I have taken profits on Nikkei longs today and added short on the French CAC. We are now switching into the lunar negative fortnight, with a geomagnetic storm also in progress, and I believe we are in a multi-month topping process in equities. I expect the topping process to be an overall volatile range lasting into September before falls in earnest, but within that I want to sell into strength and buy into weakness.
The Nikkei trade has been a big earner as I was aggressive into the pullback, based on my demographic research. Now this is how it stands: close to a 61 fib retrace of the falls, and arching over:
I maintain the expectation that it will eventually break upwards out of its long term downsloping resistance, but wish to step back for the lunar negative period and with the belief that if global equities are topping another leg down in equities should be next.
US retail and discretionary broke out to new highs along with small caps, which is bullish, but marginal new highs are normal in a topping process. There is a possibility US earnings now pull back equities, as shown by the historic correlation between USD strength and revenue misses:
We also see encouraging signs that commodities may be beginning outperformance, with crude oil pushing on again yesterday and agriculture strong the last couple of sessions, despite USD strength. A topping process in equities beginning as commodities start to outperform would be very much in line with 2007/8:
Overbearish sentiment has been stretched like an elastic band on most commodities and commodity currencies for some time now, so mean reversion also supports a rally, plus Goldman and JPM have been putting out notes arguing for some fresh upside now in the class.
Sentiment has also been very bearish on treasuries for some time now, as yields have risen 70% from their lows. I am considering taking profits on short treasuries also. My thinking is that a pullback in yields is due, and I am wondering whether a combination of the fast-rising yields together with continued soft economic data (expectations based on demographics) will bring about a softening/backtracking in wording related to the announced pull back in QE. Such a development, either in yields or in policy, should then benefit precious metals. Just speculation, but as part of my overall case for a transition in the fortunes of asset classes this summer.
I continue to look for evidence in leading indicators for a weakening in economic data that the combined demographics of USA, Europe and China suggest should occur.
Based on the latest OECD data, we see fairly flat narrow real money and leading leading indicator, neither giving much clue as to future trend, but strong enough as things stand:
And to finish, Citigroup economic surprises for the US. We see economists clearly struggling with data expectations following 2008 in the wild swings oscillating up and down, but gradually getting to grips as the swings range narrows:
If this were a stock we’d be expecting a resolution to the triangle, and as can be seen we may have one. Maybe there’s nothing to read into this, but if anyone has any thoughts I’d be interested to hear.