Break

Dear all, it’s time for a break from the blog.

I understand that even as a free blog there is a kind of duty to the visitors so I apologise for any disappointment. I am very appreciative of the regular readers and contributors.

I need a break from punching out my postings and administrating the site and will be back in the future. Until then you know my views and as most of my stuff is medium to long term those views are unlikely to change, barring any radical developments. All the material on the site will stay where it is.

I wish you all the best.

John

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Sunday Charts

Self-explanatory I believe, so no comments.

20nov1

19nov1

20nov3

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20nov22

20nov20

Clear interest in physical gold and silver which suggests the turn should be near. For stocks it comes down to the short term waves within the overall picture of a major top. I can’t rule out a Xmas rally and no fresh falls until Jan, which would mean the US large cap indices all hit new highs (whilst not invalidating the bear). But I think the probability lies with this having been the second/retrace wave of a bear and that we tip over as soon as this coming week.

19nov20 sc2

Let’s see. Have a good week.

Approaching Resolution

The Wilshire has been repelled at the 200MA and the 200MA is turned downwards, as it was in post 2000 and post 2007 bear markets:

15nov1

Source: Stockcharts

The only exception in the last 20 years was 2011. The 200MA turned downwards, the market was repelled but shortly afterwards bounced again and burst back through.

The SP500 didn’t break out of what could be a large rounded arc top.

15nov3

Source: Puru Saxena

Breadth and volatility continue to show long negative divergences like into the 2007 peak.

15nov2

We can see 2011 wasn’t the same: full breadth into the peak and not the same complacency.

Risk and other major indices are still flagging.

15nov5

15nov9

15nov15

Source: John Kicklighter

So I still think we are at the equivalent yellow circle, until all these indicators start to behave otherwise.

11-11-2015 08-05-06-2

There is still the possibility we just made ‘second chance’ which historically led to a very rapid sell off:

stars

Failing that, then the yellow circle above back in 2008 or a similar point in 2000 saw more back and forth in an overall downtrend. Either way, the key would be that we don’t revisit the early November high again.

The solunar model shows a decline into late November before a bounce.

4

Source: Chris Carolan

Of the near term indicators, $CPCE has reached a level that could suggest a bounce here.

15nov10

Source: @NathanAlanLey

But note how the boxed range shifted higher since July which could mean $CPCE goes higher yet.

Insider action has reverted to the buy zone.

Both 1998 and 2011 saw a second (or more) $TRIN spike (fear capitulation) which hasn’t occurred in 2015. It doesn’t have to, but just one more potential clue.

$SKEW remains particularly elevated. It doesn’t have a great track record of calling the outsized move that it is supposed to predict, but again, it may be a clue.

15nov17

Economic data remains weak but mixed. The overall global situation is fragile, and I maintain just the stock market, with its wealth effect, is keeping disaster at bay – for now.

3

Source: PFSScreen Shot 2015-11-09 at 18.12.22

Source: OECD

Then we have a series of anomalies occurring in the financial markets which may collectively spell liquidity troubles. Corporate bond inventories have gone negative, repo rates are fractured, swap spreads have gone negative. These are fairly unprecedented so no-one seems to quite know what they mean, but given the distortions that have built up under ZIRP and QE we shouldn’t be surprised if another systemic crisis was to start to take hold in some area.

Lastly, gold still looks like it may need a final washout low, due to open positioning and put call ratios. My guess is we see the US dollar break out and take off again here, as a bearish development for the overall markets, and gold gets its final sell off in response, before breaking into its new cyclical bull, as equities move decisively into full bear market.

Just The Facts

US earnings: blended earnings growth stands at -2.2%, compared to an expected -5.2% before reporting began. So that’s quite a beat, and may account for some market fuel, but still negative. Blended revenue stands at -3.7%. With meagre sales revenues, companies have turned to buybacks and M&A. Take out the effects of oil and the dollar and earnings look better. The question remains whether oil and dollar are signs of creeping disease or whether they are more isolated issues.

Weak oil, weak commodities, strong dollar and global manufacturing flirting with recession. These are the main problems in 2015. As a result, emerging markets with more reliance on manufacturing or commodity exports are in trouble. Some refer to this as the 3rd phase of the financial crisis (P1 US financial system circa 2008, P2 Eurozone circa 2011, P3 Emerging markets 2014-5). The question is whether the world economy can recover here again and ease us away from those issues.

Disinflation remains the dominant theme. Deflation is a threat, but if we take out energy again then prices have held up better. So for now, CBs are not reaching their inflation targets but nor are we slipping into deflation. Somewhere in between.

The strength in 2015 remains in services, particularly US services. As we approach the end of 2015, leading indicators for the US have weakened whilst they have improved in China and Europe. Maybe then we are going to see another rotation in outperformance, keeping the global economy and equities supported. Or maybe the negative feedback looping is now too entrenched. If the US dollar is now kicking off a new leg higher then we are likely in for more trouble, so something to watch.

The stock market leads the economy, not the other way round. We can summarise the above by saying that the global economy is fragile and therefore that how equities perform from here is likely to dictate whether we tip over the edge into a deflationary recession or stay in disinflationary weak growth. The situation remains unclear for equities. Neither bulls nor bears can declare victory at this point. Evidence in indicators suggests a topping process has been in progress for 2 years. Torturous for both sides. Plus, we can’t rule out the prospect of an even longer sideways range trade.

By demographic trends, the age of the investor is over, at least for the foreseeable future. This is echoed in a bunch of charts that extrapolate future returns based on current valuations, market cap and more. They suggest the market is going to flirt with zero returns over the next decade.

7nov15

Source: AmericanAnnuityAdvocates

Equities struggled to make any more headway in H1 2015 with valuations in the 97th percentile historically, sentiment and leverage at all time record extremes, allocations to equities similar to previous major peaks. With a shrinking pool of buyers under demographic trends, there is a question mark over how stocks could now resume a bull market higher from here given the market appeared so saturated earlier in the year.

Here we see Rydex traders were at extreme allocations earlier this year equivalent to the 2000 mega peak, and how the recent rally has brought them back to fairly extreme levels.

7nov1

Source: Stockcharts

They appear to have been playing the Biotech mania ($IBB). Biotechs are valued at 7x price to book, which is the same as the Nasdaq was valued at, at the 2000 peak. Can Biotechs and Rydex traders resume upwards and make even greater highs here, to beat the biggest mania of all time?

The Dow Jones World index appears to show a topping process that ended in May 2015. If that is so then we ought to be on the cusp of a new leg down.

7nov4

Stocks to bonds and stocks to dollar continue to show a peak in mid-2014, equivalent to Jan 2000 or June 2007 as a lead for a bear market.

7nov7

In both that chart and the Dow World above, new highs are required by the bulls to negate the bearish patterns. New highs are some way higher, meaning that more US large cap indices could go make intermittent new highs here, without invalidating these bearish charts.

However, levels of insider selling and puts-calls suggest the rally in equities is unlikely to get much further.

Screen Shot 2015-11-07 at 10.54.57 Screen Shot 2015-11-07 at 10.54.25

Source: Barrons

Divergences in both volatility and credit spreads also cast doubt on equities breaking out of their overall topping arc.

5nov5

5nov10

Cutting across to gold, it suffered a fresh collapse this week, with commercial positioning having moved to short. As the second chart below shows, it may need to fall further yet, to new lows, before a bottom is found.

7nov70

7nov14

Source: The Daily Gold

This would fit with the new up leg in the US dollar which appears (tentatively) to have kicked off.

Regarding the sun, October was a period of low geomagnetism and increasing sunspots, both supportive of the rally in equities. Geomagnetism is back in progress the last several days and should this persist then it should act as a headwind to stocks.

7nov19

Source: Solen

All those indicators that I previously pointed out as peaking mid 2014 with the solar max remain just so. Stocks:bonds, stocks:dollar, vix (inverted) and credit spreads can all be found further up the page showing a June-July 2014 peak which is still honoured. So, for now, the idea that the mania peaked out with the solar max still has a multi-indicator case.

In summary, the big picture suggests equities are going to struggle to break out bullishly, both in the near and longer term. Equally, however, stocks have been bid back up strongly off the October lows. Therefore, we remain in limbo. Near term indicators suggest stocks should be ripe to tip over again. Meanwhile gold may need to washout further to new lows before finding a bottom. Those two don’t seem obviously compatible, unless the US dollar rallies strongly, which could well be initiating.

Lastly, global liquidity has turned negative as central banks have spent to defend their currencies and propped up their economies. The last time this occurred was 1980 to 1985.

5nov1

Source: Nowandfutures

But what saved our fortunes back then was the upturn in collective demographic trends, shown here:

7nov90

Now note the collective demographic downdraft that is in progress from here until mid-century. This suggests central banks are going to have to keep defending their currencies and propping up their economies despite massively ballooning debt and shrinking reserves already. It is very hard to see how the world can get out of this trap.

Selective Rally

It has been a strong, unforgiving, bullish rally – but – only in select US large caps.

For the Dow Jones World index, junk bonds, Biotech and US small caps index the action better resembles a dead cat bounce.

1nov1

Source: Stockcharts

The FTSE, HSI and crude oil similarly show weak bounces.

1nov2

Here we see it looks much stronger on US large caps, but even there under the hood breadth has remained in weak longer term downtrends.

1nov3

The NDX has double topped but on just half breadth. Therefore, even in the stronger US large caps, longs are doing well only in select stocks.

Another angle on the same is the equally weighted value line index which shows a particularly meagre rally.

1nov7

In short, the ‘strong’ rally in October has seen the thinnest participation yet in both the US and globally.

The model of similar solar lunar years from the past predicted a rally throughout October to the start of November. Now we are at that point, various indicators which had become particularly bearish (contrarian bullish) have now reversed back.

1nov6

Source: Callum Thomas

Therefore, we may be in a position to rollover again imminently and maintain the bear market in equities.

However, there is little wiggle room. The SP500 is back at the major topping arc.

1nov5

Source: Northman Trader

If strength persists from here, even in just select large caps, then this would break upwards beyond the arc, the NDX would make a new high, and the danger then would be that the other weaker indices start to attract a bid again.

For now though, the opposite holds. The persistent weakness in all areas beyond select US large caps suggests they are the last pillar to fall. Continued weakness in economic surprises, ECRI leading indicators, narrow money leading indicators and earnings (less negative than expected for Q3 but still negative, and still predicted negative for Q4) provides no thrust for a renewed move higher. Meanwhile, negative feedback looping around the world persists and until we see a break in that pattern then the likelihood remains of both bear market and recession, globally.

1nov9

Source: Callum Thomas