Category: Bonds

Roundup

Posted on Posted in Bonds, Commodities, Currencies, Indicators, Macro, Stocks22 Comments

These are Gann Global’s projections using Gann methodology (mirrors in time, historical rhymes). Stocks to melt up into October 2012:

Source: Gann Global Financial

Commodities to make a parabolic move to new highs into late 2013:

Source: Gann Global Financial 

Gold to climb back to its previous highs by this September / October:

Source: Gann Global Financial

They also forecast that grains will now make a consolidation and retreat a little before advancing again to new highs, plus that treasuries have begun a new sustaining declining trend. This week’s action in treasuries and yields has the hallmarks of a significant trend change, but let’s not forget the Fed continue to tinker with this market.

Source: Stockcharts

In short, Gann Global are largely in agreement with my own predictions, and the other analysts that I read and respect are generally also more with than against. Marc Faber predicts that stocks may run up here to 1450-1500 before turning in the Fall/Autumn. Chris Ciovacco believes stocks are technically bullish and highlights the risk of a melt up. The Puplava brothers at PFS point to the rotation into pro-risk sectors, the lack of recession evidence, the intermediate term indicators for precious metals and the pick up in economic surprises as supportive for another pro-risk rally. Scott Grannis suggests the divergence between stocks and treasury yields is now being resolved in favour of stocks, and that the key risk is that we see better economic outcomes ahead than priced into treasuries. Tiho’s continued bearishness aside, I largely have those that I respect in tune with my own forecasts, and clearly I don’t consider that a contrarian alignment.

There are several crunch points in the remainder of August which will help determine overall momentum pro-risk or pro-safety. The resolution of the large multi-month triangle on gold. ECB intervention and/or Fed announcement of action at the Jackson Hole meeting 31 August. Whether the Euro can base here above 1.20, and by association pull the US dollar back. Whether leading indicators can pick up and fill in the missing macro support for pro-risk, and in particular whether China can either pick up or deliver stimulus, reflected in the key resistance tests shown below for Hong Kong and China stocks.

Source: Chris Kimble

In the very short term I remain as per my last post – holding my positions until the end of this week, into the new moon. At the time of writing stocks have made little movement since my last post. Chris Puplava highlights today’s Philly Fed news as a likely mover, expected to the upside. Rob Hanna’s study suggests that these last few days of tight range historically resolve to the upside. I personally believe that with the Nasdaq, Apple, SP500 and Dow all within touching distance of their previous 2012 highs, they will go tag those highs. If that were to occur, then we would be looking at the bears’ last stand. However, there is a weekly Demark sell signal on the SP500 and with lunar down pressure erupting as of next week, I am open to the possibility that stocks may consolidate before attacking those highs. But let’s see the action today and tomorrow. As before, I will notify if I take some profits.

I figure you may be interested in a list of all my current open positions:

Long FTSE

Long Dax

Long Hang Seng

Long Nikkei

Long Nasdaq

Long SP500

Long Market Vectors Gold Miners ETF

Long Gold

Long Silver

Long Crude Oil

Long Natural Gas

Long ETC Agriculture (general soft commodities ETF)

Long ETC Wheat

Long Chicago Wheat

Long Coffee Arabica

Long London Cocoa

Long New York Cocoa

Long NY Cotton

Long NY Orange Juice

Long Oats

Long Ultrashort 20+ Yr Treasury Bond ETF (i.e. short treasuries)

In a nutshell, I have significant long positions in precious metals, energy and agricultural commodities, as well as global stock indices. I have a smaller position in short treasuries. I expect to peel out of stock indices first, expecting them to top in late 2012 / the turn of 2013, and then to peel out of commodities into a parabolic finale into mid 2013. I expect to hold short treasuries for the longer term.

Precious metals are the key laggard in my account currently, but I expect them to eventually become the best performer, looking out into 2013.

Natural Gas was for a long time the dog of the account, and my aggregate position is still under water, but in 2012, having exhausted buyer interest, it finally turned as it reached historic extreme cheapness versus oil and the stocks of gas started to come back towards historical averages (second chart below):

Source: Trading Charts

Source: EIA

Crude oil inventories have also begun to move back towards the historical average range and together with the shortage in emergency supplies this has given oil a rewnewed thrust in recent sessions:

Source: Bespoke

And lastly, the climate stats for July have been released and show global temperatures for July on land coming in at the 3rd hottest July since records began, and the hottest in the Northern Hemisphere since records began, continuing to support soft commodity prices:

Source: NOAA

Developments

Posted on Posted in Bonds, Commodities, Currencies, Indicators, Macro, Solar Cycles, Stocks15 Comments

Back from hols and it was a good week for pro-risk and my account. Can pro-risk go further? I maintain that it can. By solar and secular cycles, we should see a blow-off top in pro-risk, with stocks overthrowing (H2 2012) and then wilting (end of 2012 / start of 2013) whilst commodities make a parabolic secular finale (into the solar peak of Spring 2013 and terminating around summer 2013). So do the technicals, indicators and macro data support this?

Firstly, we see the SP100, soybeans and corn at new 3 year highs:

Source: Stockcharts

Soybeans – Source: Tradingcharts.com

Corn – Source: Tradingcharts.com

Those developments give more confidence that commodities did not already make their secular peak and that other equity indices could break out. However, it’s tentative for now as these new highs are marginal and until other pro-risk follows suit. Furthermore, we continue to see opposing indicators that present a confused picture. Here are four indicators from Sentimentrader.

Commercial shorts on the SP500 suggest a market due a pullback – although the two occurrences in 2010 and 2011 led to more gains before a pullback. The Farrell sentiment index suggests the SP500 is a buy. Economic uncertainty has reached a level that also could imply a buy. Lastly, risk appetite is up to the kind of exhaustion level that could mean pro-risk needs to pull back – although in 2006 and 2009 we saw stocks push higher whilst risk appetite spent more time at this kind of level.

Source all: Sentimentrader

Drawing those indicators together, it is a mixed picture, but bullish developments in the weeks ahead have the edge.

As previously noted, the rally in equities has been more defensive than a normal healthy rally, but there is potential evidence that this is turning:

Source: Ryan Puplava

US equities have not reached either overbought or overbullish yet.

Source: Technical Take

Source: IndexIndicators

Both show there is room to push higher yet. Meanwhile, overbought and overbullish indicators for the German Dax are a little higher but also room for more gains yet.

Grains had reached levels of overbought and overbullish but have spent the last 3 weeks or so consolidating and relieving those indicators. The fundamentals support further gains ahead.

Gold and silver remain at the low extremes of sentiment (public opinion, Hulbert), suggesting the breakout move will be upwards out of the mutli-month triangles. This is supported by the recent acceleration in soft commodities, recovery in the oil price, and renewed global efforts to maintain negative real interest rates.

Treasuries have pulled back, and there is a good chance of this continuing, due to the parabolic unsustainable rise coupled with having reached overbought and overbullish extremes.

Turning to global macro, Euro debt has continued to pull back from accute:

Source: Scott Grannis / Bloomberg

Citigroup economic surprises continue to maintain a rising trend for the US, emerging markets, and G10 nations (shown below).

Source: Bloomberg

However, global leading indicators continue to languish. China trade data on Friday was particularly bad. The latest OECD readings show a precarious global economy. ECRI leading indicators for the US look reasonable. Conference Board leading indicators for the key nations are below and show a picture that is notably more negative than positive:

Source: Conference Board

US earnings this season have come it at around a 59% beat rate, compared to a 62% average since 1998. More of a negative than a positive.

Geomagnetism has been fairly benign the last 3 weeks and the forecast for the next 3 weeks is likewise. That has finally given the geomagnetism models an up turn.

The SP500 remains significantly above the geomagnetism model, and this is reflected in the SP500 being one of the most expensive global indices by p/e valuation. So at some point we should expect the SP500 to correct, but when? Well, I maintain not yet – that stocks should first go on to make new highs in a cyclical bull overthrow finale. I believe the SP100 is the first to lead the way.

Into previous secular/solar peaks (secular asset peaks align with solar maximums), increasing sunspots had the effect of inspiring speculation excess in human behaviour. I believe that’s what we are seeing unfolding here, but it’s not directly measurable. We need to look for the signs. Pro-risk assets going to new highs. Risk appetite high and staying high. Pro-risk assets leaving behind the geomagnetism models (for a period). Excessive speculation in the context of the current economic situation.

There is some evidence for each of those, but we are just getting started. We need to see more stock indices move to new highs. We need to see gold and silver break out upwards. A period of Euro outperformance versus the dollar. And most likely additional fuel by global central banks.

In short, I have no current reason to doubt what I have maintained for some time will come to pass (as per the first paragraph in this post), but it will become much clearer one way or the other as the remainder of 2012 plays out. The current picture is mixed, but there is increasing supporting evidence.

For now, I am looking once again to lunar phasing for a near term position tweaking. Namely, the new moon is this Friday, which suggests positive pressure into the end of this week, supported by tame geomagnetism. If pro-risk pushes higher into this Friday, I may trim back my overall pro-risk positions again, and will notify you if so. However, I will be looking for evidence of overbought/overbullish and technical resistance. I will also be looking at developments in leading indicators or central bank  action between now and then. September and October is typically a more difficult time for pro-risk, however this has not historically applied in a US election year, plus this is the run-up into a solar peak.

Charts Of Interest

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1. AAII sentiment survey bullish percent 12 week average at level that represented important bottom for US equities historically:

Source: Sentimentrader / AAII / TSP Talk

2. Yet Vix is at a level that has represented a top for equities the last 3 years:

Source: Forbes / Bloomberg

3. Risk appetite is reaching towards a level that has implied stocks may not be able to advance too far from here, although there is scope for the rally to continue some way further in price and time yet.

Source: Sentimentrader

4. Treasuries are at record extremes in price (with sentiment at the bullish extreme, suggesting a reversal):

Source: Stockcharts / James Craig

5. Gold miners bullishness is at the extreme low, suggesting miners should rally imminently:

Source: Stockcharts

6. Euro bullishness is also at the extreme low, a level that has historically implied a Euro rally:

Source: Sentimentrader

7. US jobless claims suggest there is no US recession now or ahead:

Source: PFS Group

Macro Update

Posted on Posted in Bonds, Commodities, Currencies, Indicators, Macro, Stocks2 Comments

Let’s start with Economic Surprises. G10 nations:

Source: Bloomberg / Citigroup

And Emerging Markets:

Source: Bloomberg / Citigroup

The message is one of improvement in actual data versus expectations.

Next, leading indicators. Here is the latest Conference Board summary:

Source: Conference Board

The message is one of continued negativity. ECRI US leading indicators made an uptick on Friday but one week doesn’t make a trend, and it came on the heels of another ECRI media appearance reaffirming their call that the US is in recession. Scott Grannis made a compelling case in response as to why the US isn’t in recession here.

Next, Euro debt. Here are Portugal, Greece, Spain and Italy CDSs:

Source: Acting Man

And here France, Belgium, Japan and Ireland:

Source: Acting Man

There has been general improvement since the Euro summit outputs, in that French, Spanish and Italian CDSs have all fallen back the last 4 weeks. Only Greek CDSs are notably rising again.

Now let’s turn to geomagnetism and sunspots. All models have been updated this morning. There was a big geomagnetic storm the last 2 days (circled on the chart below) and there is another siginificant episode predicted all the way through from the 27th July to the 4th August.

This is higher geomagnetism than is seasonally expected, and the result is that my short and medium term models continue to trend downwards. There is neutral pressure into this Thursday’s new moon but thereafter downward pressure erupts.

On the flip side, sunspots continue their general trend upwards which is a positive.

Next, US earnings. Goldman report today and we will see other big names this week. Only one third of companies have beaten estimates so far, but we need to see the bigger volume of reports this week to get a better feel of the beat rate. So far though, earnings are a negative.

Turning to central bank intervention, Bernanke is scheduled to speak today and the markets are again looking for clues as to whether more stimulus is likely. August 1 is the next FOMC outputs. Otherwise, central banks around the world continue a theme of more easing and stimulus, but there is a new threat to this in that soft commodities have been sharply acccelerating, particularly grains. In emerging markets especially, this is likely to translate into inflation in H2 2012, which may impede further easing. So let’s finally turn to agri commodities.

Soft commodities, particularly grains, have been experiencing a supply-side push due to global wierding. The global climate report for June is in and it was the hottest global June on land on record, as shown below. This follows the hottest May on land on record and the second hottest April on land on record.

Source: NOAA

In July so far, the heat and drought extremes persist. El Nino should develop as the summer progresses which could ease these issues, but El Nino also brings it own problems. For now, grains are surging in price and are threatening their previous two major highs of 2008 and 2010/11. Danske predicts that the UN food price index will accordingly shoot up in H2 2012 to a new high. If that occurs, it will be highly significant in support of a secular commodities peak ahead rather than already occurred in 2011.

Source: Danske Bank

So let me summarise. Economic surprises and Euro debt both appear to be turning in favour of pro-risk. Meanwhile, leading indicators continue to point red, but global policy responses also continue, with the likelihood that at some point leading indicators will improve as a result. However, recent soft commodity price rises may be about to close the window on easing. US earnings gather pace this week and by Friday we should have a better feel for whether they are likely to be a drag on the markets over the next few weeks. Geomagnetism is currently higher than is seasonal, and should be a downward pull on pro-risk after the end of this week. Sunspots, however, continue to rise in an overall trend, and should encourage speculation into commodities.

Trading-wise, I am leaning towards a little more upside in pro-risk into this Thursday’s new moon, due to the technical picture on most charts. Should that occur, I will take some profits off the table. The FOMC is an unknown, however Bernanke could telegraph his intentions as early as today. If he sticks with no further action then the markets may protest again.

I have focussed on the macro today, but technical indicators continue to show excess bullishness in treasuries and dollar and excess bearishness in the Euro (plus a positive divergence) and excess bearishness in precious metals. What this means is that a move the other way is ripe, subject to supportive developments. In other words, some evidence of improvement in leading indicators,  some dovish noises from Bernanke or some big US earnings beats could all set the scene for a more enduring pro-risk rally. Without improvement in these three areas, the danger is the current pro-risk rally tops out again.

Equities v Bonds v Commodities v Dollar

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Here is the 30 year treasury long term chart. Price has hit the top of the channel from which previous reversals occurred.

Underlying Source: Stockcharts / James Craig

Below we see the commodities to 30 year treasury bond ratio which is back to the level at which historically commodities have been bought versus bonds.

Source: Stockcharts / James Craig

Next we see that Wall Street strategists’ recommended allocation to bonds is at a 15 year high and to equities at a 15 year low. The steep drop in recommended stock allocation not only exceeds the 2008/9 panic low but also resembles a capitulation.

 Source: Sentimentrader/Bloomberg

Below are the global p/e ratios as at the end of June. Those in single digits are at secular bottom valuations.

Source: Megane Faber

Next, two charts courtsey of Tiho, which show that public opinion is at opposite extremes for silver and the US dollar, both at comparable levels to the 2008/9 panic lows.

Source: Short Side Of Long / Sentimentrader

And lastly, a chart showing there is internal strength to the recent up move in stocks, with cumulative advance/declines at a new high, that normally suggests new market highs ahead.

Source: Sentimentrader

Drawing all together, the bigger picture suggests that an enduring move should be at hand away from treasury bonds and the US dollar towards commodities and stocks (particularly European), in other words a major rally in pro-risk and out of safe havens.

Charts For Thought

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Other analysts’ views of the bigger picture:

Market Anthropology show this technical analogy with 2007 (below). What happened next? The beginning of the waterfall declines all the way down to March 2009. I don’t believe that’s where we are now, but the technical similarities are not in doubt. Analogies can work – e.g. the Mammis sentiment analogy played out in H2 2011 very well. Yet, 2011’s mid-year correction provided a similar close analogy with 2007’s top and subsequent action, which various analysts noted at the time, but eventually failed as the market rallied out of it late in 2011. But if the analogy below is to play out a little further, then we might look to 1400 as a potential target for the Sp500.

Source: Market Anthropology

Prometheus show a (proprietary) cyclical bull market top signal took place at the top at the start of April this year. They believe the cyclical bull in place since March 2009 has topped out. If that’s the case then we should not make a higher high, and 1400 might again be a suitable limit before renewed and deeper declines.

Source: Prometheus MI

On the other hand, a golden cross (moving averages crossing) that just occurred on the SP500 suggests significant advances ahead to new highs. This is coupled with a death cross on the Vix also just happening – a twin occurence that previously gave way to strong gains for stocks. When I draw in my main references (solar and secular positioning), this is more aligned to my predictions – new highs in equities in H2 2012, before we consider any new cyclical bear market.

Source: Schwab

Of course not all 3 chart predications can come good, but there is perhaps a little window here where they can unite in calling the index up towards around 1400 before they diverge.

Lastly, here are (i) stocks and (ii) bonds as a percentage of household assets (US) with my channel lines added. The message I suggest is that we are close to the end of the secular bear market in equities and the secular bull market in bonds or even beyond that point.

Underlying Source: Schwab 

Addition:

Laslo Birinyi’s historical analysis of equity bull markets looks like this:

Source: Birinyi

He says that bull market generally have four quartiles, lasting around 410 days each. The biggest gains come in the first and fourth quartiles. He believes that from here stocks should make a siginificantly higher high accordingly in the fourth quartile which is soon to begin.

Here are my calcs for the 2009 bull:

Quartile 1: March 2009 – May 2010: 80% gain

Quartile 2: May 2010 – July 2011: 13% gain

Quartile 3: July 2011 – September 2012: the table average of an 18% gain would put the SP500 at 1593 by September this year

Quartile 4: September 2012 – November 2013: again using the table average for the fourth quartile, the Sp500 would be around 2200 by November 2013 which would mark the end of the cyclical bull (NB: Birinyi comes up with an ending level of 2100, which cross references with my calcs).

My take is that Nov 2013 is too far out, IF the solar maximum comes good in Spring 2013 (note Jan has been doing more solar work and estimates the solar max could occur Jan/Feb 2014). But as the calcs are based on averages clearly that could come in earlier but still generally fit with Laslo’s analysis.

I have highlighted the first two quartiles below.

If 1593 by September 2012 seems far-fetched, then note it would be achieved with a return to the top of the cyclical bull channel:

Again, all the predictions in this post can’t all come good. It’s up to you to work out which are the red herrings.

Roundup into the FOMC

Posted on Posted in Bonds, Commodities, Currencies, Indicators, Macro, Stocks11 Comments

Another bullish day yesterday for pro-risk, and we are now at dual resistance on the SP500:

Source: TSP Talk / Decision Point

Yesterday was the new moon, and downward pressure now emerges on my lunar geomagnetic models as of tomorrow.

We also see short term overbought signals that suggest a pullback is required, such as on the Nymo:

Source: Stockcharts

It gives us a set up whereby today’s FOMC could disappoint the markets, because of the trio of short term overbought, technical resistance, and lunar/geomagnetic down pressure as of tomorrow.

Now let’s just step back a moment and see the bigger technical picture.

Bullish percent and put/call ratio are down at the low extreme still, suggestive of a more enduring rally.

Source: Stockcharts

Hulbert Stock Newsletter sentiment is at the low extreme level that suggests a more enduring rally also.

Source: Hulbert / Sentimentrader

A spike in bearish ETF volume is synoymous with previous important lows and significant upside ahead.

Source: Sentimentrader / NYSE / Bloomberg

The recent pop in insider buying is suggestive of the market rallying ahead, as this smart money historically calls it correctly.

Source: Insider Score / Technical Take

And a low extreme followed by a new upturn in breadth also reflects important previous bottoms.

Source: ShortSideOfLong

In short, the technical picture for US stocks is bullish in a multi-week/month timeframe. So, if a short term pullback comes to pass, it is likely to be followed by further upside. If we draw in recent oversold/overbearish extremes in global stocks, commodities and the Euro, and the recent parabolic rise in treasury bonds, we have further support for an enduring move out of safe havens and into pro-risk.

Yet, the global macro picture continues to deteriorate. Economic surprises continue their downtrend and don’t display a pull-up ahead of a stocks rally, as we have seen the last couple of years. Leading indicators continue to decline – yesterday Australia came in at -1.4% (Conference Board). Euro CDSs continue to flirt with records.

As I previously stated, a mean reversion rally away from the oversold/overbearish extremes in pro-risk was likely to occur, regardless of the outlook, and we are seeing that currently. Either leading indicators and economic data start to improve and pro-risk does more than just mean-revert, or mean reversion then gives way to further declines.

US earnings begin again with Alcoa 9th July. The recent off-season beat rate has been almost 80% which suggests we may see a bullish earnings season.

Presidential cycles are supportive of upside into the US November elections, but that is largely because the President creates a positive backdrop into the elections, with concrete actions and also data spin. We start today with the FOMC and see how supportive the outputs are. Meanwhile, European leaders still need to do significantly more if they are to diffuse Euro CDSs. China also appears to need to do more to stimulate and other countries also.

Agricultural commodities had a bumper day yesterday, as concerns over the hot dry weather came to the fore. One day doesn’t make a trend but data shows that commercials were taking positions, not just speculators. I believe June and July’s climate data will really determine whether or not we see a major H2 rally in soft commodities this year.

I am going to take a couple more pro-risk profits today, selling into the strength before the unknown of the FOMC, but still retaining the vast bulk of my pro-risk positions. As I stated above, there are reasons for a short term pullback (unless the Fed really goes full-stimulus, which I don’t believe they will).

Thereafter I remain of the view that the speculative push into the solar peak of 2013 will occur. As noted above the technical picture for Euro, dollar, bonds, stocks and commodities very much suggests an enduring rally should emerge here. I therefore believe slightly less bad news in terms of leading and current data and developments is likely to spur pro-risk higher, i.e. it doesn’t have to be great, just better. I also believe we are in the midst of another period of global central bank easing and stimulating action and that we will see further rate cuts and credit easing actions and the like.

One Week Later

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As expected, we saw a reversal at the start of last week. Capitulative Breadth hit the 7-10 capitulation zone on Monday (and has since dropped back to zero due to the rallying). Monday began with more sellling then made an intraday reversal and daily hammer candle – another bottom signal. We printed the missing positive Nymo divergence between the lows of 18th May and 4th June, and positive RSI divergence between the two also. The week then progressed bullishly but Friday’s action in pro-risk, particularly in commodities and the Euro, looked weak for a while but by the close had reversed strongly. The media assigned rumours of a Spain banks bailout coming at the weekend to the reversal. This duly occurred on Saturday and we will see market reaction this coming week (Spanish CDSs had pulled back a little last week, we shall see if this can be sustained this week). Technically we were due an enduring rally in pro-risk, as per the many indicator extremes I posted in my last few entries. Central bank fuel for such a rally was mixed however. China and Australia cut rates. The Bank of England stayed put. The ECB did not cut rates. Bernanke did not telegraph further QE, as some had also speculated, but left the door open to do ‘something’ – or nothing – at the June 20 FOMC, subject to the latest economic developments. And now Spanish banks bailed out by the EU.

ECRI leading indicators for the US dropped to -2. Chinese data disappointed again this weekend (Chinese stocks made bearish technical action last week, contrary to most pro-risk, and despite the rate cut). Citigroup Economic Surprises languish and haven’t made a turn-up ahead of stocks bottoming, if that was a bottom, as they did in 2011 and 2009. So the economic picture remains weak and the question is whether central banks have begun another round of easing and aiding and stimulating, with last week’s announcements just the beginning, or whether they feel they can largely stay put and see how things develop. Well, suffice it to say that if the picture does not improve they will likely intervene more, but what we need to know is whether we will see more downside for pro-risk ahead if they don’t do more currently.

Let’s return to the techincal picture. Look back in my previous handful of posts to see the extremes reached in terms of overbullish/overbought treasuries and dollar and oversold/overbearish commodities, Euro and stocks. One thing missing for equities was an Investors Intelligence sentiment washout (whereas AAII had made such an extreme). Last week percentage II bulls finally dropped into the historic extreme low zone, but percentage bears did not, i.e. still quite a few neutrals. Accordingly, the bulls minus bears chart still doesn’t show a historic extreme:

Source: Shaeffer / Investors Intelligence 

Also, Chris Puplava notes the lack of panic selling compared to 2009, 2010 and 2011 major bottoms.

Source: PFS Group

On the other side of the ledger, equity fund flows have hit historic pessimistic extremes, matching real investor action with the sentiment shown in AAII. Also, treasury yields made an inverse parabolic move into the beginning of Monday that resembles other historic blow-off parabolic moves that normally don’t come again for some time. The action as of Monday was a v-bounce that could mark the reversal, and if so, that could spell an enduring move into pro-risk from here.

Source: Chris Kimble

The S&P500 looks pretty bullish. As per Chris Ciovacco’s chart below, we appear to have broken out and backtested important resistance. The question is whether stocks can go on to make a higher high than the end of May at the start of this coming week. If they can’t, then an inverse Head and Shoulders pattern could be in the making as long as stocks don’t exceed last Monday’s lows.

Source: Chris Ciovacco

NASA’s updated solar prediction still forecasts Spring 2013 for the solar peak, and still forecasts it to be a weak solar maximum historically. The sun is fairly active currently, which is bullish, and this should continue into next year. Some geomagnetism early-mid last week has pushed down a little on my short term model, but the message remains of a likely bottoming here, with seasonal upward pressure into July. Near term, there is the scope for upward pressure this coming week into the new moon of 19 June. I will update all models on Tuesday, with the extended NOAA forecasts, but here is the up to date Dax:

Expecting upward pressure into the new moon, I don’t plan to take profits on any of my pro-risk longs yet. The next couple of weeks give us the BofJ meeting, the Greek elections, the FOMC and other Euro meetings. Between them there is the potential to really give this rally some momentum and start to fulfil the historic positive seasonality in an election year from June to November. Or there is the potential to disappoint the markets and leave the focus on weak data and Eurozone issues.

Here is what I think. Pro-risk is overdue a counter trend rally here, a sustained upmove that provides some mean reversion for the stretched oversold/overbearish extremes. I expect us to to make that rally now. If pro-risk is heading for another lunge lower, to perhaps give us the missing II sentiment and panic selling extremes then I expect that to occur after we have made a decent retrace upwards for a few weeks. The clues will be in the health of that up move and the developments in economic surprises and leading indicators – i.e. if we rally up but all that deteriorates further then I’d be looking to take profits. However, rising sunspots, seasonally less geomagnetism, presidential seasonality all support mid-year upside. The blow-off move in treasuries suggests an enduring flow into pro-risk from here also. Extremes in US dollar COT and bullish sentiment, and the reverse in key commodities also support an enduring flow the other way. The secular position is closely linked to the solar cycle position, and we should expect a speculative push into pro-risk, with commodities accelerating into a final upmove. I consider us in a different position to 2010 and 2011 as we reach up into the solar peak less than a year away. I think it is more likely we print a strong mid-year this year, rather than a repeat of the last two years. I continue to expect a natural turn up in growth, as per the growthflation of historical rhymes, and a central bank invervention inspired turn up in growth also, at this point. Clearly though, I am frontrunning, and we need to see the evidence build to support that view. For now, we are tentatively trying to start a pro-risk mean reversion rally, and no more.

One last chart. An alternative view of secular cycling using consumer confidence readings, with my notes added. Consumer confidence topped out just before the secular stocks / solar peaks of 1968 and 2000, and bottomed out just before the 1980 secular commodities /solar peak. It made twin lows then, like it has in the current secular commodities bull, as shown by the circles. In keeping, consumer confidence should have made its secular bottom, and supporting this the nominal levels reached reflect the last secular lows. A pullback in confidence should be ahead into the secular commodities peak of 2013 and subsequent bear market, but within a new longer term uptrend.

Underling Source: Daneric / Sentimentrader

Weekend Update

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As I’m not here next week, here is an additional update following Friday’s falls.

Economic data really disappointed again. The only positive is that Surprises are reaching towards a level of historic reversion. As data worsens, analysts move the bar lower, and eventually the data starts to positively surprise.

Source: Bloomberg

Jobs data was particularly poor, perhaps boosting the chances of Fed action given their dual mandate includes maximisng employment. US ECRI leading indicators came in at -0.6, still fairly neutral but echoing the weakening trend.

Euro CDSs continue to climb. Spanish at new record highs. Policy response expected soon.

Source: Bloomberg

The June calendar looks like this:

6 June: EU meeting to resolve failed banks

7 June: ECB rate meeting – expected 50bp cut – and Bernanke Testimony to Congress – Danske Bank expect Bernanke to already state his QE intentions at this testimony

13 June: Germany growth pact meeting

17 June: Greek elections

18/19 June: G20 summit

20 June: FOMC

I believe the markets are going to get satisfaction in June through policy response, both in the US and Europe, but also China could help stimulate too. The recent commodity price falls and weak jobs data give the Fed the legroom and reason to stimulate again in some way. Obama’s chances of re-election will only improve if the markets and economy turn up again.

Policy response aside, I believe we may also see a natural turn up in growth ahead enabled by lower oil prices and lower commodity input prices on the whole, a cheaper Euro enabling more export led growth in the Eurozone, plus the natural turn up in activity historically occurring as sunspots ramp up into the solar maximum. So I continue to expect a combination of central bank intervention together with a natural turn up to provide the growthflationary finale into next year.

Turning to the market action. Dax stocks above the 50MA are now at zero.

Source: Underlying Dax

A Demark weekly buy set up is in place following Friday’s falls to new lows. The chart below was taken on Thursday.

Source: Andrew Nyquist

We now have the positive Nymo divergence that was missing at the last low.

Treasury yields have made a blow off bottom.

Source: Stockcharts

Thanks to Tiho for this summary of other extremes:

Dow Jones is down 18 out of 22 days and DSI just hit 10% bulls – US equity market experienced a “90% down day” yesterday – Crude Oil is down 21 out of 22 days and DSI just hit 8% bulls – US Dollar is up 21 out of 25 days and Euro DSI just hit 7% bulls – US Treasury 10 / 30 Yr yields are at 220 year record with DSI hitting 95% bulls.

Capitulative Breadth hit 5 on Friday but is expected to reach true capitulation levels on Monday. Panic has reached towards the extreme but could also top out higher on Monday.

Source: SigmaTradingOscillator

Vix has also reached the kind of overbought level associated with stock bottoms, but could also nominally jump higher on Monday.

Underlying Source: Cobra / Stockcharts

With Monday being the full moon and peak downward pressure, I believe the evidence is pretty compelling that we may bottom out on Monday. Capitulation is close at hand, and further falls on Monday could bring about an intraday reversal and hammer candle. If not, then Tuesday for the snapback rally to begin.

The alternative scenario of a Puetz crash window beginning on Monday and lasting a couple of weeks I believe is now remote due to the extremes and capitulation-at-hand evidence. I am therefore looking to make my last additional pro-risk buys on Monday, unless some surprise good news at the weekend means we break upwards from the outset on Monday.

I have updated my short and medium term models. Commodities are well below. The SP500 remains above but the Dax below. As the Dax is cheaper by p/e and the cheaper Euro should help German exports, maybe we will see a period of outperformance in the Dax. Seasonal geomagnetism should be less into July, which means the models should start to turn upwards.