Capitulation

Posted on Posted in Macro, Stocks26 Comments

At yesterday’s close, Capitulative Breadth hit 7, so into the 7-10 zone that historically brought about a bottom.

Nymo is into the extreme oversold zone, at -100, and we saw a large daily volume candle yesterday, both signalling a bottom.

Source: Cobra / Stockcharts

This morning in Europe pre markets open, the SP500 and Nasdaq have hit the lower channel lines shown here in Alphahorn’s charts:

Source: Alphahorn

If we don’t bounce today then I suspect we will crash, make a cycle inversion into this weekend’s new moon, and then rally on Monday, but my expectation is rather that we print a daily hammer candle today, from this out-of-hours (for Europe and US) selling, due to the indicators above, and shared yesterday and the day before. I have added to Hang Seng longs this morning, and will buy more pro-risk if we fall further today or even crash. I maintain these are golden opportunities for a significant bounce as we print one oversold or overbearish extreme after another.

On the macro front yesterday, US leading indicators came in at -0.1, but Korea a woeful -1.5. If LIs turn down en masse then the picture changes, so let’s see. US economic data also disappointed yesterday and with Euro CDSs continuing to rise, global government and central bank intervention draws closer, both out of necessity and likelihood.

Equities Update

Posted on Posted in Macro, Stocks13 Comments

Yesterday, Capitulative Breadth moved up to 5 from 2 (with 7-10 historically marking bottoms for stocks).

The percentage of Dax stocks above the 50MA is zero, making for an oversold extreme.

Source: Indexindicators

Down pressure for US stocks has reached a historic extreme, which has previously led to significant bounces within a couple of days.

Source: Sentimentrader

SP500 bullish percent over put/call ratio is down at the levels of the 2009 and 2010 corrections, but not as deep as 2011.

Source: Stockcharts

The message is the same: a bottom or a bounce should be close. I reiterate my expectation that leading into and around this weekend’s new moon upward pressure should emerge. So I foresee a bounce lasting into the middle of next week, and thereafter we shall see.

This weekend is also a solar eclipse, and it gives rise to a subsquent Puetz crash window, June 4 – June 13. Puetz crash windows I have previously found to be hit and miss, but wanted to put it on the radar. With a rerun of the Greek elections scheduled for June 17, some Greek citizens withdrawing deposits from banks, and Euro CDSs still climbing, there is clearly fuel for fear to overwhelm the markets. Based on recent history though, governments and central banks will intervene in any significant escalation, supporting markets. If the situation in Europe is again diffused, then positive leading indicators and a further tick up in economic surprises will likely return the fore, fuelling a period of mean reversion for pro-risk away from oversold and overbearish extremes, and out of the safe havens of treasuries and the dollar.

On The Attack

Posted on Posted in Bonds, Commodities, Currencies, Macro, Stocks23 Comments

It is a contrarian’s dream, right here right now. These are the opportunities that make me lick my lips: oversold and overbearish extremes. This morning I have added long Hang Seng, FTSE 100, silver, oil.

Starting with equities, NYSE oversold extreme has historically marked bottoms:

Source: DecisionPoint

Put/call ratios at levels that have historically marked bottoms:

Source: Decision Point

Source: Cobra / Stockcharts

AAII sentiment at bearish extreme, plus high percentage of II sentiment neutrals which has historically siginified a trend change. UBS here highlight the lack of high volume capitulation. Yesterday gave us a voluminous daily candle, but capitulative breadth only reached 3. It is possible today we could see that capitulation, followed by a hammer v-bounce. Let’s see.

Source: UBS

Nymo positive divergence. Again, UBS’s chart, with their interpretation that we will see a significant bounce then further downside. I repeat my point that whether you side with my longer term projections or not, a period of mean reversion will follow when pro-risk hits oversold and overbearish extremes.

Source: UBS

Sentiment is at bullish extreme for the US dollar. Euro-dollar RSI is in the extreme oversold zone.

Source: Profitimes / Sentimentrader

The USD longer term is now at horizontal resistance.

Source: James Craig / Stockcharts

Gold sentiment is extreme bearish.

Source: Profitimes / Sentimentrader

Silver sentiment also, levels that histrorically marked bottoms.

Source: Sentimentrader / Profitimes

Rydex precious metal allocations are at extreme lows.

Source: Jordan Byrne / Sentimentrader

Gold miners are at oversold and overbearish extremes.

Source: Jordan Byrne / Sentimentrader

Gold commercial and open interest is at contrarian extreme.

Source: Jordan Byrne

Commodities are at long term historic low valuations compared to treasury bonds.

Source: James Craig / Stockcharts

Treasury bonds are at all time highs, paying negative real returns.

Source: James Craig / Stockcharts

Various agri commodities are in the overbearish extreme sentiment zones, including orange juice, coffee, wheat and cocoa. The global temperature figures for April came in at the second warmest on land since records began. Dry weather gave agri commodities a push up yesterday, counter to the pro-risk sellling, as harvests are likely to be affected.

Source: NOAA

Lastly, the macro front. Leading indicators point to growth ahead, with the exception of Euroland.

Source: Conference Board

Economic Surprises have stablised in the last couple of weeks for the major economies. Leading indicators suggest we may see them turn up ahead.

Source: Bloomberg

But the overarching issue currently is Greece and Euro debt. Spanish CDSs are at a record and still climbing, plus Greece is going back to the polls with a probability of installing a government that does not agree to the bailout terms from the ECB. The fear is that Greece is expelled, makes a hard default and brings down major European banks.

Source: Acting Man / Bloomberg

I am not belittling the Greece and Euro debt issues. But we have been here before, the last 2 years. Politicians will take action, central banks will take action. The oversold/overbearish extremes scream opportunity, to me. If the Greece/Euroland saga rapidly spirals into the worst case scenario, and pro-risk plunges much further before reviving, then I will take some account pain. But I always keep powder dry. If we do plunge much more overbearish and oversold I will attack again lower down. But I believe the bottom is close at hand.

More Opportunities

Posted on Posted in Macro, Stocks50 Comments

I’ve added to long stock indices positions this morning (SP500, Dax and Hang Seng). My original position was fairly small. Here’s why I’ve added.

AAII bearish sentiment has moved to the levels seen at last year’s market bottoms. In other words, bullish sentiment has very rapidly evaporated.

Source: PragmaticCapitalism / AAII

There is a positive divergence on the Nymo, which has historically signalled a bottom.

Source: Cobra / Stockcharts (plus my green positive divergence lines)

To reiterate my view: I expect equities to track overall sideways with volatility into next year’s solar peak, something like the action in the box below. That means I’m looking for opportunities for shorter term moves, up or down, where the indicators line up.

Source: Charles Githler

Economic Surprises continue to languish, Euro debt continues to fester. However, OECD leading indicators paint an overall positive picture ahead. The period into the solar peak is typically one of growthflation. I reiterate that I expect a natural pick up in growth or one with central bank assistance. There is some evidence here that we may swing up naturally ahead.

Source: OECD

Opportunities

Posted on Posted in Bonds, Commodities, Currencies, Macro, Solar Cycles, Stocks11 Comments

More selling yesterday, but then intraday reversals that produced hammer candles (stocks, oil). Hammer candles often mark bottoms, but capitulative breadth still didn’t trigger. Ryan Puplava compiles some oversold indicators and divergences that are suggestive of an imminent rally, but he also notes that market breadth has weakened.

This is how the SP500 stands. There is a trio of supports coming together around 1341, if we head lower, and that would potentially put us sub RSI 30.

The Russell 2000 has either made a triple bottom or is playing out a large head and shoulders to a considerably lower target.

Source: StockSage

Stocks are reaching towards overbearish but sentiment could drop lower yet before a reversal.

Source: Stockcharts

Stocks are heading towards oversold, but could also drop further yet to reach extreme.

Source: Indexindicators

The Chinese stock index needed to make a higher high to confirm a new bull trend since the start of 2012 but has pulled back at a double top, shown. If it can break out, it will be suggestive of China growth and associations with commodities.

Source: Bloomberg

10 year treasury yields are back to all time lows.

Source: Stockcharts

30 year treasuries back to all time highs.

Source: Stockcharts

I have added to short treasury positions. Doug Kass is bearish on treasuries here (hat tip Juan), calling it the trade of the decade.

The US dollar remains in a range, despite the Euroland troubles. As yet this is not resolved.

Source: Stockcharts

Spanish CDSs have nudged back up, but other than Greece CDSs, Euro debt hasn’t catapulted up again in this fresh round of fear.

Source: Bloomberg

Right now, it looks like 2010 and 2011 again – mid year pro-risk retreat with Euro debt back to the fore and slowing growth. I find it hard to believe we will see the same again, as the market always likes to surprise. So what if not that? Well, the run up into the solar peak is typically one of growthflation. The mid year should be lower geomagnetism, by seasonality, which is supportive. Sunspots should continue upwards, which is supportive. And stocks generally fair well mid year in US election years. I suggest therefore that we need either a natural pick up in growth here (economic surprises ticked up for all regions yesterday but we need to break the downward trend; China and emerging markets could take over as the driver) or we need central bank assistance, such as ECB action to deflate Euroland issues again, and the Fed to replace Twist in June. But either way, I rather expect we will see a more pro-risk friendly mid-year.

Gold miners’ cheapness relative to the gold price, overbearish sentiment and oversold RSI sub 30 make them still a great opportunity here, I believe. I added to long gold miners.

Source: Stockcharts

Source: Andrew Nyquist

Silver is sub RSI 30 and overbearish sentiment. I added to silver longs.

Crude oil is also oversold. I added to oil longs.

Orange juice has halved in price since the turn of the year due to ample supplies, but is now oversold and extreme overbearish. I opened a long OJ position.

Source: TradingCharts

Nothing (so far) has shifted me from my view of how things will play out into 2013, namely a commodities surge, and even if I were wrong, oversold AND overbearish assets eventually mean-revert. If we move further to extremes in commodities, treasuries pricing and sentiment in the sessions ahead I will add again. These are great opportunities, in my view. The picture for equities is more in the balance, with some indicators of a bottom but some reasons to expect further selling. Developments in the macro picture need close monitoring, as evidence of a pick up in data or government intervention could cause a surge, or equally, continued deterioration could cause a big sell-off.

Models Update And Commodities Peak

Posted on Posted in Commodities, Solar Cycles12 Comments

I have updated all the short, medium and long term model pages.

A quick recap. By solar cycles, commodities should make their secular peak close to the next solar maximum, expected Spring 2013 (within the following 6 months fits with history). In the run up to that point, we should see commodities outperform stocks by some margin, and we should see commodities pull away from the geomagnetism/lunar model. I am positioned for that, with a ‘full’ set of commodities longs.

Yet, so far in 2012, it is stocks outperforming commodities, and US stocks pulling away from the geomagnetism/lunar model, whilst commodities are closely following the model, which has recently been trending down.

Below I have boxed in black the outperformance of stocks into the last solar peak of March 2000. On the far right of the chart we see developments right up to date and observe that commodities have not pulled away in the same way yet, with just 12 months or so to go, in fact, stocks have pulled away in the last couple of months.

The purple box above shows the last episode of full commodities mania whilst stocks pulled back. This is what I expect into the solar peak. By history, stocks should track overall sideways from here into the solar peak, falling away towards the end, whilst commodities should accelerate into a final mania. That purple box lasted just 6 months, and drawing on history again, we might indeed expect commodities to accelerate as of 6 months before their peak, and go truly manic as of 6 weeks before their peak.

Right now, certain commodities display contrarian oversold and overbearish readings. That makes for a fairly compelling buy if I am correct about outperformance and mania ahead in 2012/2013. Gold should be the leading commodity in this Kondratieff Winter, and it is one commodity showing excess pessimism, with gold miners likewise.

Source: ActingMan / Sentimentrader / Hulbert

The reasoning behind secular asset peaks merging with solar peaks is that sunspots drive human exciteability which translates as speculation, buying and inflation in the markets and economy. Sunspots have been a little underwhelming in Q1 2012, but just lately picked up. If sunspots start to make new highs, then I expect commodities to begin their outperformance. But putting sunspots aside, let’s recall what happened in late 2007 and early 2008 when commodities went the opposite way to stocks.

Oil was the driving commodity. A decline in reserves, peak oil worries, Middle East tension, monetary inflation all played their part, and eventually a feedback looping of speculative greed dominated, until the global slowdown became more accute and commodities popped along with everything else.

Food prices rose to records, as oil is dominant in the process. Plus increasing demand from emerging markets and global wierding affecting harvests both shrunk stocks. Gold rose as an inflationary hedge, as a safe haven and as a hard currency.

In 2012, we still have low reserves in oil and agricultural commodities. Global wierding has been less extreme in recent months, depressing food prices as record harvests are expected from record plantings. Nature has the ability to deliver that, or to sabotage it and put low inventories back into focus. Oil inventories have been rising as global growth has gone through a slow patch, but emergency reserves remain low. Geopolitical concerns remain, but right now are more muted than, say, during the Arab Spring of 2011. Rising sunspots into the solar peak have historically correlated with protest, revolution and war, so again, nature has the ability to cause trouble here and affect oil prices.

There is a close relationship between food prices and the gold price (a chart I recently published), there is a correlation between oil and food, as oil is everywhere in the process, and there is a correlation between oil and gold, as oil drives inflation and gold hedges inflation. Farmers also switch plantings (foodstuffs, biofuel) depending on prices, adding to the interrelations. So, if we get a trigger in either energy, precious metals or agriculture, we may see the feedback looping begin in all three.

In summary, I reiterate my expectations for commodities to surge into the solar peak of 2013, and I maintain my trading positions to match, but patience is required as we could potentially not see true acceleration and outperformance until Q3 or Q4 of 2012. However, we see contrarian overbearish or oversold extremes in certain commodities now, providing a base from which to begin an uptrend, and a recent pick up in sunspots that has the potential to inspire speculation and potentially geopolitical disturbance which could drive up oil or gold.

Sunday Update

Posted on Posted in Bonds, Commodities, Macro, Stocks19 Comments

Quite strong selling on Friday, but Rob Hanna’s Capitulative Breadth indicator stayed at zero, suggesting the selling in stocks is not likely over.

Source: Andrew Nyquist

Commodities took a hit as well, particularly oil, as attention turns to slowing growth. The economic surprises for the developed economies continue to tumble at an alarming rate.

Source: Bloomberg

Compensating to some degree we see China is overall looking positive ahead (though still tentative in some areas).

Source: Yardeni

US earnings finished last week with 3 bad days of results, taking the overall beat rate from 69% down to 61%, quite a drop. No longer a very impressive beat rate. ECRI US leading indicators came in at zero this last week, a further drop back and now threatening to turn negative again.

Money has poured back into US treasuries, taking the yield back down towards the previous lows. But Spain and Europe CDSs have paused, not contuning their climb for now.

In Zeal LLC’s latest essay they suggest stocks will make another push up before rolling over properly, and this echoes the lack of major topping indicators at the 2012 highs to date. My own historical comparisons suggest an overall sideways range for stocks into next year’s solar peak, so I’m on the look out for opportunities short or long, when indicators align one way or the other. Short term then, I am expecting some more selling to take out the April low, in the early part of this coming week, and will be looking for bottoming indicators to reveal themselves. Upward pressure should emerge again as we move towards 21 May, around the new moon. If we do make another push up to highs in stocks, perhaps after that, then I will be looking for negative divergences and topping indicators.

Gold did its best to defy the selling on Friday. We still have those contrarian buy signals in precious metals, miners and certain agricultural commodities. It’s possible that we could see commodities outperfom stocks here if China data continues to improve whilst Western economic data languishes. However, if selling gains momentum it is more likely all will fall together. Gold could potentially rise alone as a safe haven, particularly if participants become more expectant of QE based on poorer data. The next FOMC is June 20. That gives them 6-7 weeks to assess further trending in data. It is also when Twist expires. If data continues to decline, and the Fed does deliver a stimulus programme of some kind, then maybe that would set up the final commodities launch that I am expecting into 2013. Well, let’s see how data trends develop into June.

Extremes

Posted on Posted in Commodities, Currencies, Stocks10 Comments

The Spanish stock index is back at its 2009 low, and out of its lower bollinger band.

Source: StockSage

Gold miners are out of their lower bollinger, at an extreme of pessimistic sentiment, and gold miners to gold ratio is at a major extreme.

Source: EC De Groot

And two from Tiho: investors extreme bullish positions on US dollar and public opinion on silver extreme pessimism.

Source both: Shortsideoflong 

Extremes typically mean opportunities, especially when they ‘fit’ together. There are several contrarian opportunities to choose from here. But patience is often required (the market can stay irrational longer than you can stay solvent).

The downside that I was expecting into this coming weekend’s full moon eventually materialised. Once we are through that, I will consider new trades from these areas. Regardless of the outlook, a period of mean reversion eventually comes to pass.

In Charts

Posted on Posted in Macro, Stocks2 Comments

US equities sentiment is not at an overbullish or overbearish extreme.

Source: Shaeffer Research / Investors Intelligence

US equities are also neutral by intermediate overbought / oversold indicators.

Source: Index Indicators

We need to look elsewhere therefore for clues about direction.

US earnings this quarter have a beat rate of 69%. That makes it one of the best of the last decade, if applied on this historical chart.

Source: Bespoke 

Forward guidance has been good too, so that’s all positive for equities.

Yet, economic surprises continue to plunge.

Source both:  Bloomberg

The last time we saw such a plunge from the high extreme swiftly into negative territory, equities range-traded for a couple of months and then dropped sharply (July 2011). It was a time when Euro debt came to the fore, and Spanish debt has done so again.

Source: Bloomberg

Euroland economic data is currently bad. Asia is looking brighter, although there is some mixed data out of China. Nevertheless, the Shanghai Composite has made a higher low, broken above the down sloping resistance and now needs to make a higher high above the horizontal resistance to make a compelling new bull trend.

Source: Bloomberg

The Australian ASX is at a key point, the merging of both long term down sloping resistance and horizontal resistance.

The Hang Seng made a bullish breakout, as shown yesterday. Plus as also previously noted, commodities display some technical and sentiment reasons for bull moves ahead.

All together that makes a mixed picture. Some key bullish / pro-risk developments, and some important bearish / safehaven developments. Recall that historic parallels (solar cycle secular commodity conclusions) showed overall sideways action in equities with volatility whilst commodities broke away to their bullish conclusion. The current mixed picture would support that overall sideways action in equities, but we perhaps need some other development to give commodities acceleration. That could be through further central bank intervention, in response to persistent Euro debt trouble, continued falling economic data or to replace Twist with something when it ends in June.

For now then, I continue to watch leading indicators and developments in the key areas noted above, and await assets moving to extremes in sentiment or overbought/oversold readings.