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:
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:
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.
Narrow money as a leading indicator currently suggests improvement in the global economy into February and then a peak out.
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:
Cyclicals as a leading indicator suggest a top by March 2013:
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):
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.