record where La Nina occurred (which has a cooling effect). The chart of the last 60 years looks like this:

17jan20138Source: NOAA

The question is whether the cluster of bars over the last 10 years is a topping pattern or whether the uptrend is still in tact and 2013 potentially becomes a new record hottest year without La Nina around and a possible weak El Nino in play. Were the latter to occur that would help deliver an acceleration in soft commodities.

I have updated all models this morning. Geomagnetism is forecast to continue to be tame the next 3 weeks, which is supportive for pro-risk; and the recent higher daily sunspots counts add weight to the likelihood that the sunspot peak remains ahead and that excitement in humans should accordingly build.


In total I spent 4 weeks in Thailand in 4 different places: Phitsanulok, Bangkok, Hua Hin and Phuket. There were some common threads to my experience in all 4 regions, which, backed up by reading and research, have formed the impression I outline below.

There are two notable pillars in Thai society: the Buddha and the King. 95% of Thais are Buddhist, and the King is also revered. Wherever you go, there are Buddha statues and portraits of the Thai King.

There are draconian laws against being outwardly critical of the King, but the majority of Thais have a true love and respect for the King, who is often talked of in demi-god terms. Understand that the Thai King is the longest serving living monarch in the world, and has been a constant in Thais’ lives throughout a politically unstable environment of 15 coups and 27 prime ministers, as well as a major economic transformation from an agricultural to an industrialised country in the last half century. The King has occasionally intervened in the political sphere, so he is not a neutral bystander, but he has largely overseen some impressive economic growth, as well as a few crises.

Thai buddhist monks are a common sight wherever you go, because they survive solely on what is given to them by the people. Their day largely consists of meditation, then going out barefoot begging for breakfast from the local community, a few domestic chores, more meditation, the remains of the food for lunch then no food allowed until the following breakfast, some schooling in the afternoon and more meditation in the evening. What is impressive is that the majority of Thai men (and some women) become Thai monks for a period (normally from 3 months to a year as young adults), much like military service in other countries. It is not compulsory but it is considered important to have served time as a monk when it comes to marriage and positions of authority. Some Thais go on to remain monks all their lives, but for the majority it is a rite of passage as a young adult. Perhaps because is it so widely pursued, it is not without issues. It has been reported that almost half Thai monks are overweight, because the community provide them with rich food (with good intentions of course) and the monks’ day is largely one of inactivity. Plus it is not uncommon to see them now with mobile phones or Ipads, despite the ideology of no possessions and a simple life. Nonetheless, in my simplistic view, it would appear to be a fruitful experience to go through such a humble, conditioning process as a young adult.

Thailand stands out in this part of Asia because it was not colonised like the other neighbouring countries. The result is a culture that is less diluted, with one notable barrier to entry being the unique language and script. In Phitsanulok, the least tourist-trodden of our destinations, we generally had to get by on gestures and signs, as zero English was spoken. Thais embrace ‘fun’ living and this has been a key factor in drawing in tourists, extending to an ‘encouraged’ sex industry (for revenues) and some of the party capitals of Asia having grown here. Massage is also everywhere and the cost of living cheap. Unsurprisingly therefore, it has become a favourite backpacker destination. So how about for a ‘flashpacker’ with family in tow?

Well, Thailand didn’t measure up to Singapore, Malaysia and Bali. In Kuala Lumpur I was amazed at how friendly and laid back people were for a capital city, Bangkok was all round more ‘edgey’. In Bali journeys around the island were a sensory overload of both interest and beauty, whereas land travel through Thailand was more underwhelming. Overall, I found Thailand to be more scruffy than the other countries on my route so far (accepting it is a developing nation), and this would apply to both the natural and the man-made. Thailand was one of the fastest growing countries in the world in the 1980s and 90s but there have been some growing pains with such a rapid transformation. There is more of a crime issue than in the other countries I have so far visited and, to my eye, aesthetics have been rather overlooked in the country’s rapid development. One image that will remain in my mind is the jungle of telephone wires everywhere we went (see images below). A lot of these cables are put up illegally at night, until there are so many that some of the telephone poles start to lean over. I can only imagine that the spaghetti wiring is not considered an eyesore in Thailand, and maybe it isn’t to other travellers. But travel is a personal thing, and I found this to be a dominant ‘blot on the landscape’.

I enjoyed the food, the cheap living and the glorious weather, and we met some very friendly Thais. But overall there was more effort required to gauge people and their motivations than in Singapore, Bali and Malaysia, and in Bangkok we certainly came across a few unpleasant types. Honestly, I wouldn’t have expected otherwise, but having been spoiled with collective warmth and friendliness in those other countries, Thailand didn’t quite measure up.

The Thai SET stock index was one of the best performers of 2012: the 5th best returner in the world. However it is now one of the more expensive in terms of p/e valuation at around 18. Thailand reached one of the cheapest ever valuations in the wake of the Asian financial crisis of the late 1990s, reaching a p/e of just 3, shown here:


Source: Cnx Translation

This has since been beaten by Greece in the recent Euro crisis, which got to p/e sub 2. The Thai SET history shows that a brave purchase at such a cheap level would have been rewarded handsomely with time, and I believe Greece prove similar for those who took the plunge at the extreme (not I). At current p/e 18, I don’t want a holiday souvenir of a stake in the Thai SET. Instead I’ll settle for a few pictures below.

Long live…


Cape Panwa, Phuket:


Insect snacks:


Monks on walkabout:


Those wires…


40% Stock Indices Longs Closed

We got the advance that I was looking for into today’s new moon, taking us a little more overbought and overbullish, plus Tom DeMark also fairly well aligned: his call yesterday was to exit Europe longs and that the SP500 should top by 1492 possibly as early as today – for a subsequent 5% decline. My forecast based on solar/secular history for world equities looked like this in Sept 2012, namely a breakout from the secular bear pentagon into 2013 and a final but mild and short-lived cyclical bear 2013-14 before secular bull momentum erupts:

11jan20132The MSCI World today looks like this:


Source: MSCI

A breakout indeed, and drawing together the models of the previous post, I predict a higher high (and cyclical bull topping high) by around June 2013, but on negative divergences, before a cyclical bear in H2 2013 into early 2014 takes us back to the pentagon angle level roughly. All subject to developments of course.

So I took 40% stock indices longs profits today, but I retain all the different country stock indices that I listed to some degree. I don’t believe this is the cyclical top, but that stocks should in due course pull back, advance again to a new marginal high on weaker internals and that the whole H1 2013 will be a topping process in hindsight. Therefore if stocks do make the anticipated pullback I may add again for a final push up. If stocks continue upwards some way further I shall ride the remaining positions. But the main focus is now to see if commodities can start to outperform equities, as my weighting is now much more skewed towards them, playing for a secular finale of parabolic fashion, expecting that outperformance versus equities as of now, born out of current excessive pessimism in various softs and precious metals.

11jan20133Underlying source: Bloomberg

Have a great weekend all. I now in the Kota Kinabalu region of Borneo for a few days.

Tools For 2013

Here is the lunar geomagnetic model for the stock market for 2013:

9jan20131This combines the seasonality of geomagnetism with lunar phase oscillation. Both phenomena influence human sentiment and therefore market performance. The caveat is that some years are more ‘seasonal’ than others, and that lunar phase oscillation doesn’t work all the time, with lunar inversions also occurring. Nonetheless, the key dates are noted with a potential peak this coming Friday, a March-April low, a June-July peak and an October low.

Now take a look at Eurodollar COT as a lead indicator (by 1 year) for equities:


Source: NowAndFutures

There is a clear alignment with my model above: Jan and June peaks, March and Oct lows.

I have found Bradley turns too hit and miss to be a part of my regular toolkit, but for those hits when they occur, I like to keep it on the radar each year. Bradley turns are based on the planets, and it should be noted that whilst chart maps are built on them each year, the turn dates can be either lows or highs so do not actually indicate a path for the market, only trend change points. With that caveat, here is a siderograph for 2013:


Source: Time-Price-Research-Astrofin Blogspot

A June peak and an October low again, but this time no low around March, just upward into June.

The 45 year cycle was brought up in the comments on my last post. I would argue that this is in fact 4 solar cycles, and suggested this when I reproduced this Dow Jones spectrogram in 2012 showing actual cycles in the Dow Jones. The peaks show real cycles around 11, 33 and 44 years, all approximations and multiples of the solar cycle:


Source: Sergey Tarassov

What perked my interest however was that in Dec 2012 I had shown a chart using MCRI’s tool that revealed 1967 to be the closest mirror from history for US stocks with a 90% correlation, and I now realise this is 45 years ago, which adds weight to the potency of the 45 year or 4 solar cycle repetition in time. The next chart therefore shows what happens next in 1968 with potential connotations for 2013:


Source: MRCI

Interestingly, similar peaks and troughs pop up: Jan high, March low, June peak.

Here’s one more. Presidential seasonality in the year after US elections looks like this:

9jan20137Source: SeasonalCharts

Spring low, Summer high, Autumn/Fall low. That’s five models in impressive alignment. But before we get too carried away, I suggest there is likely to be some repetition in the underlying for this range of models, namely common seasonality. By my research, the seasonality of geomagnetism is behind the seasonality of the stock market (see Seasonality section of my Trading The Sun PDF). The majority of years play out similar to the seasonal model. Therefore that overall theme of a Jan high, spring low, summer recovery and bottom around October time, is fairly common looking back at stock market years in history. But sometimes we get an atypical year. Geomagnetism may not follow the usual roadmap or technical and fundamental factors may blow the market off course. One potential such factor is that we enter 2013 with an overall pick up in economic data together with recent technical breakouts in certain key markets, both of which could inspire stocks to perform beyond January. Also recall that cyclical stocks as a leading indicator suggest a peak around March and a mid-year low – quite the opposite to the above:

7jan20133Source: PFS Group

However, we do currently see evidence of overbought and overbullish extremes in certain pro-risk markets, which could provide the backdrop to a January high. Look at the excessive optimism across the different US stock market sectors, with one obvious exception in gold miners:

9jan20138Source: Sentimentrader

Furthermore, economic surprises for the US appear to be rolling over, which could also drag back equities (although the lead time on that has historically varied):

9jan20139Source: Ed Yardeni

In H2 2012 I was on the look out for cyclical stocks bull topping indicators, including: a topping range process lasting several months whilst internals degrade; divergences in breadth and/or leading indicators; a spike in yields and inflation. We didn’t see them, so I remained long equities. Now, in January 2013, if stocks are topping, then they can only be at the beginning of a topping process, because we still do not particularly see those characteristics. That said, I am confident we will see a cyclical stocks bull top in 2013, based on secular/solar history, and it should occur by the latest at the solar peak (forecast for circa Sept 2013 currently).  So a mutli-month topping process that began now and completed by mid-2013, would fit well.

Here is a typical example from the last cyclical bull top:

9jan201310Source: Cobra/Stockcharts

Stocks made a high then a marginal new high several months later, whilst breadth diverged. There were two opportunities to exit stock longs, but the clues for the cyclical top were only in evidence by the second opportunity: the marginal new high.

So here’s a hypothesis. Stocks make a top in January 2013, as per the aligned models, followed by a pullback within an overall topping range process, then a marginal new high around June which bears the divergences of a cyclical bull top. Were this to come good, then that could imply that the first opportunity to exit stock longs would be imminent, possibly Friday of this week. One factor that could play into this is US earnings, which began yesterday with Alcoa. The season really gets going next week, and a ‘sell’ theme could potentially play out on an overall disappointing beat rate or outlook.

An alternative scenario would be that stocks continue to advance into March, as per the cyclical stocks model, with support from recent improvement in economic data, before the topping process begins and lasts through to the Autumn/Fall.

So what to do? I am going to mull this over but if stocks can rise further into bull/bought extremes by the end of this week, I may sell a chunk of long positions. Understand though that as things stand with my equity longs in tact, my bigger pro-risk weighting is to commodities. A concern I have is that if I exit equities I am very much dependent on commodities making a final secular push – a push which one would have to say is currently absent. So let’s have a look at commodities.

As previously noted, many commodities are currently suffering extremes of overbearish sentiment. That sets them up for a potential rally. Supporting this is economic improvement in China – the biggest consumer in commodities. Plus inflation expectations have risen of late, and treasuries have begun to experience outflows, both of which should inspire more money into commodities. All that said, commodities as a class remain without momentum at the moment, despite Gann forecasting acceleration would begin as of November 2012, and solar/secular history also suggesting commodities should accelerate over the course of the 12 months into the solar peak. Here is the current combined solar peak forecast – note that a pick up in sunspots over the last week has helped give the overall solar oscillation more of an uptrend look:

9jan20133In short, commodities should accelerate without delay, and start to outperform stocks. Precious metals should be the leading class. A long term look at the Dow-gold ratio reveals that equities are historically cheap compared to precious metals. Long precious metals at this point is therefore a play on a parabolic finale to extreme overvaluation. That may be a dangerous game, but history has fairly reliably delivered such a parabolic finale to a secular bull. There was some question last year over whether silver had in fact made that secular parabolic peak, by comparing it to the Nasdaq bubble:


Source: Profitimes

I have added in white what happened since – and in the bulls’ favour it broke free from the analogy and did not collapse into the start of 2013. Gold made no such parabolic but remains range bound over the last year, neither confirming the bull or bear case. In short, I still maintain precious metals will go on to make a parabolic finale ahead this year, along with commodities as a whole, but right now it remains a position of faith. As we are in a multi-year transtion period from secular commodities and treasuries bulls and secular equities bear to the opposite in each, with equities cheap compared to treasuries and commodities, and commodities lacking in momentum, I have concerns about leaving myself heavily weighted to commodities making their finale, until we see that acceleration begin to occur. However, we may potentially be knocking on the door of that development:

9jan201312Source: Chris Kimble

This is what I am going to chew over today and tomorrow. If you have anything to add to this, please step forward in the comments below, as I welcome your input.

Current State Of The Markets

Mixed fortunes for pro-risk currently. Commodities, as a class, are still struggling to gain upward traction, although pockets have woken up in recent weeks, such as crude oil and iron ore, as China has displayed increasing evidence of a turnaround. However, the weakness in gold and softs has brought daily sentiment readings down to sub 10 for gold, soybean, soybean meal and oats, and sub 15 for corn, wheat, coffee and sugar (out of 100). I believe this extreme bearishness should provide a reversal in due course.

Treasury yields, on other hand, have made a move of some momentum, which adds weight to a potential bottoming mid-2012:

7jan20131Source: Stockcharts

Equities have been particularly strong since the fiscal cliff relief. The global stock index has broken out beyond its Q3 2012 high and is now within touching distance of new cyclical bull highs as shown:


Source: Bloomberg

Dow Transports have broken out. The Shanghai Composite has rocketed 18% over the last 4-5 weeks. The SP500 is just 10 points away from a new cyclical bull high. We do not see major negative divergence in internals or in leading/economic data so I believe global stocks can go on to make new highs. We have upward pressure into the new moon of the 11th January, and thereafter the rapid climbs in the Nikkei and Shanghai may need to digest.

The combined global manufacturing and services PMI composite looks like this – a notable improvement in Q4 2012. It is not clear however whether this is just another oscilliation in the downward trend in place the last 3 years that will roll over again shortly.


Source: Markit

Narrow money as a leading indicator currently suggests improvement in the global economy into February and then a peak out.


Source: MoneyMovesMarkets

Citigroup economic surprises may be topping out in the US, as this index has made a rounded head over the last couple of months, in a high zone historically associated with turnarounds (and this is a mean-reverting indicator as economic data or analyst expectations eventually shift). Here’s a reminder of what happened to stocks when economic surprises (blue line) topped the last two times:

7jan20132Equities were on borrowed time, though in both cases there were several months in which to sell.

Cyclicals as a leading indicator suggest a top by March 2013:

7jan20133Source: PFS Group

Lastly, Eurodollar COT as a leading indicator suggests a top right here, or if not a topping process beginning here and lasting until June (second high on negative divergence would be the norm):


Source: Nowandfutures

All combined, we may be looking at a top in equities in Q1 2013, but as yet there is a lack of the usual topping indicators, so I am sitting tight for further gains until more data evidence comes to light to support the time predictions.

I completed Thailand with Phitsanulok and Hua Hun and am now in Borneo, starting with 4 nights in Kuching.