Developments

Oil broke out – upwards – though it is not yet sufficiently clear of the triangle to call it finally resolved:

18jun2

Large speculators have been betting big on such a bullish outcome:

18jun4Source: Sentimentrader

Small speculators, usually ‘wrong’, are betting big on further treasury bond declines:

18jun5Source: Sentimentrader

Which means we could see a near term pullback in yields. And that brings us to tomorow’s FOMC. Having sewn seeds of doubt that QE may see some tapering as early as in tomorrow’s announcement, I suspect whatever they say could be a catalyst for big moves in the markets. If treasuries are due a bounce, then gold is too:

18jun6Source: ShortSideOfLong

The SP500 has consolidated its pullback and is at a point whereby it could make a further leg down, in an ABC correction, or make a fresh attempt at a new high. By geomagnetism, the former is more likely:

18jun1

I remain of the view that a topping process has begun in the SP500 and that it should take several months to play out in a volatile range. A new marginal high on negative divergences would be normal, so if an ABC correction did occur we should still then see a return to the highs. Outperformance should transfer to commodities, whilst this takes place, and maybe the breakout in oil is the first key development in this.

Leading indicators have generally softened but remain positive:

18jun3Source: Conference Board

The Bradley turn for equities is 22 June and gold seasonals take off as of mid-June.

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33 thoughts on “Developments

  1. Oil! Commercials are producers like XOM. Large specs are speculators. Per Stephen Briese’s Commitment of Traders Bible: commercials are usually right and speculators are wrong. Well the commercials have been selling (shorting) like crazy for 2 years. The speculators have bought all the producers shorting and are now at near record long levels. 2 years could become 3 years, but I will short any daily reversal bearish engulfing pattern. Some interesting things about oil. Commercials produce oil so they naturally sell. Well several months prior to Saddam Hussein’s invasion o Kuwait, they became net buyers. The way hedging works, if the producers sell and prices go down they make more money. However, if it goes up, they make less as they lose the amount it goes up and they must meet margin calls.. Something very unusual happened in 2008. The price of oil went up so much, the producers got fed up losing so much money and having to meet margin calls so
    they covered all their hedges. This was a main cause of the final blow off to $147.
    Since speculators are currently maxed out theoretically, it should take a new set of buyers to really make oil break out to new levels.
    Should be interesting.

    1. Hi Kent. Not all commercials are producers. E.g refiners like Valero (VLO) will typically be buyers. If they expect prices to rise in the future they try to do more buying at current prices. So, when commercial longs are low (vs shorts), it tells us they are currently not worried about higher prices.
      Since the commercials are basically the insiders, they are usually on the right side of the market, but not always.

  2. Hi John,

    I was watching this Kyle Bass video, and with so much of what he’s basing his Japan analysis on being Japanese demographics, I naturally began to wonder how his Japanese demographic analysis and conclusions fit with your work.

    Great video as well for a lot more reasons than just that by the way.

  3. THe big thing today after Ben spoke was the sell off in treasuries, now yields are above 2.3%. Now how does this factor into the whole scenario?

    1. Higher interest rates eventually squeeze out available liquidity causing financial markets to decline and later the whole economy. We are right at the point where the financial markets should start topping out. We have never had such excess liquidity before so it may be different this time but I doubt it. Bonds clearly broke into warning territory topping 15 month high in rates today.

  4. I think everything evetually will sell… it will be deleveraging/deflation, and everything will fall. But when leverage is flushed, then some will be used as safe havens (perhaps treasuries, PM). Leverage in the real economy will take a long time, and probably not good for stocks.

  5. Need to let the dust settle, but I think it’s good news. Yields should rise further along with money velocity, commodities and inflation:

    Just like in the 1940s when the government stepping back from full-on intervention was a trigger for such a big move.
    However, the initial move yesterday was pro-USD and hence counter commodities, which is why we need to see the dust settle.

    1. Doesn’t that also cut the other way? The USD has been weak since mid May, which should have been pro-commodities. But commodities have largely failed to benefit.
      Now the USD rises for one day and immediately commodities are showing a big reaction to the downside. This suggests that deflation is still the path of least resistance.
      Gold and silver are testing $1300 and $20 at the moment. If interests rates continue to rise, then the dollar will likely strengthen further. And neither a rising dollar nor rising interest rates are considered bullish news for gold (and for commodities in general).

      1. Yes, relative judgment of market reactions is extremely impt. Being a super bull on the dollar, the refusal for the Euro to go down in the face of some bad new saw a 3 pt rally.

    1. Hi Rob. COT data and sentiment measures are very similar in their behavior. They have the habit of looking “positive” (or negative) for months/years on end, so they are not very helpful to time trades. While major bottoms typically come with extreme sentiment and COT readings, the reverse is not true: not every extreme COT or sentiment reading marks a major bottom.
      Gold sentiment has been low since February-March, but gold has just kept dropping down. Stock traders have been pointing to the very low VIX since February as their reason to sell because too much “complacency”. But stocks have kept going up…
      Trading based on fundamentals and sentiment is often a recipe for losses.
      That’s why economists are known to be poor investors.

      1. Thanks Danny.

        Another reason for scepticism about COT data for gold is apparently the Gold futures market Gold is a small market compared to the ‘real’ market in physical gold, so relying too heavily on COT data doesn’t have as much meaning as it would in markets such as Wheat.

  6. looks like SPX is doing the bearflag/gartley. The top was yesterday, and the historical analogs suggest ~3 week downside from here.
    If that happens, it would resemble an inverted/collapsing 6month cycle, producing a downtrend to Nov-Dec. And it may be crashy, specially the coming 2-3 weeks are dangerous (similar setup to 1987 in SPX)
    Normally I wouldnt expect a crash from this setup, but with possible inverted cycles there is a higher risk.

    OR
    The cycles dont invert, and we just have a lagging market low some time late next week, and then rally to Aug-Sept 🙂

  7. My gut says PM will flush all leverage, and that can be done quickly. And when they are “safe”, they will be a safe haven (rally) in the coming bear market/depression 😉

  8. Commodities in down trend since 2011. Equities, commodities and Bond prices, including Oil, Gold and silver will plunge.

    Only Us indices resilient to the down-trend in all assets around the world.

    Until now.

    @apanalis

  9. In the Dow Jones the topping process is similar to 1909-16-19, and after suffered a plunge of -46%; like 2000-07-13?

    My expectaton is a retracement about 0,76fib since 2009.

    Can follow S&P in nov 1980 peak, after a retracement of 35%. It raised 130%.

    Now, 150% up, from 2009.

    This cycle, is lagging indeed, it should have plunged last summer as secular pattern pointed aout, but the Federal Reserve builted a wall of confidence.

    @apanalis

      1. Danny, with all my respects, that´s is not the point, we are in the 2019 peak and the most parabolic rise will be seen from 2017 to 2023+-.

        90-100 years cycle from 1929.

        180-200 years from 1835

        300 years Cycle from 1720

        Regards

        @apanalis

    1. It seems that gold, miners, coffee all going down the crap hole these days. Commodities in general seem to drop regardless of a strong or weak USD……….. John do you really see a turning point in something like coffee anytime soon ? It’s being slaughterede again……….. I have a few books by Martin Pring too but it doens’t looke like commodites are going to peak anytime soon/?

  10. with all my longer term charts at make or break levels given by my tools. i did something i have not done in 4 years…. i bought the miners for more than a trade with the intent to hold for longer term

    1. The gold miners (XAU) have a historic tendency of peaking and bottoming before the price of gold itself peaks or bottoms. So, I would always buy the gold stocks before considering longs in gold or silver. Now that the 100 level has given way, the 85 level on the XAU is a level I want to watch. I bought some gold stocks today, but not yet full position as we could easily see even lower prices in the next month or two.

  11. John, you’re more gutsy than I. I picked up silver in April after the first big drop. Going to have to wait for some recovery before considering it again. May have to start trimming if this continues. Fed may soon find itself in a deflation scenario, even though they claim “they’ll never let it happen again”

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