Stocks ended the week on some buying. We are approaching this coming Tuesday’s new moon and Thursday’s ECB meeting, at which we should expect some kind of QE or new programme of action, given the Swiss central bank’s pre-emptive action this week. Therefore, I expect a little more strength in the first half of this coming week and then a sell-the-news resumption of the equities downtrend, which ought to be the definitive breakdown in stocks, as we head into the geomagnetic low of March/April.
The Dax made a new high on Friday, but this has to be seen in the context of a fast-weakening Euro, and the majority of other global stock indices still dictate the overall peak around mid-year 2014. Shown below are other European indices in comparison to the Dax plus US stocks, together with breadth, volatility and junk:treasury bonds.
Here we see the deflation problem Europe has to address with policy response.
US earnings season is underway for Q4 2014 and is currently reporting a blended earnings growth rate of 0.6% and a blended revenue growth rate of 0.8%. This the weakest in some time, and earnings forecasts for 2015 are also weak, due to the combined impact of rising dollar and tumbling oil. Meanwhile, economic surprises for the US are dropping towards the zero level and leading indicators for the US continue to flag red:
Therefore, supports for the bull continuation have been significantly weakened.
Here is combined smart and dumb money for US stocks: a rare lop-sided agreement that has been a marker of previous major peaks:
Similar topping flags have been raised throughout 2014 but at this point we see a more united degradation in leading indicators, negative divergences, earnings, and cross-asset action. Below we see how December to January has produced intensifying developments in government bonds and currencies.
Industrial commodities have also seen acceleration to the downside in that period, whilst gold has taken off. All these developments make it unlikely stocks can continue their levitation, and this divergence in growth-dependent commodities versus safe haven commodities ought to continue. But what about agri/soft commodities? Largely unloved, but climate could give them a boost. 2014 ended up as the hottest year on record:
Perhaps when the US dollar finally turns, agri may attract buying interest. Positioning in the US dollar remains extreme, whilst the Euro is showing signs of capitulation. Again, I would the see ECB meeting this coming week to be the sell-the-news event.
In summary, developments are now much more supportive of stocks breaking down and gold breaking up. Post-solar-max, degradation in leading indicators and earnings, sharp moves in commodities and currencies, and a lot of data pointing to a mid-year 2014 ‘real’ peak. Back in 2008, stocks and leading indicators were tumbling whilst commodities levitated, but commodities could not levitate for long under those circumstances. I see the same here in reverse, with the cross-asset and cross-indicator breakdowns the prelude for the collapse in equities.
I previously looked at the ‘second chance’ peaks of the similar examples from history, e.g. Nasdaq 2000, Nikkei 1989, Dow 1937. They all showed a main peak followed by a lower high (failed) peak, which was then the trigger for waterfall selling. Looking at stock indices charts for 2014-15, we don’t see obvious such second chance peaks. The most parabolic of the indices was the Nasdaq 100, but this has produced more of an up-and-down range over the last couple of months, than a clear second-but-failed attempt at the high. So, we need to see price develop further to assess, but the picture may be one of a topping price range instead. It does not alter the likely subsequent collapse, which is already written in highly lopsided sentiment and allocations, extreme leverage and the post-solar-maximum rug-pulling.