Stock Indices

Major global stock indices are attempting major breakouts:

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17se4The Dax broke above its recent range yesterday, and the FTSE is flirting with its all time highs. The US indices are further advanced, having already made and held overthrows earlier in the year, and whilst the SP500 and Dow could still feasibly be carving out a topping range, the Nasdaq 100 shows no signs:

17se6Indeed, recent strength in tech has cast doubt on the transfer from early to late cyclicals, which is one topping process sign normally:

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Source: Bloomberg

Homebuilders, another early cyclical, have also pulled up sharply. The other two shown are materials and energy sectors, late cyclicals, which over the last week have underperformed relatively. This casts some doubt on the topping process.

Recall we saw some topping signs present, and some absent. One topping signal was breadth not making a new high in August with the SP500, as shown:

17se7Source: Stockcharts

Now if breadth rebounds and takes out that double top it would negate this, and I’m wondering whether that’s what may now occur. Following the FOMC output tomorrow, we have 2 weeks of positive lunar pressure with a positive geomagnetism forecast to accompany. As per my speculation, I wonder whether taper-light with supportive wording will be the catalyst for a breakout in global indices and a 2 week rally, pushing any topping process further out in time.

It’s a difficult call because, to be clear, there are indeed some warning signs. If European and Asian stocks are turned down away from those major resistance levels, and the SP500 and Dow turn back down into their ranges, then technically a topping process will look more compelling. Margin debt is frothy, put/call ratios are frothy, certain indicators of Martin Pring are on the edge.

But, new highs – new lows do not signal a top at this stage. We don’t as yet see excessive rises in oil or bond yields. Leading indicators continue to point to broad sufficient strength into year end. Economic surprises for emerging markets have turned positive. In short, I am wondering whether a topping process in equities is going to be postponed for now, and we see another breakout rally first. If we see degradation in leading indicators, sharp rallies in oil or bond yields, or the US pulling back too sharply on QE and government spending (debt ceiling) then I would feel more confident predicting a top. For now things look too benign. Of course the Fed could surprise us tomorrow with an aggressive taper programme, but the continued relative historic weakness in the economy does not support it.

I side with the historic norm and predict rallies in oil (inflation) and bond yields will tip the economy and equity markets over in due course, but at the moment neither are threatening enough. If that scenario doesn’t occur then I predict demographics will tip the economy and asset markets into deflation, with the help of the Fed pulling back on QE/spending. So, the former would be an inflationary tipping into recession, the latter a deflationary turnover. For now though, whilst there are warning flags, we don’t appear to be sufficiently down either path to tip equity markets over. Your thoughts?

 

 

 

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39 thoughts on “Stock Indices

  1. Dear John,

    thank you very much for your thoughts!

    Regarding the German DAX: please keep in mind that it is a performance index (incl. dividends etc). The “real” DAX would be a DAX, comparable to the DOW: we call it K-DAX; K=Kurs. Enclosed you find a picture for the K-Dax. It hasn’t broken out yet. Kind regards, Felix

    PS: picture taken from wellenreiter-invest

  2. I love your posts but your analysis gets a bit convoluted for me. I like to watch two specific stocks as indicators of US equities. One is GE which does well when the world is buying. The second is Phillip Morris which does well when the equity market is subsiding or fear increases. But I haven’t been watching them in a rising interest rate world, so going forward, who knows.

  3. “Deeper dimension markets like volatility, correlation, and volatility-of-volatility are important because they measure our confidence in the financial representation of economic reality.” – Christopher Cole of Artemis Capital (Vega Fund Strategist)

    Here Chris labels 4 dimensions (layers):

    1. Economic Reality
    2. Financial Markets
    3. Volatility and Correlations
    4. Volatility-of-Volatility

    There are productive ways of measuring the 3rd and 4th dimensions (and combinations of). For instance, the $JCJ / $VIX or $KCJ / $VIX ratio typically correlated to S&P prices. (Usually look at 60 day/ 60min). $JCJ and $KCJ are correlation indices (see CBOE for more details) and we all know what the VIX is. VIX spreads like $VXV – $VIX also are telling market signs.

    The same can be be said for the $VVIX / $VIX ratio where the VVIX is the implied volatility of the VIX (or volatility-of-volatility). One can also look at the $SKEW index as a barometer of the “confidence in the financial representation of economic reality.”

    Why does this have any relevance to the post? Because while we are seeing some positive breakouts in price (dimension #2), the dimensions beneath are showing cracks in confidence as these ratio’s are diverging from SPX price, which they are normally correlated positively with.

    This is NOT necessarily an indication that a top is in or prices must correct, but in my history of watching “deeper dimensions”, it typically is a sign of real, constructive fear. Whether this fear manifests itself in something like a pullback, a top, or a crash is not for me to call.

    Some platforms allow you to look at these ratios and spreads. It is a great tool to add to one’s arsenal. Again, see CBOE for more details on JCJ, KCJ, ICJ indices, the SKEW index, the VVIX index, and the VXV index.

  4. Excellent analysis john.I believe markets are not yet ready to fall and may extend their upmove with big volatility into early 2014 before the real fall starts.We still haven’t had a disbelief rally nor the exuberance that accompanies tops.Even Shanghai looks all set to breakout soon along with all other world markets.

    1. Many people, like you Robert, keep banging on about how QE and how this will be inflationary, or worse still, hyper-inflationary. This is a load of nonsense my friend and you really do need to start reading some books and conduct some further research. There will be no hyperinflation because I imagine that you assume that government will honour its debts and print money over the long term. Looking back in history, governments always default such as in the Great Depression. There will be a switch to precious metals but that’s only because currencies will become volatile and unstable, and markets will lose their appetite for the perceived risk. But the US will never enter hyperinflation. Their inflation will always be exported until the day they collapse the dollar.

      1. I do not have a view on this =). I am just expressing my feelings and some people’s feelings that probably cause them to want to buy stuff. I think the future is uncertain and nobody knows what it holds. Ultimately we will collapse but when or where or whatever I do not know. I think my feelings are irrelevant too and other people’s feelings too. Just follow price. Nobody really knows what will happen. It is impossible unless you have a machine like Xavier and can read all market participants thoughts in real time. Then you could know what would happen. Unfortunately, humans are not that gifted. Trade a system. Stick to it. Ignore the noise. =). Key is to be agnostic about assets. To not get married to them or views on the markets. Nobody knows. Not even Big Ben or the heads at Goldman etc. We can not predict the future. It is uncertain. Accept it. Find an edge use it. Apply good money management – FOCUS on MONEY MANAGEMENT instead of entries. You can enter randomly and make money. But stick to the same thing unless the edge disappears (which also may just be temporary and then you need to suffer a bit). We do not want that because it is not fun so everyone runs around looking for a new system, a new hot stock, a new thing someone can sell them. A better analysis or whatever to easy your pain and heat in the position or fear about the future. That’s why there are so many people working on Wall Street not making any money but they are there to help investors mentally. Hold their hand. They are all psychologists =). The FUTURE is UNKNOWN and ANYTHING can HAPPEN but HUMANS can NOT predict.

        Keep to the lunar edge, refine it get your PhD in that =). Enough posting. I am gone from this forum. Good luck to you all =).

  5. No taper: stocks and commodities rocket, bonds rise, dollar falls. Bonds were due a rally having reached extremes of oversold and overbearish. The dollar is now on the cusp of a major breakdown, which could help deliver the meaningful commodities rally that I seek. Gold has a better case again, plus a higher low, so let’s see if it can now go make a higher high above the late Aug high, which would then look much more healthy. Stocks were already generally overbought into yesterday’s leap, so the possiblity is of a consolidation soon. I was wondering whether they might sell off sharply after the initial rally, on panic about the economy, but so far not. As per the post above many were at important breakout levels which have now been realised, so if they can maintain a close above again today (with Fed fully digested) it will look good for ultimate further gains. There remain some breadth divergences, e.g. new highs and mclellan summation, despite yesteryday’s high volume rally, so those are the warning flags. So, for now, I am still tentatively watching the dust settle, but if those breakouts are cemented into the weekend then I will look for the 2 week uptrend in pro-risk that the lunar geomagnetic backdrop should enable.

  6. What economy are you talking about? The “economy” is only a social construct. Then there are financial markets that are independent but that politicians try to use in order to have power. Stop looking at it in reality terms. It is a GAME.

    Do not second guess the system. Full moon is a buy. If it does not work out take a small loss. I might show you examples where we rise into a full moon and then rise further. That is called a trend. =). But yes probability might be higher for buying stocks, indices that are not overbought but you need to test that statistically or it is just market lore and BS fucking with your brain.

    1. Robert, you have an excellent command of the English language and can express yourself really well …..without the need to use foul words:-)). Please refrain. Thank you.

      Your ideas are provocative and very enjoyable to read..

      1. Sorry for the bad word but that is what the market does. It screws with your brain. For me the market is a big prostitute that is out there to literary screw everyone mentally and financially. Consistency is key in my opinion. And again I am very thankful to John and his work. The only thing I am arguing a bit with is the introduction of stuff that we have not tested. It is unnecessary. Just follow the edge =). If we can test it then introduce it but otherwise it will just paralyze and conflict and destroy the good edge. Again no offence. Everyone is free to trade his way. We are just posting and exchanging views. I think if everyone agrees then we all do not learn anything from eachother but keep being sheep in the crows. And again many thanks to John and his work and I want to see him succeed.

  7. Do not you think that the FED has technical analysts and astrologists on their payroll? I mean they did the geomag study for you so they have all the info or even sold you the info ;=). If it is obvious – it is obviously wrong. Be against the crowd.

    1. If your answer is some rationalization then you are not looking to make money but to be smart and there is a place called YALE for that. Be a trader not a YALE student.

    2. Hi Robert
      Your comments have got very agressive.
      But you posts make interesting reading.
      Are you saying only trade the new high (breakout)?
      regards
      bob

  8. Sorry if anyone took my posts as offensive. I just trying to make a point and that is to keep to the system =). Second guessing destroys your edge and it messes with the head which makes it hard to keep trading consistently and successfully. It causes stress. Trading should be without stress except for handling your draw downs. But if you change and second guess and think and etc and but and reisk and etc you become paralyzed. Sorry if anyone took offense. The lunar edge is their. Stick to it. What are you afraid of?

    I am not saying to trade any particular system. You need to trade your system but often we complicate and higher highs is better than lower lows. Turning points are good too but keep consistent. If you change all the time then your results are random and you will just suffer mentally. I like higher highs for trading (it is sort of logic) or investing in crashed stocks that are turning i.e. value investing for the long haul.

  9. Robert’s expressions about trading systems and the markets may not be pretty; but they are accurate, imho. Even he agrees (I think) that to be consistently successful trading one must not only have a self-designed system (based on personal beliefs) but the system must also have an EDGE. Otherwise we could all get rich in Vegas.
    (:-)

    1. I think that more important than a system is the knowledge of the market, of our instrument and the way it moves. When we got all that (and can get it only from years of experience) then we will see too many strategies and sadly we would need to choose only those that suit us (it’s better to trade less instruments and less time, – increasing size only). There is at least 10 drives a month of at least 100 DJIA points, we need to catch one or two to make a good living. But we need to know the difference between drive and trend, see how and when they occur. And also have imagination : todays market are plain vanilla sailing, compared with a sideways chops of 300 points in August 2011…So any working black box out there must have a ‘scale out and adopt’ mechanism otherwise I’d have only human ‘adversaires’:) There is no tool, ‘in-chart’ algorithm that works all the time in all markets. Markets differ too much.
      I got ‘bearish’ on Wednesday when I heard on radio that the markets make new all time highs (big hands want to dump some) and the current downtrend started on Wednesday 20.00 UK time, with the last trading hour on a news day. Guessing the approximate size of a trend day, and knowing that trend day should close at the opposite end, I saw my DJIA target at 66. Bang. Now some sideways days are welcome, we hand only ‘3 high drive’ days in September.

  10. Had someone else made the post I might have perceived it an aggressive attack, but Robert has posted enough to know him. And I agree there is something in what he is drumming. When I think back to the early years and how I made money despite limited knowledge and some unreliable market tools, it was largely the same in practice: having conviction on one side of the trade and using money management to gauge when to increase, when to cut back, when to take profits etc.

    1. Thanks Yogi. It is indeed of interest, but I think he has it wrong.

      There is a long term correlation in global temperature variation with fertility (as a result of long term variation in geomagnetism and sunspots), which produces demographic swells and contractions.
      https://solarcycles.net/2013/05/22/sunspots-geomagnetism-global-temperature-and-birth-rate/

      Demographics correlate with trends in price inflation. A swell of people aged 15-20 entering the workforce works up price inflation through spending, whereas more people entering old age relative to the work force is disinflationary through saving and disinvestment.
      https://solarcycles.net/2013/06/23/demographics-disinflation-and-deflation/

      The unprecedented collective demographic downtrends in USA, China and Europe make it very hard currently and over the next few years to sustain price inflation, as evidenced in no improvement in money velocity / multiplier measures. Aside speculative rallies in commodities, the remainder of this decade should be price deflationary – not price inflationary as he believes – due to demographic trends put in place many years ago.

      He has made an ‘assumption’ that global cooling would reduce crop yields (making for price inflation), when in fact the research out there shows that it is shorter term weather variation rather than longer term temperature variation, that is the key influencer of crop yields.

  11. A read a great book last night. Could not put it down. It is called The Trading Tribe by Ed Seykota. It is not that much about indicators or systems but about psychology and about getting in terms with your own psychology that inhibits you from following a trading strategy or problems in personal life. Ed Seykota says that one should experience once feelings and celebrate them so a bad word from time to time is good =). The book was a bit expensive but I think it was great. It takes a bit of experience in the markets and stuff to appreciate it because it is just psychology and a bit about running a trading tribe group. I think it is good to celebrate our feelings on this site. I realized I have a lot of k-nots that I need to deal with as well as most people here on the forum.

    He says some good things:

    “I love theories about feelings. Lots of good theories about where they came from, who is creating them, why I want them, why I don’t need them, why I am more powerful, how to control, when they should appear, when I should suppress, so many profound insights have I.

    What a novel idea that none of these theories matter.

    Just embrace the feeling.

    This is sort of like theories about stocks, P/E ratios, earnings expectations, insider buying, book value, analyst reports, sector analysis, economic data, Fed pronouncements, interest rates. What a novel idea that none of them matter, just embrace the trend.

    Liberating!

    Chop wood. Carry Water. Place order. ”

    Good bless you

  12. Ed Seykota says: “There is no such thing as Causality, blame or guilt. We realize that we cannot predict the future. In fact, we do not even think the future exist. We do best to control risk, go with the flow of life and cut our losses when things go against us. Causality, however provides the philosophical basis for Western Civilization. In our causal world, we pin blame on people who stray outside the rules and we punish them. Absent the belief in Causality, our Western legal and political systems unravel. Causality provides the basis for “Fundamental Analysis”. Fundamental Analysis is an approach to investing in which the analyst forms an opinion about what factors are the really important causes. He then proceeds to spin a story about how these causes are bound to make something happen in the future. The Fundamental Analyst typically makes a recommendation that the future looks bright for some company and for the entire industry sector as well. Some of the problems with Fundamental Analysis are (1) determination of cause is, at best, arbitrary, ambiguous and impossible, (2) the future does not exist, (3) the current price may already discount the fundamental story and (4) trading on fundamental model does not afford any risk control”.

    1. Grabbing some TSLA into the pos lunar phase. Are we breaking higher highs? Yes. Chop wood. Carry water. Place orders. Stop orders in. Go for a walk.

    1. Well Friday’s close is particularly frustrating to make that call. Most stock indices fell back to around their breakouts, retracing Wednesday’s gains but no more, leaving both options open: either post Fed digestion reading of economy as weak, plus lunar inversion, plus some breadth divergence, means stocks now break back down beneath breakout (revealing fakeout), making a topping process look much more compelling – or – easy money and continued growth and positive leading indicators plus lunar positive period beginning this weekend (plus stocks were overbought) mean we bounce from here and resume the bull above the breakout level. Same applies to commodities: it doesn’t look good having retraced all Wed’s gains, but if the markets were blown off course by the surprise, they may have just retraced the surprise element. We’ll see this coming week.

    1. we are at/near solar maximum, and geomagnetism tend to peak after solar maximum.
      High geomagnetic activity correlate with warm weather… so my bias is for a (relative) warm winter.
      But when the solar cycle starts to weaken significant, and geomagnetism has peaked… the bias will be for colder weather

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