Stocks, Surprises And Bonds

Posted on Posted in Bonds, Macro, Stocks5 Comments

Here’s Apple again, the leading stock in the leading stock index.

The inverted hammer candle of 15 Feb didn’t turn out to be the top, despite reaching RSI over 90. Here we are now further up the parabolic curve, a curve that is unsustainable. The question is when it is going to break, because as the leading stock in the leading stock index, it’s likely to be important. On the chart above I’ve marked the long term rising upper resistance line that stretches back years but was broken early Feb 2012. At the end of yesterday RSI was at 85. I’m on the look out again for an intraday reversal and inverted daily hammer candle.

The Vix is still trying to make a rounded bottom. We still see some overbought/overbullish readings in equities, and some negative divergences. We also still see a solid uptrend, and no screaming sell.

Turning to Citigroup US economic surprises, this index appears to have topped out at the start of 2012, but it tends to lead the market. I’ve highlighted the major recent trends in this index, and applied the same to the S&P500 chart.

Source: Bloomberg

Compare the strong move up in surprises from an extreme low to an extreme high in 2009 and 2011. Both advanced off the bottom a couple of months before stocks bottomed. Back in 2009, the surprises index then topped out at the high extreme around June-July 2009, and gradually fell away to neutral into Autumn/Fall 2010. Stocks tracked overall sideways in this period, as designated by the arrow, but it is notable that stocks made their high within this range about 9 months after economic surprises topped.

In short, assuming economic surprises have topped out and now fall away to neutral (as this is a mean reverting indicator) mirror action to 2009/10 would see stocks push higher into late 2012, before being dragged back.

Now bonds. The 10 year treasury yield is showing evidence of building a rounded bottom.

Source: Stockcharts

The treasury bond aggregate has potentially broken down beyond rising support.

Source: Chris Kimble

Treasury bonds are at a historic extreme high, and yields a historic extreme low. If we see a significant change of trend here, then it will fuel pro-risk.

Idle Speculation – Sp500

Posted on Posted in StocksTagged 12 Comments

Drawing together the historic seasonality of geomagnetism, the window of growth into mid year before headwinds in H2 as per leading indicators, the cyclical bull’s behaviour to date in fib and channel tagging, the expectation by solar cycles of stocks topping out ahead of the solar peak and noting the S&P500’s current battle with 2011’s top (but expecting it will eventually break upwards, as the Nasdaq has led the way already):

As per the title, don’t take it too seriously. But it does appear the S&P500 has a destination of the merging of the 100 fib and top channel line, and this is in line with Zealllc’s expectation of roughly where this cyclical bull will top out.

Protect Gains?

Posted on Posted in Uncategorized23 Comments

So far it’s been a leap year for the account – which I hope is the case for you too. First, I profited from the big up trend in stocks, and took a large part off in profits. Now commodities are outperforming and I am benefitting from a full set of long positions there. Based on a rather unscientific indicator, when things are going this well, there’s usually some ‘less well’ around the corner. So let’s get a bit more scientific about whether some protection of gains here might be wise or not.

Firstly, silver broke out yesterday. Unless we see a swift reversal today, that looks pretty compelling for the bulls.

The US dollar could potentially have started a multi-month downtrend, which would be supportive for commodities.

Source: Chris Kimble

If we consider the (energy-heavy) Commodity Ishares fund’s relative performance to stocks and to bonds, it suggests significant relative upside should be ahead for commodities and energy in particular – that is IF the secular commodities peak is still ahead. I maintain that it is.

Commodity Ishares : Stocks

Commodity Ishares : Bonds

Source: Stockcharts

However, sentiment for the US dollar is now into the overly bearish zone, suggesting a near term pull-up might be imminent.

Source: Daneric / Sentimentrader

Sentiment for crude oil is also into the bullish extreme zone, suggesting oil might need some respite.

Source: Shortsideoflong Blogspot / MBH

And actual and forecast geomagnetism has now flattened out. With greater seasonal geomagnetism normal in March and April, I expect my model to tip over or at best stay flat. I also maintain the expectation that some consolidation or downside will be realised into around March 9th. The RJ CRB commodity index in near and medium term views:

Turning to stocks, the Vix still appears to be making a bottoming pattern, whilst the CS Fear index remains at an extreme high, which together suggest a pullback in stocks may be imminent. The Summation index also appears to be rolling over.

Source: Chris Ciovacco

Citigroup Economic Surprises remain in an uptrend for major economies as a whole, but are perhaps now in retreat for the US, which as previously noted might spell overall sideways action for stocks.

Source: Bloomberg

We see divergences in Mclellan momentum and Dow theory. Overall though, equities remain in a tidy uptrend without screaming sell signals.

So what to do?

I have enough evidence to want to protect some gains, but whilst expecting that any near term reversal in the US dollar and commodities will only be a counter trend move before momentum resumes towards in favour of commodities and against the US dollar. If I’m right in my assessment of a secular commodities peak ahead, likely 2013, then commodities should outfperform stocks going forward. So, I’m on the look out for a push up and reversal intraday in pro-risk, and maybe either LTRO or US GDP announcements today could provide that. I will be looking to exit some or all of my remaining (small) stocks longs positions and to just trim my commodities positions lightly, with a view to refilling to the full long commodities position, potentially week commencing 12 March.

This Week

Posted on Posted in Macro, Stocks13 Comments

Since my model top of 22 Feb, stock indices have either begun a pullback or are digesting gains ahead of an imminent further leg up. My models predict a pullback into 9 March, so the former is my primary expectation. Supportive of a pullback here are a perfected DeMark sell set-up on the Dax, a potential Vix bottom in relation to US stocks and a historic extreme in the CS Fear Index (which suggests participants are insuring against perceived forthcoming downside):

Source both: Andrew Nyquist

Source: Bloomberg

If we do see a pullback this week and next, then recall Tom De Mark suggested it may be a correction that frustrates bears – lots of back and forth and overall shallow, before pushing on again.

Chris Ciovacco points to a 2004 rhyme and suggests the stock market needs to flatten out at the top following such a powerful up trend, before any significant correction:

And this fits with not having seen divergence in market breadth yet, which would normally signify an important topping process.

So if we picture something between shallow consolidation and shallow gains in the weeks ahead for stocks, then that sets the scene for commodities to outperform, and that’s what we’ve been seeing the last few sessions. Crude oil looks set to challenge its 2011 high of around $114. Gold and silver are at key levels, whereby a break above would likely attract significant money flows.

But if we consider the fortunes of pro-risk as a whole, a fly in the ointment remains ECRI, who reiterated their recession call (for sometime in 2012) on Friday, despite improvement across the board in leading indicators from Conference Board’s own to Money Supply to Financial Conditions Index to the stock market itself. I note they quoted flatlining GDP and retail sales in their defence (yet both these show recent improvement trends) and marginally improved WLI (which has actually risen from -10 to -3.5), so that makes me a little skeptical. Well, I don’t want to disregard them because of their track record, and Chris Puplava suggests it’s all compatible: that we have a growth window into mid-2012 before ECRI’s call comes good. He points to prices paid as a lead indicator for manufacturing, which shows that summer 2012 rollover:

Source: PFS Group

I would summarise like this: if the economy is to roll over by mid-year we will see various leading indicators roll over ahead of that, and not be reliant on the word of ECRI. Right now, we see leading indicators improving, and where I identified potential early casualties in the form of earnings and economic surprises (both at historic highs) we still don’t yet see a decisive tipping over. I maintain the expectation of a growthflationary finale into the secular peak, with the emphasis on inflation. So let’s see how things progress.

Solar Cycles And Astro Trading

Posted on Posted in Solar Cycles23 Comments

There is one (and only one) strand of scientific theory that gives astro trading credibility (astro traders typically operate without reference to science or logical reasoning, and more on faith, which doesn’t sit well with me), namely that planetary alignment influences solar activity (which in turn influences the financial markets through sunspots and geomagnetism), so is there any evidence for this?

Yes, there is. There is a close relationship between the alignment of Venus, Earth and Jupiter, and solar activity cycles. Here it is in chart form from two different studies:

Source: Ching Cheh Hung

Source: Roy Martin

Essentially, the most aligned days between these 3 planets correlate very well with solar cycles, suggesting these tidal planets are the key driver of the sun’s known 11-year cycle of activity. NOTE: only these three tidal planets are found to be infuential, not other planets. So astro traders drawing on Mars or Saturn, for instance, do not have this scientific backing.

Now here are just a couple of my own multiple charts which provide evidence of the correlation between solar activity and the financial markets.

Astro traders who forecast the financial markets by considering constellations of Jupiter, Venus and Earth potentially are one step back in the process compared to my own assessment of sunspots and geomagnetism, HOWEVER this depends on their method (whether or not they are considering most aligned days between these three planets, or other configurations or drawing in other planets).

Do we need to go this one step further back? Well, we can predict the sunspot cycle fairly reliably without having to calculate planetary alignment (NASA forecast this) and we know the next peak should occur around Feb/March 2013. We can also predict geomagnetism using a space weather forecast up to 3 weeks out, and we can model it further out using historic seasonal geomagnetism. It is therefore questionnable what additional predictiveness planetary calculations can offer.

In summary, there is evidence to link together the alignment of Jupiter, Venus and the Earth with the sun’s activity cycle and the financial markets. There is a lack of evidence for other planets being influential. If predicting using sunspots and geomagnetism forecasts is one stage back, then predicting using most aligned days of those three planets is one stage further back, however it is questionnable what additional benefit this offers.

Stocks, Dollar

Posted on Posted in Currencies, Stocks14 Comments

Tom De Mark pins us around a top here, still suggesting roughly a 5% retreat from here in total, in an up-down manner that frustrates bears, before the market then advances again. He makes the following analogy with 1987:

Source: De Mark / Bloomberg

My model top is around today, fitting with De Mark’s call, and my next model low is around 9 March, which fits with that 1987 analogy.

With a little more geomagnetism forecast, my model is flattening out. Ideally, I would like to see a final higher push today/tomorrow into which strength I would exit further stock indices longs, with a view to looking to buy some back if we can reach around 5% lower or so, but still being much more overweight in commodities expecting outperformance in that class going forward.

Turning to the US dollar, Chris Puplava identified this analogy with the 1970s in the middle of last year.

Source: PFS Group

Note how the US dollar failed a backtest of the ABC s/r line in the 1970s and then declined significantly, providing the backdrop to the last secular commodities bull finale.

The current US dollar technical position is very similar (shown below), possibly having just backtested the s/r line and potentially now going on to decline, as a backdrop to this secular commodities bull finale. Dollar sentiment is fairly neutral currently, giving no clues, but the Euro-USD relationship has closely mirrored pro-risk in recent years. As my other references support a bullish commodities conclusion over the next 12 months, I predict the US dollar will indeed fall away and the Euro advance again, as pro-risk led by commodities is the dominant theme. The Greek debt deal yesterday should assist in supporting Euro-USD.

Source: Stockcharts / James Craig 

This Week

Posted on Posted in Commodities, Macro, Stocks19 Comments

Last week we saw leading indicators ticking up for Korea, USA (both ECRI and CB) and Spain. Evidence is accumulating for a new business cycle upswing. Looking back at previous such cycles, 6-9 months is fairly typical for such a cycle to play out, and this next chart suggests a 9 month upswing may be ahead this time.

Source: Chris Puplava

Drawing in my previous analysis on how events have unfolded into solar/secular commodities peaks, we have a potential sequence of events here. Growth and pro-risk advance as a whole before excessive inflation and commodity mania.  Stocks do well into late 2012 before turning down as commodities diverge towards the end. Commodities rise into the secular peak of Feb-Mar 2013 before excessive oil prices help bring on a recession, with stocks turning down several months ahead of the recession as a leading indicator.

Underlying source: Dshort

What are the threats to this scenario? Well, the business cycle upswing is still tentative at this point. Leading indicators for some countries are still negative. China had to lower its reserve ratio this weekend to stimulate lending. Sovereign debt could flare again, and Greece remains unresolved at the time of writing, with the March payment deadline approaching. However, I expect resolution on Greece ahead of the deadline, and I expect leading indicators for the laggard countries to turn up in the weeks ahead. At this point, emerging from an extreme in global anti-risk appetite reached at the end of 2011, and with a natural business cycle upswing supercharged by the range of central bank counter-responses over the last 6 months, I believe the weight of evidence supports a growthflationary finale from here into the solar peak, in line with history.

Shorter term, I still expect a pullback in equities, for the following reasons.

1. We continue to flirt with overbought and overbullish readings.

Source: IndexIndicators

Source: TheTechnicalTake

2. We approach Fib resistance

Source: Afraid To Trade

3. CS Fear Barometer has potentially topped ahead of the market:

Source: Bloomberg

and 4. We have a DeMark sell set up (the conditions in place for a period of retreat, if not the momentum).

We don’t have a full set of top indicators, but we have ‘enough’ for a pullback.

Now to add to this, POMO sales could add to the likelihood of a pullback from here into the end of Feb.

Source: McOscillator

Plus, we have a new moon tomorrow, my models suggest a top the day after, and a geomagnetic disturbance is in progress again, shown by the arrow, adding weight to a seasonal pick up in geomagnetism, which is a headwind.

For now, economic surprises remain in an uptrend for the major economies, but perhaps topping out for the US. As a mean reverter, it is a matter of time before we start to see more disappointments versus estimates than beats. Some are predicting a US jobs figures major disappointment on the first Friday of March. As we enter March, geomagnetic seasonality should pick up yet more.

So, tomorrow and Wednesday I will be looking at potentially taking profits on my remaing stock indices longs, and will report if/when I do. However, I do not see this as a major top that I wish to short, but rather of an overbought/overbullish pullback. I maintain the expectation of commodities beginning to outperform, and will not be taking profits in commodities but rather holding into the solar peak (unless the picture radically changes).

Top 10 Sites

Posted on Posted in References9 Comments

A quick update. A reversal of a reversal yesterday in pro-risk, so let’s see if we now get a further reversal to increase the picture of a topping process, or whether we can reach higher into next week. The geomagnetic disturbance ended and no follow up is expected. II sentiment moved a little more bullish but still more neutral than extreme, whereas AAII sentiment dropped from the bullish extreme. Economic Surprises advanced again, both for the US and Major Economies. Greek CDSs have flared again, as we approach the debt payment deadline without a resolution, but optimism for progress has increased overnight. The Natural Gas price got a lift yesterday on declining inventories, and shows some evidence of a bottoming pattern. However, stocks remain excessive compared to historic ranges.

OK, I have compiled a list of my top 10 current sites that I draw upon for trading. It’s not definitive – I view and rate others too – and it’s not in any order. It’s also a fluid list – slightly different to this time last year and most likely tweaked again by this time next year. But it takes time to filter who is consitently reliable and who offers genuinely useful tools, so I share mine here, and hope that you’ll add in the comments below your own unmissables.

Apple Top

Posted on Posted in Stocks29 Comments

The leading stock in the leading stock index made a large inverted hammer candle following a recent parabolic rise that hit RSI 90, and this looks very much like a top (with US indices also making inverted hammers):

Furthermore, the unforecast geomagnetic storm that I referred to made for the following spike:

The pick up in geomagnetism that seasonality warns us of may be occuring. However, before we call a market top, I refer you to previous Nasdaq topping processes:

Messy affairs – reversals of reversals of reversals before declining in earnest. Some back and forth to make a top into the middle of next week (around 22 Feb) would fit very well with my models. In support of this, not everything sold off yesterday. The Hang Seng actually broke out, and has held the break out today.

In short, I think Apple has topped and the US indices have begun a topping process, but the wider market is less likely to dive from here and more likely to flirt with the highs in a topping process. I will keep my eyes on the geomagnetic disturbance, as it isn’t quite done yet, but also on other assets and indices to see if they start to line up behind Apple.