Category: Commodities

Bear And Recession Ahead?

Posted on Posted in Bonds, Commodities, Currencies, Macro, Solar Cycles, Stocks5 Comments

We can assess the odds of a bear market and recession ahead (with the former leading the latter), by amalgamating mutliple indicators. If you followed me on Amalgamator then you may recognise this as an exercise I’ve done before. I will mark in green those indicating no bear/recession ahead, red those that do, and leave black those in neutral territory.

1. Ten year treasury yields (over 6% is a historical marker of the end of cyclical stocks bulls) – currently less than 2%.

2. Yield curve / spread (if abnormal or inverted, may signal bear/recession ahead) – currently flattening but normal. Yield curve suggest negligible probability of recession.

Source: Fed Reserve Bank of Cleveland 

3. Inflation rate (over 4% is a historical marker of the end of cyclical stocks bulls) – currently 2% official in the US but 5.5% by Shadowstats, so taking something inbetween as the reality, let’s mark that neutral. In Europe, official rates generally are between 2-3% and China 3.5%. Overall neutral.

4. Interest rate (overtightening of interest rates is a historical market of the end of cyclical stocks bulls and imminent recessions) – currently ZIRP in the US and negligible in the major economies.

5. Money supply and Velocity of money (both rising and positive for the most positive outlook) – in the US money supply is still in a rising trend but velocity is still falling; in the Eurozone the situation is the same; between them neutral.

6. Solar Cycles (predict secular asset peaks, growth/recessions and inflation) – one year from the solar peak we should see growthflation and pro-risk speculation as sunspots rise. A bear and recession here would be a historic anomaly.

7. Leading Economic Indicator composites of Conference Board, OECD and ECRI (trending positive or negative?) – Conference Board global LIs are mixed but weakening, OECD overall positive, ECRI for US neutral and close to zero. Overall neutral.

8. Manufacturing (this is a lead indicator, whereas GDP, income, employment and CPI are coincident or laggard) – US is weakening but still positive, Eurozone has turned negative, China still strong above 10%. Overall neutral.

Source: Calculated Risk

Source: Markit/Eurostat

Source: Taintedalpha 

9. Dr. Copper (copper is a bell weather for the economy and markets) – in recent weeks copper has drooped and looks technically weak. Although the longer term trend is still in tact from around the start of the secular bull market in 2000, the near term prognosis from this Doctor is negative.

Source: TradingCharts 

10. Dr. Kospi (the Kospi index is also a bellweather) – the Kospi has rallied the last couple of weeks but so far only a partial retrace of deeper falls. The 12-monthly picture is sideways. Overall a negative. 

Source: Bloomberg 

11. Stock Market Breadth (usually deteriorates and diverges from price into a stock market top). At the March 2012 top-to-date, we did not see the typical negative divergence in breadth that accompanies a major top, plus cyclical sectors displayed relative strength, unlike ahead of other previous major tops whereby they weakend some weeks or months ahead of the top.

12. Economic Surprises Index (is a lead indicator and also a mean reverting indicator – is it at a historic extreme, is it leading counter trend?) – Economic Surprises have typically oscillated between +50 and -50, and currently Surprises for the major economies are at -31, for the US alone -30. In the last couple of weeks they have attempted to flatten out somewhat, but until an upward trend develops, this is a negative.

Source: Bloomberg

13. Earnings (solid beat rates in both earnings and revenues, and future guidance) – in this last US earnings season quarter, the overall earnings beat rate came in around 62%, which is weaker than the historical average but better than achieved throughout 2011, whilst the spread between companies raising rather than lowering guidance was positive. Eurozone earnings upgrades versus downgrades are at neutral. Overall neutral.

Source: Thomson Reuters / Scott Barber

14. Seasonality (monthly seasonality, 4 year presidential cycle) – May to July has historically been positive, a period of lower seasonal geomagnetism. Specifically though in a US election year, a major bottom has been carved out in May-June, from which the market then rallied into the (November) election. That makes it a positive from here.

Source: Seasonalcharts

15. Bull Market Historic Internals and Historical rhymes (compare and overlay with historical precedents) – in my recent post ‘The Secular Position’ I showed that in the last 2 secular stocks bears / secular commodities bulls there were clear parallels to the current one, and that in the 1970s and 1940s our current position showed that we should be looking upwards for stocks, not downwards, in the bigger picture. Here is one more, showing the 1910s secular stocks bear / secular commodities bull – a similar picture, with some upside ahead in the next 12 months, and then some downside as the post-solar peak, post-commodity peak recession occurs. All 3 historic parallels show a positive picture for equities and commodities for the next 12 months.

Underlying Source: Stockcharts 

16. Oil Price (the stock market was historically killed by a doubling of the oil price in a 12 month period) – the oil price has dropped by 10% in the last 12 months as measured at today’s price – that is a positive.

17. Real GDP growth YoY (dropping beneath 2% has invariably led to a recession) – currently just above 2% in the US, delicately poised. As the latest data marked a push up, this is neutral for now, but will be resolved one way or the other in the months ahead.

Source: Dshort 

18. Stocks and commodities relative cheapness to bonds (compared to history) – currently stocks are in the historic neutral range in pricing versus bonds, whilst commodities are at extreme cheapness versus bonds. That’s overall postive for pro-risk.

19. Bond yields versus stock yields (long term government bonds yields should not exceed stocks yields by more than 6%). This has in fact inverted, with bond yields paying negative real returns.

20. Stock valuations (stocks p/es should be historically reasonable (historic US average 17)) – US currently 14, Germany 11, UK just under 10, China 7 – all historically reasonable.

21. Investor sentiment (II, AAII, Market Vane, etc, sentiment survey readings should not be overly bullish). AAII is at high bearish, which is contrarian bullish, whilst II is neutral to bearish. Overall positive for equities.

Overall, roughly half of the indicators are positive and do not support a bear and recession ahead. The remainder are mostly neutral with just three true negatives currently. Those kind of odds I will take.

To sum it up, the evironment is positive for pro-risk in terms of negligible interest rates, bonds pricing and dividends (compared to commodities and stocks respectively), and central bank supportive intervention. However, the weakening of leading indicators and economic surprises and the esclation of Euro debt has driven money again to safe havens, pending a natural improvement or central bank assitance. Should neither occur/work, then we would likely see a deterioration in the above picture and a greater likelihood of bear and recession ahead. This, however, would be anomalous to historic analogues, Presidential and solar cycles. Regardless, due to oversold/overbearish extremes in pro-risk (Euro, stocks, commodities), a period of mean reversion should come to pass. As we rally again upwards, we should print the divergences that were missing in March, if this is to be a major top. If we are not topping out here, then that mean reversion rally should be healthy in internals and accompanied by an upturn in leading indicators and surprises. 

Update

Posted on Posted in Commodities, Macro, Stocks22 Comments

Leading indicators released this week for France, Australia, Germany and China all came in positive. China manufacturing data underwhelmed. Global economic surprises data has been neutral the last 2 weeks – the downtrend has been arrested but no uptrend has emerged. The Euro continues to decline, but under extremes of overbearishness and oversold readings (elastic stretching). Commodities have been accordingly pressured, but with the exception of oil most remain above last week’s lows, and the same applies for most stock indices. So the question is whether pro-risk will follow oil and the Euro to new lows.

The Nymo positive divergence that I last mentioned 16th May was removed by the subsequent two days deeper selling. That leaves us without the typical divergence that we see at a bottom. However, the extreme reading the Nymo reached suggests an important bottom will be forthcoming in the next few weeks, if this isn’t it.

Source: Alphahorn

Capitulative Breadth (Rob Hanna’s CBI) hit on Thursday and Friday of last week. In the chart below for 2011 the lower blue line shows where this happened last year. The first occasion was in March, which produced a kind of V-bounce in stocks. The second was in June, where a more rounded bottom was reqired with some volatility around the basing, and the third was the Sept-Oct much longer, messier bottoming. That Sept-Oct period was a double bottoming, however, and buying the first CBI did lead to a v-bounce, only shorter lived.

Source: Quantifiable Edges

Percentage of stocks above the 50MA shows how extreme oversold we just reached, but again from that kind of level we have previously seen v-bounces or more extended basing, lasting from a couple of weeks to a couple of months.

Source: IndexIndicators

But there is an overarching message: from such extreme readings in Nymo, % stocks above 50MA and CBI (which hit 11 on Friday), the nominal bottom was close, and buy-side attack was the appropriate strategy.

My models show downward pressure into the end of next week. What happens the last couple of days of this week I therefore consider to be key. If stocks can rally further away from their lows then I would expect Euro and oil to reverse and join them and for a v-bounce low to be happening, with some consolidation only into the end of next week. If pro-risk alternatively falls and takes out last week’s lows then I will be looking to attack on the buy side again once we see the Nymo divergence and that would most likely after the end of next week once positive pressure emerges. My leaning is for Friday’s bottom to hold, but we will see.

The Secular Position

Posted on Posted in Commodities, Solar Cycles, Stocks26 Comments

What if I said the prices stock indices are at currently may never be seen again? I’ve not gone crazily bullish, but it is possible. Let me explain.

This is a compilation of global stock indices, provided by commenter John. They are all in large triangle formations. Symmetrical triangles following sideways action since 2000 is very much in keeping with previous secular stocks bears under permanent policies of inflation, namely sideways coiling.

Source: R Bowden 

So which way are they going to break? A symmetrical triangle forming following a sideways range gives no edge technically – it can go either way. But note that the S&P500 has broken out upwards and is backtesting the triangle, whilst the Nasdaq, not shown, is even more bullish than that.

Below is the last secular stocks bear market. The secular/solar stocks peak of 1968 corresponds to the secular/solar stocks peak of 2000. The secular nominal / solar bottom of 74/75 to 2008/9. A large triangle formed (in red) and broke out to the upside. One year away from the solar/secular commodities peak of 1980 (like now, 1 year away from the Spring 2013 solar peak), stocks had also broken out and were backtesting the triangle – the We Are Here point. Now note that although stocks didn’t gain real new secular bull market traction until mid 1982 after the post-solar peak recession, they never got as low as that ‘We Are Here’ point again.

Underlying Source: Stockcharts

Now take a look at the Nasdaq at the same point. Even more bullish, much like today’s Nasdaq.

Underlying Source: Stockcharts

Cross over the pond, and the FTSE 100 did make slightly lower lows after the current equivalent point, but only marginally.

Underlying Source: Sharelynx

A look at the FTSE All Share paints the same picture: barely new lows after this point.

Underlying Source: Thomson Reuters

Looking at the secular bear market of the 1940s and the Dow Jones, stocks did not take off in earnest until 2 years after the equivalent current point, but again barely reached lower than the lows made 1 year before the solar peak.

Underlying Source: Stockcharts

So, using secular bear market history as our guide and combining with the timing and influence of solar cycles, we have fairly bullish roadmap for equities from here forwards. Into a solar peak we see a speculative maximum, making for secular tops. It therefore follows that stocks do not decline into a solar peak even when it is a secular commodities solar peak (and this is reflected in my historical analysis of stocks returns into solar maximums), as the pro-risk sentiment prevails. But what’s interesting is that the post-solar peak recession and bear market didn’t do much damage. It reflects what I previously said about redefining secular stocks bulls as beginning at the nominal lows of 1942, 1975 and, I argue, 2009.

In past secular bears, the low point has come in the middle of what’s commonly understood to be the secular bear range, followed by a gradual process of repair. It therefore follows that the nominal lows for equities are successively higher after that point – e.g. between 1975 and 1980, between March 2009 and 2013. Right now, things look bleak. It seems that global growth struggles to sustain without central bank stimulus. Euro debt keeps returning to the fore despite government actions. Large companies are still going under as weak economies prevail. Yet, this is how secular stocks bulls begin – a huge wall of worry, which is dismantled piece by piece. They don’t start from everything being fixed, they start from a mess, but a mess where equities are historically cheap and a lot of excess has been purged from the system. All the last 3 secular bears have had more in common than differences: problematic inflation combined with sluggish growth, geopolitical disturbance, debt crises and the loss of companies and jobs. If it seems like problems are major this time round, it was no different back then. In 1979, the equivalent point to now, there were debt crises in Latin America and Korea and the USA had to raise its debt ceiling, much like today. In 1946, again the equivalent point, excessive war debts meant that interest rates had to be kept low, despite inflation, much like today.

At the turn of 2009, the talk was of total system melt down. Consider that the start of the huge wall of worry, the very messiest point. Now we are no longer facing total system meltdown but facing Euro debt contagion and economies seemingly dependent on central bank stimulus. That is an improvement on 2009, and the stock market (the US stock market) has doubled since then. There has also been significant cleansing and repair since then: bloated companies purged, house prices deflated to historical normal ranges, household debt burdens back to the levels where the last secular stocks bull market began:

Source: Scott Grannis 

Fund flows in equities have been negative the last 5 years and continue to be outflows. Retail participation in stocks still isn’t happening. Yet participation in treasuries continues to increase despite real treasury returns being negative. In other words, the fear of stock declines is so great that people would rather be parked in something paying a guaranteed small real net loss.

Source both: Scott Grannis

Stock dividends are highly attractive compared to treasury yields, back at levels compared to 2009. As it slowly dawns that stocks are going up, not down, money still start to flow the other way. Once that occurs the secular stocks bull will truly gain traction.

Source: Chris Puplava

Secular bear markets in stocks typically end with p/es in single digits. Current country p/e ratios that have reached single digits right now include China 7.2; Hong Kong 9.2; Norway 9.6; Russia 5.2; Singapore 8.9 and UK 9.7. Others aren’t there yet, such as US 14, Brazil 10, Germany 11, Australia 13 and Japan 14, but after the next bear and recession, circa 2014 by solar cycles, I expect them all to be there. Consider that US stocks topped around p/e 40 in 2000 – again, that’s quite a process of repair.

Once the natural cleansing cycle is close to completion, genuine global growth will get going again, without central bank support. Technological evolution will be the engine. Excess debt may have been transferred to government balance sheets, but the major economy debt to GDP levels aren’t at crisis points. Once revenues pick up and central bank support diminishes, the rate of balance sheet expansion will slow. Euro debt and the Greece situation needs further counter action currently, but governments have made it clear, both in words and actions, that they will step in to prevent worst case scenarios.

In short, I acknowledge the seriousness of the issues we face right now, but also the intent of global leadership. Most importantly though, history reveals that it is normal at this point in the secular bear to still be facing such challenges and that despite the challenges (or even thanks to them: wall of worry) we should be looking up, not down for equities. I’m not implying that all-in on equities right now is the way to go. Commodities should make their final blow-off move into next year, making them more attractive than stocks over the next 12 months, and thereafter a bear and recession should eventually provide the final great opportunity to get into equities. But there is a chance, even a likelihood, that the low in equities at that point will be higher nominally than now, which makes me reflect on all the long positions I took last week in equities.

Turning to commodities then, and using history as our guide again, there was a peak in inflation in 1942 and a higher peak in inflation in 1947, the solar / secular commodities peak. There was a peak in inflation in 1975, and a higher peak in inflation in 1980, the solar / secular commodities peak:

Source:  FRBSF

2013 is the forecasted solar peak, inflation peak and secular commodities peak by solar cycles. We saw the first inflation peak in 2008 – which would be 5 years prior, just like in the 1940s and 1970s. The chart below shows the 2008 peak and our trending upwards since then again, despite the ‘deflation’ chatter.

Source: Shadowstats

Now look at the commodities charts, courtesy of John again. Large symmetrical triangles, like stock indices, but the difference is that these formed in upward rising trends in place since 1998/2000. By the book, that makes them more likely to be continuation patterns. I believe they will break out upwards, and when they do, they should make the acceleration into the secular /solar peak, fulfilling the inflation prediction at the same time.

Source: R Bowden

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.

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.

Update

Posted on Posted in Commodities, Currencies, Macro, Solar Cycles, Stocks1 Comment

The Dow made a new high yesterday but closed beneath it. The other indices did not yet see new highs.

The Hang Seng has made a pretty compelling breakout – a successful backtest of a bull flag and then a pop today with China data good again and the Shanghai Composite performing well.

The threats of declining and negative Economic Surprises, weakening US leading indicators, and Spanish CDSs close to record highs, all remain. But for now, equities look technically bullish. I continue to expect some weakness to occur into this coming weekend, so let’s see how today unfolds.

The latest POMO schedule was released here and shows a programme of both buys and sales, not making much of a push or pull either way.

Commodities look to have potentially made an important trend break here.

Source: Chris Ciovacco

Certain commodities are still at extremes of pessimism or bearishness. However, yesterday’s positive US data and hawkish Fed tones have pushed up the dollar and pulled back gold. The commodities complex may struggle if that holds. Euro PMIs today may affect sentiment one way or the other.

In short, good reasons to fancy commodities here (China growth signals, excess pessimism), but as always patience may be required.

The latest solar maximum prediction from Nasa was released and continues to forecast a solar maximum in Spring 2013.

Source: NASA