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I’m on holidays, so just some updated data below.

Sunspots still high, adding weight to possibility of solar max still ahead – modelled versus SP500 here:

29oct20131

Geomagnetism forecast extended for next 3 weeks, overall still flat – modelled versus commodities index here:

29oct20132

FOMC output tomorrow, new moon on Friday, lunar negative period begins the start of next week.

Economic surprises falling in US and Europe, improving but negative in Japan, and positive in China:

29oct2013329oct20134

29oct20135 29oct20136Leading indicators for the US falling:

29oct20137 29oct20138

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Update

Stock indices rose into the full moon, making for a third consecutive lunar inversion. Here is the updated lunar-geomagnetic model versus the SP500:

21oct20131Forecast geomagnetism is fairly benign and we are now into lunar positive fortnight, however the three back-to-back inversions leave me less confident as to the direction of the stock market. Normal service may resume here (i.e. a two week uptrend) but the triple inversion maybe has some significance.

Breadth broke out, as in Advance-Declines:

21oct20132Source: Stockcharts

This development casts doubt on a stock market topping process. However, other developments have added weight to my criteria list for a top (last post), namely treasury yields fell again, commodities indices edged up again, ECRI leading indicator growth fell further, narrow money leading indicators for the G7 have worsened, Citigroup economic surprises for the major nations have all turned into downtrends, bar China which has turned flat. Here are the CCI and CRY commodity indices:

21oct20133

 

Source: Bloomberg

Still tentative uptrends short of momentum, still too early to say if they are going to take off. Crude oil has flattened out but is still in a downtrend for now, whilst gold broke up beyond downsloping resistance on Thursday and held the break on Friday:

21oct20134

Follow through is still required though, so also tentative but more promising.

The result is I am watching the markets at the start of this week: can stocks rally and the SP500 break upwards out of its wedge on good breadth, or is another pullback going to come to pass (earnings revenues disappointing so far but the season only still getting under way); can commodities (particularly gold) rally and gain momentum; can the US dollar break beneath another support level at 79 (expectation has switched again to no QE taper in the near term)?

For a more definitive judgement on whether equities are topping cyclically we need more time, and more developments. On balance I believe we are in the early part of a topping process, pending further evidence. Next we would require a deeper correction ahead to produce a lower low, followed by a rally back to the highs whilst leading indicators fall. Rising commodities would normally play a role too, and if they are in a new uptrend, they need more time to rally some way higher. But all this could take weeks or months to fully develop.

I am also watching the sunspot count as the sun has woken up again. If the solar max is still ahead then we ought to see a sustained period of higher solar activity.

21oct20135

 

 

Cyclical stocks bull top?

Weighing up whether the equities bull market that began in 2009 is topping out here, we can look to fairly reliable historical topping signals, and I can summarise as follows:

1. A topping process, normally months, with reversals of reversals of reversals in a range – yes, up and down legs since May within overall range

2. Evidence of overbought and overbullish extremes (such as RSI and sentiment surveys) РI found this not to be too reliable as an indicator once the topping process has begun, but nonetheless, investors intelligence bears would be one such current reading Рclick here for link

3. Breadth divergence – yes, advance-declines or Mclellan summation index would be two

4. Cyclical sectors topping out before the index top and money flow into defensives Рnope, not happened meaningfully yet

5. Major distribution days near the highs – we have had some 90% down days since May

6. Yield curve flat or negative – since the debt impasse began, treasury yields at the shorter end of the spectrum have indeed inverted, the longer end remains healthy

7. Tightening of rates through rising yields – we have seen a doubling in treasury yields over the last 6 months

8. Excessive inflation – nope, we are seeing global disinflation

9. Rolling over of leading indicators and recession model alerts being produced – combining OECD, Conference Board, ECRI, narrow money and Recession Alert, we don’t yet see this in any meaningful way

10. Market valuation excessive – measures such as the Q ratio and cyclical p/e show the US to be currently overvalued, whilst globally speaking valuations are within normal historic range (however, by my work this is relative to demographics and as such USA and Europe should get cheaper)

In summary, we see some warning signs of a top in progress, but not yet a full set.

To be clear, not all cyclical tops are a process. Some are parabolic manias that end in a spike, with a similar crash down the other side. Examples link here.

However, we don’t see parabolic rises in equities in global stock indices currently, and if this is a top being formed currently, then it is of the topping process type. The 2000 and 2007 tops were topping processes, as were the multiple tops around the 1970s.

What I have found about the topping processes is that when the topping range began, there were precious few topping signals present – as if the stock market were as competent a leading indicator as any other. But when the topping range ended – the last push up – the majority of signals were clearly present. I have highlighted the 2000 (Mar-Aug) and 2007 (July-Oct) topping ranges on the charts below to show this.

First, OECD leading indicators – downtrends in evidence by the end of the topping ranges

14oct20131

Second, ECRI leading indicators – by the end of the topping range had fallen through zero
14oct20133

 

Third, treasury yields – rising prior to the topping range, then falling once topping range in progress
14oct20134

Next we see the topping ranges on the SP500, which if you zoom in, had different shapes in 2000 and 2007 but in both cases there was a last push up to the highs, with many topping signals present, before the bear began. I show here what happened with commodities – both times topping after the stock market. In 2007 commodities only took off once the equities topping process had begun, so there is the potential for that to occur now, but it has to happen without delay if this is a top.14oct20135

Fifthly I show US housing, declining into the market tops. The recent drops in new home sales, related to the increasing mortgage rates, could be similar if it continues.14oct20136

Sixth, US GDP – again clearly in a downtrend by the end of the topping ranges, so should look for the same this time14oct20137 Seventh, margin debt. We see a similar overthrow rally in margin debt recently as per the 2000 and 2007 tops, and again margin debt was in a clear downtrend by the end of the topping ranges so should look for the same to occur
14oct20139 In short my message is this. If this is a topping process in equities, then we should see a further leg up ahead where the bulk of these indicators have moved into clear downtrends. We have certain topping signals already in place, but the rest should fall into place ahead if this is a topping range. It means a golden opportunity to go short would be following a further leg up in stocks against the backdrop of these remaining indicators having turned. If this is not a top in equities, but a consolidation before further gains, then we should break free from the range, and the topping indicators in place one-by-one cease to be.

I want to end by commenting on the global disinflation in place currently. This to me is consistent with demographic trends, and is the threat to a commodities rally coming to pass. If commodities can’t rally as per historic topping order norms, then I would point to the unprecedented collective demographic deflationary trends in place now.

As inflation levels drop in the major indebted economies, the danger is that inflation drops below yields making the massive debt effectively grow bigger. Central banks would then need to intervene further to suppress rates or initiate inflation, perhaps by increasing QE. If, on the other hand, commodities become a speculative rally target here, then inflation will increase but the move would have detrimental impacts on the economy. Central banks would again be bringing out the toolkit. It’s the trap that I referred to before. Can instead the goldilocks scenario continue, of low growth, low inflation and equities rising, with the Fed able to slowly ease out of QE? I personally can’t see it, because it is such a fragile position. Rallying yields or rallying commodities or government pullback on stimulus/spending would likely tip the fragile economy over, and I believe one or more of those will happen in due course. It would take stronger growth to prevent this, and I don’t see it can occur against the demographics.

 

Stock Indices, Commodity Indices

Here is the CCI commodity index and the CRY (Thomson Reuters) commodity index. All I can say is the combined picture for the two still remains unresolved.

11oct20131Source: Bloomberg

The possible breakout and end to the 2011-2013 bear market should be clear to see, but at this point it hasn’t done enough, and a breakdown beneath the horizotnal support could still come to pass. Looking at individual commodities within that things aren’t much clearer. Gold and silver could be basing currently, or it could be weak action before further falls. Crude oil dropped sharply on Wednesday, looking bearish for the commodity indices, and then rose sharply on Thursday, looking bullish: confusing action. Certain agri commodities have broken out of their downtrends, others not. Simply put, we’re just going to just have to wait longer to see which way the complex is heading.

Turning to stocks, US equities have underperformed since the government shutdown, correcting more than other country stock indices. A sharp and broad reversal upwards yesterday made for what looks like a fake-out (failed breakdown) on the SP500 that is normally bullish, and puts the German Dax, Aussie ASX and Hong Kong Hang Seng (as examples) all back flirting with major breakouts:

11oct20132 11oct20133 11oct20134 11oct20135The 90% up-day in the US yesterday, together with the break back into the wedge is typically bullish, whilst acknowledging that nothing has been resolved on US shutdown or debt ceiling, and developments or non-developments in that arena can still buffet the market around. Nonetheless, the broader market action is still showing signs of a cyclical topping process: the volatile moves up and down since May, the divergence in breadth, the overthrow moves in nominal price and margin debt this year which echo 2000 and 2007. Here is the SP500 on a monthly view with a momentum indicator:

11oct20136It is typical at the end of a cyclical bull for the market to lose momentum as buying is exhausted, with alternating and short up and down legs in a range at the top, before selling in earnest begins. The momentum indicator has made three lower highs since May. If this is a cyclical topping process then any further leg up should be weak, with more loss of momentum, more new percentage new lows, narrower market participation. If this is not a cyclical topping process then we should see the opposite: strong rallying with renewed momentum and broad participation, breaking away from the range in play since May. From a technical perspective, looking round major indices such as the Dax, ASX and Hang Seng, it should be clear how such strong rallying could erupt from collective major breakouts. However, I believe the weight of evidence instead supports a topping process unfolding, pending further developments, and as such believe the danger lies in long positions rather than short.

*Update*

Below, gold and silver secular bull market charts (from Robert Williams, hat tip Roger Reynolds). Both have primary uptrend still in tact. Gold has corrected to the 38 fib, silver to the 61 fib (silver acting as a leveraged gold, both up and down). Gold could yet correct further to the 50 fib and meet the rising primary support, circa $1100. However, gold corrected around 33% in 2008 and then resumed the bull, and has corrected a similar percentage this time round. Drawing these factors together, we would appear to be at a key make-or-break point for precious metals, similar to (and playing into) the picture on the commodities indices.

11oct20137 11oct20138Source: Robert Williams / Stockcharts

 

 

Update

I’ve been busy with the shift of focus, towards shorter term trading. I advised recently that a poor year for commodities threatens my year end PnL, so pending the validation or invalidation of solar cycle and demographic theories, I am taking action to try to ensure a good year-end figure. What this means in practice is (i) taking profits on markets where applicable (ii) using shorter term indicators and leverage to bring other positions to profit and then close out and (iii) as the range of markets I am involved in narrows, attacking the remaining markets, plus (iv) trading in and out of other opportunities where I see them. So I am gradually reducing the range of markets I am involved in whilst leveraging up on the remaining markets: a combination of decreasing and increasing exposure to keep risk levels satisfactory. And no longer term strategic positioning any more – that will be resumed following this exercise. It’s an enjoyable challenge, as I haven’t used this approach for some time. No guarantee of success though, and only in the early stages.

It remains to be seen whether the solar peak is ahead or behind us, and if it is ahead of us whether the anticipated correlated commodities peak will occur. It is also still not yet clear whether commodities are changing trend into an uptrend, or still in a bear market since 2011. Below, both commodities index and sunspots versus Sp500.

8oct20131

8oct20132Similarly unclear yet is whether equities are in a cyclical topping process. We see breadth divergences, but not yet deterioration in leading indicators. We see the kind of price oscillation within a range that would mark a top, but as yet no real marked shift in sector performance that would be typical of a top. By my demographic work, we should tip into another global recession and equities bear in due course, but it would be historically typical if this was triggered by tightening: bond yields rise too far (not yet there) or government cuts back on spending/stimulus. On the latter, the US government shutdown, if prolonged, threatens to do the equivalent job of reducing government spending; or the government may agree to spending cuts to raise the debt ceiling (deadline Oct 17th); or the Fed may taper QE (next FOMC output Oct 30th). The near term prospect of a taper looks less likely with the government shutdown potentially shaving off GDP, but it remains out there as unknown, and on that note, commodities typically perform historically (as shown in the first chart above) once equities have topped and the economy has topped, once rate cuts are underway. Clearly that isn’t our current scenario, which adds to the uncertainty over commodities. Plus, again referring to demographics, we have an unprecedented collective global downtrend in place which could potentially overwhelm any possible commodities/inflation rally. Which brings me back to the start: nothing has been validated or invalidated yet in terms of solar, demographic, commodities, equities, bond yields and government spending/stimulus. Gradually developments in all these areas will make it clear, but pending that, my focus is making money shorter term.

So to the near term. Below I show the position of the SP500: at support in a rising wedge. That rising wedge could spell a breakdown ahead, but first a bounce may be in order.

8oct20133The US government shutdown and debt ceiling uncertainty is affecting market sentiment, but news of a likely agreement could at any point provide a relief rally. If the impasse remains however, then the next two weeks are the negative lunar period which takes us up to the debt ceiling deadline and could therefore keep downward pressure on stocks.

Below is the latest geomagnetic-lunar model versus the commodities index. The geomagnetic trend has flattened out and has a positive edge looking out over the next 3 weeks. Indeed we are into the last quarter of the year, where we typically see more benign geomagnetism and positive seasonality for pro-risk (which I believe are correlated). If equities are not yet making a cyclical top, then there is both a backdrop and a time window in which to rally away from the price range of the last few months.

8oct20134The US dollar is flirting with major breakdown, but arrives there oversold and overbearish. A breakdown would add weight to a commodities rally, so I continue to watch. Crude oil is typically the main driver of an inflationary commodities rally and looks to have formed a short term low over the last couple of sessions. I am watching that too, as further drops back into the range of the last couple of years would cast doubt on commodities making a meaningful uptrend.

*Updated short term lunargeomagnetic model versus SP500 10 Oct*:

8oct20135