Category: Commodities

Update

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Equities: the indices have diverged to some extent. The Hang Seng has been correcting since late Feb. The Dax looks to have begun a consolidation/correction last week in my anticipated turn window, and continued it this week. The SP500 is unclear – either Monday’s action was a fakeout to the upside and the correction begun last week continues, possibly sideways, or it is still in an uptrend. The Nasdaq looks very much still in its uptrend, digesting Monday’s gains and ready for more. Apple remains in its uptrend too.

It’s unclear. We aren’t generally seeing a set of extremes in overbullish and overbought indicators (whilst recognising that we are overall elevated) – there are just a couple of indicators calling for an immediate turn – such as a persistent high extreme CS Fear Index and a Nasdaq RSI of over 75. Yet, US Economic Surprises dropped again, and we continue to see divergences in this and in my geomagnetism models from the US stock indices. Chris Puplava’s latest analysis negates the likelihood of an imminent bear market for stocks, and I generally anticipate sideways action. So I continue to wait for a better opportunity in equities – either at overbought/overbullish extremes or the opposite, whichever comes first.

Source: Stockcharts

Bond yields have fallen back in the last few sessions, perhaps following Bernanke’s dovish comments, and commodities have fallen back also, with concerns over China’s growth playing. Gold now looks to have been repelled at the 200MA so perhaps needs more time to consolidate before gaining upside traction. Oil inventories were higher than expected yesterday, putting oil at the lower side of its recent range. If oil were to break downwards out of this range, then that would also suggest more time is required before commodities are ready for a momentum rally, so let’s see. Portugese CDSs dropped out of their long term uptrend, in an interesting development. Yet Spanish CDSs have not weakened in the same way. Italy CDSs are unclear.

I have little else to add at the moment, and don’t want to post ‘filler’. It’s been a week with not much to report or analyse, so patience it is for now, and we’ll see what transpires.

Roundup

Posted on Posted in Commodities, Currencies, Macro, Stocks6 Comments

Last week gave us a correction in stocks, but upside resumed yesterday. Apple continues to print topping candles and then reversals. Broadly speaking, indicators are not screaming overbought or overbullish, so for now the medium term uptrend remains in place.

Bernanke’s dovish comments provided a trigger yesterday for gold and miners to move up, which was in line with the overbearish extremes both had reached. Oil continues to range trade but in what looks like a bullish flag. The Euro and Dollar are at an important decision point.

I have updated and extended my short and medium term models (see pages of those names). There is some near term downward pressure next week into the 7th April. Medium term, the message remains that stocks have run above the models and should now be brought back into range, in overall sideways action.

US earnings begin again 10th April. Profit margins are at a record and historically this has been mean reverting. If earnings start to disappoint, then coupled with downward trends in economic surprises, that would make further upside difficult for stocks. However, earnings may not disappoint, so let’s see. Here are suprises:

Source: Bloomberg

Quite a downtrend in place since the turn of the year, and unless this turns up then stocks should eventually exit their uptrend. Here is the updated overlay of the surprises index on the S&P500. In both recent examples of 2009 and 2011, once the surprises index topped out, the stock market moved from uptrend to sideways/down consolidation a few months later.

How’s Euro debt? Here are Spain and Portugal 5 year CDSs. They remain in their longer term uptrends. Unless they can break down decisively, then it suggests Euro debt will come to the fore again at some point in 2012. Let’s see.

Source: Bloomberg

Trading-wise, I am currently doing nothing. I am hopeful that gold may now take off, with yesterday’s trigger and the overbearish extremes reached, and I am well positioned for that. Oil looks strong, both technically and fundamentally. Agriculture is picking up again, slowly. Again, I am positioned for both those. The Euro-Dollar remains finely balanced and I continue to monitor. I have a negligible stock indices long position. I do not wish to short equities, whilst leading indicators continue to improve. I do not wish to go long equities, whilst divergences build in surprises and geomagnetism. I am awaiting a more clear cut opportunity in stocks, whenever that comes.

Gold

Posted on Posted in Commodities19 Comments

Let me start by saying that I’m not a gold bug. I don’t own any physical. In the event of a global mega-disaster I don’t want gold. The fiat system is unsustainable on current trends, but debt limits in the major developed nations are further out, circa 2030, so those buying gold as protection against its collapse are too early, in my view. Investment and central bank demand are the growth areas for gold, and I expect them to reverse once a new secular growth cycle emerges and dividend-less gold suddenly doesn’t look very appealing.

All that said, gold has been a source of great profits since I started trading, because of its enduring secular bull since 2000, and I am overweight precious metals currently, anticipating that the biggest gains are yet to come in an imminent finale. By solar cycles, the peak should be 2013, and thereafter I don’t want any gold in my portfolio – not until the next secular commodities bull in the 2030s. In short, I believe there is a final gold mania just ahead, which is a terrific opportunity for a trader to make big, fast profits, and yet, I don’t want to get stuck with gold so want to ensure I sell out before the peak. Therefore, I have a full long position in precious metals already, frontrunning what I believe to be a final mania (if you subscribe to the general ideas of Kondratieff, then this is a K-winter in which gold is the leading asset).

But might I be wrong? It is a tricky one to call, as it isn’t clear cut, particularly with gold currently in a down trend some way off its peak. It reminds me of the condundrum regarding equities in the second half of 2011. It was a tough call that needed repeated assessment. So here we go again…

As things stand, gold’s secular bull remains in an orderly uptrend, although it is currently beneath the 200MA, which has largely supported the bull to date. There have been notable spikes on the way since 2000, but nothing resembling historical manias. If I had to pick out a few analysts who I respect and trust, then Marc Faber remains a gold bull, Zeal LLC maintain we are still in a gold secular bull, Chris Puplava is bullish on gold to retake $1900. The alternative is that precious metals peaked in 2011 and the batton has already been passed to equities.

The major central bank policies of negligible interest rates and stimulus make for asset bubbles, hence since the secular stocks bear began in 2000 we have seen bubbles in real estate, oil, cotton, and even equities in 2007. Until their policies change more bubble-blowing is likely, and with money finally flowing out of treasuries, the likelihood of bubbles has risen again. But will equities be the main beneficiary, with their low historic valuations and good dividends, will real estate, now that it is back at historically reasonable levels, or will commodities, and if so, some or all commodities?

Let’s start with real interest rates. Negative real interest rates are typically bullish for gold. The below chart shows that certain key countries have negative real rates but the trend is currently up as money exits safe havens and inflation has eased a little following 2011’s deflationary episode.

However, with a tentative economic recovery and large debt obligations, central banks and goverments need to keep rates down. Of course, their actions and policies over the last decade have made it clear that they will and can do this, particularly if inflation is not too pressing. Real interest rates are likely to stay supportive of gold into 2013, particularly as inflation should rear again, due to oil.

Oil inventories remain above historic average levels currently, however the recent push up in the price partly reflects the worsening situation in emergency stocks, as shown:

Source: IEA

This is total OECD fallback stocks. Note that the dip in these stocks early in 2011 corresponded to the oil price accelerating in that period, only for the Euro-debt deflationary episode to deflate it for a while. But now stocks are decreasing again and the crude oil price is back over $100.

Below the global demand-supply situation. The forecast is for demand to increase later this year, which means supplies will have to increase again, if the price isn’t going to run away.

Source: IEA

But now look at global production – it has been flat the last few years, with new supply coming on stream only covering old supply ending. Although it appears from the above chart that oil supply has been rising along with demand, it partly reflects drawdown on emergency stocks.

In short, the situation for oil is tight, and a geo-political supply disruption would rapidly see price escalation. As we head into the solar maximum of 2013, increasing sunspots have historically corresponded to protest, revolution and war (such as last year’s Arab uprisings), due to increased human excitability. I believe there is a distinct possibility that we could see something that threatens supply, and potentially mirrors the 1970s:

Source: Now And Futures

Now let’s look at gold supply and demand:

Source: Morgan Stanley

Essentially, investor and central bank demand are expected to reverse as of 2015. The price is expected to be supported into 2013/2014. What might change this? Emerging central banks are switching some reserves out of diluted major currencies to gold. It is unlikely by next year that the US, UK, Japan and Eurozone will have reversed their policies to non-dilutory. Investor demand could potentially reverse if the oil price declines and economic growth continues to pick up, making equities yet more attractive. However, stronger economic growth and oil price declines are an unlikely combination.

Balance sheets of the 5 main central banks continue to grow, and as a proxy for gold now make gold appear underpriced.

Source: PFS Group

Food prices also appear to be a proxy for gold. Broadly speaking the current outlook for food prices is supported by tight supplies and increasing demand but dampened by record plantings. With trends in natural disasters still on the rise, and particulary strong in 2011, there are potential threats to the plantings and harvests, but where and on what foodstuff is hard to predict. I therefore remain exposed to agri as a whole.

Source: Casey Research

If all non-gold reserves were covered by gold then the price would be close to $10,000. As can be seen, during the last secular stocks bull of the 90s, the gap in this measure didn’t inspire it to close. Whether it could do now, in a secular gold finale, remains to be seen.

Source: Casey Research

Gold in relation to the money supply reveals we are some way from gold’s last secular peak.

Source: Casey Research

CPI inflation-adjusted gold paints a different picture, that we have aleady reached 1980’s heights.

Source: Measuring Worth

However, the same model using Shadowstats undoctored inflation data shows a very meagre gold run to date.

However, there is nothing to say gold ought to replicate the final height of the last gold bull. For that, we might do better looking at gold’s relative value to other assets. The Dow-gold ratio, shown in my earlier posts of this week, reveals an unclear picture. Having bottomed so far around 6, it lies beneath the long term trend line, but some way from the 1-2 reached in the last gold bull. Having begun its secular bull from a ratio of around 40, gold’s relative value has moved a long way. So we might conclude that gold is relatively expensive to stocks historically, but could potentially move more extreme yet, doubling or tripling in relative value.

We see a similar picture in gold’s relative value to real estate. Both US and UK shown.

Source: Approximity

Again, gold is historically expensive compared to real estate, but could yet become more extreme, perhaps doubling again.

Lastly, here is an overlay of the current gold bull on the last. There are some technical similarities, and the finale would be achieved by 2013, in line with my expectations. The top would be circa $6k. Again, there is no requirement for gold to replicate the last gold bull’s ferocity, but drawing in the potential to hit absolute extremes in relative value versus stocks and real estate, something of that size would fit.

Source: Now And Futures

OK, let me sum up. The balance of evidence supports further rises for gold into 2013. Demand and supply, the oil/inflation situation, real interest rates and government balance sheet. As per my post of yesterday, gold and gold stocks are currently at overbearish extremes, suggesting a rally will occur soon, supported by gold seasonals the next 2 months. The technical shaping of that rally should give further clues as to whether my favoured scenario is correct. Developments in agri and oil and economic data will also help to bolster the one scenario or the other. For now, I sit on my full set of precious metals longs. If gold was to drop out of its current consolidation to the downside, then it would make the overbearish/oversold indicators yet more extreme, and therefore a mean reversion rally as a minimum. Furthermore, historical rhymes suggest that we should get a rally here even if it made its secular top last year. So, I expect a period of rally, and then we can reassess again.

Risk Asset Cycles And Gold

Posted on Posted in Commodities, Solar Cycles, Stocks23 Comments

In my last analysis I suggested a new secular stocks bull began 2009 lasting through to 2032, so does that mean you missed the boat if you didn’t load up in equities in 2009? Well, with the secular commodities solar peak expected around Spring 2013, take a look at the Dow action into previous such peaks, denoted by the orange lines in the long term Dow chart below. The Dow pulled back just before these peaks and tracked sideways across them, making for a higher nominal peak than denoted by the nominal low red circles, but a good buying opportunity. So, if history repeats and we see a commodities overthrow into 2013 followed by a stocks low around 2014, then the most profitable trade would be to focus investment in commodities until the 2013 solar peak and then switch to stocks at their low circa 2014.

Let’s now remove inflation and look at ‘real’ long term stocks. i.e. net of inflation – this time the SP500. I have marked the same secular and interim stocks peaks in green and commodities secular peaks in orange, plus the full risk assets cycle between the black lines. In real terms, the dip in real stocks value around the secular commodities peak each cycle is notable, followed by an upswing into the interim and secular stocks peaks. The result is a waveform, marked in dark red, known as a sine wave. This wave pattern is very common in nature, occuring in ocean waves, sound waves and light waves. Again, there is an upward trajectory to the long term wave, which reflects technological evolution and increasing human value-add. Following the waveform and the history, a lower real low for the S&P500 should be yet to come around the commodities / solar peak of 2013, and it looks like it needs to fall some way.

Source: Dshort

Yet, if we adjust for ‘undoctored’ inflation (Shadowstats figures) rather than ‘official’ inflation, the chart looks quite different, with the 2009 real low already at the low extreme:

Source: Dshort

Between the two charts, some kind of rounded bottom looks likely with another low still to come, before stocks take off in real terms, and I suggest it is indeed possible that we see a higher low in nominal terms and a lower low, or perhaps double bottom, in real terms, with inflation making the difference between the two. By solar cycles and history, inflation should peak along with solar activity and commodities, meaning the difference between the nominal and the real price of stocks may be fairly substantial at that point.

So let’s look at inflation. The chart below shows that both official inflation and Shadowstats inflation peaked in early 2008, when oil spiked. If, as some argue, we have already seen the secular peak in commodities, say with oil in 2008 and with precious metals in 2011, then we are unlikely to exceed that 2008 inflation peak.

Source: Shadowstats

The implications of that would be that the circle on the next chart would mark the inflation peak of this solar cycle, and that would be an anomaly with previous solar maxima both in time and height.

Of course if we apply Shadowstats figures to the chart, then the height of that spike would become more compelling, but nevertheless, by solar cycles and by history, the next solar maximum of 2013 should drive human behaviour to maximum speculation in commodities and maximum consumer inflation.

Next is a similar long term inflation-adjusted chart, but this time for commodities. Again, I have marked the same commodities peaks in orange and the risk asset cycle markers in black. I have applied waveform again, and again we see a sine wave but with reverse polarity to that of stocks.

Again, it would be an anomaly if commodities had already peaked around the solar minimum secular nominal stocks bottom of 2008/9, instead of around the next solar maximum of 2013.

One more chart – here is the long term Dow-gold ratio. Again, note the sine wave.

It can be seen that at the time of each secular nominal stocks bottoms (black lines), there was a notable spike down in the Dow-gold ratio. In fact, that spike down was sometimes the nominal bottom in the ratio. From those spike lows, the ratio then made a bounce, lasting 2-4 years, up towards the middle trend line, before typically falling again to another low around the solar/commodities peak.

Curiously, following the 2008/9 low, the ratio made only a weak bounce into 2010 before falling again. With the solar peak looming just 12 months away now, the likelihood of an intermittent bounce in 2012 up to the middle trendline, i.e a Dow-gold ratio of 20 (gold falls to 650, or Dow rises to 32,000), looks slim to say the least. Either the weak bounce is a clue that the ratio will keep dropping to a new and final low around the solar peak of 2013, as it did in 1979/80, of perhaps 1-2, or it will make some kind of W bottom, with stocks outperforming currently and then giving way to commodities again into the solar peak, with a ratio bottom of 5 or above. As the evidence further up the page suggests stocks might track overall sideways into the solar peak, the difference between the two ratio scenarios perhaps indicates the scale of a final gold ascent, ranging from meagre (maybe final gold $2000 or so) to colossal (maybe $10,000).

In my recent post of 6th March, ‘Precious Metals’, I detailed the fundamental support for gold into 2013 from negative real interest rates, central bank and investment demand. Disinvestment and greater new supply is forecast to occur after 2014. In short, the window from here into 2013 has the fundamental support to fulfil the final parabolic ascent forecast by solar cycles and historic rhymes. Not only that, but I suggest that the entry point for gold and miners is right now, and here is the evidence.

Gold miners bullish percent index / Market Vectors Gold Miners ratio is at an overbearish level that has previously corresponded to bottoms in gold (see second chart):

Source Stockcharts

PFS’s intermediate term gold indicator is at a buy level, by history:

Source: PFS Group

Rydex precious metals allocations are into the extreme low zone:

Source: Pater Tenebrarum / Sentimentrader

Hulbert gold sentiment in the latest reading is now -15.7. The below chart is taken prior to that reading, but note it will now be down at a level on par with 2008:

Source: Pater Tenebrarum / Hulbert / Sentimentrader

Trading Update

Posted on Posted in Bonds, Commodities, Stocks6 Comments

Treasury bond yields added to their breakout, making for what looks like a significant change of trend. Money should accordingly flow into pro-risk. My short treasuries trade is now in the money.

Source: Stockcharts

Looking at the 30 year bond, the initial target would be a return to the trend line:

Source: Stockcharts

Pessimistic sentiment is at an extreme in gold miners, and gold itself is very oversold by PFS’s intermediate term indicator, an indicator that I have found reliable for entry points in the past. I have added to my gold long position and opened a long gold miners ETF position.

Source: PFS Group

Turning to equities, Apple made a third attempt at a top yesterday, and maybe third time is the charm:

The stock indices held up despite that, but from today into next Friday we are into a likely turn window, drawing together my models, Bradley and the Equinox. Geomagnetism also continues, making for a significant gap between SP500 actuals and my model. The Dax has also moved above the model.

We see a partial set of overbought and overbullish indicators in stocks. Ideally a push a little higher into next week would give us a more complete set and make for a more compelling turn in the turn window. Here is bullish percent over call/put – into the excessive zone again:

Source: Stockcharts

I have sold part of my remaing stock indices long position today. I will sell the remainder later next week if the stock market can push on further.

I don’t see evidence of a major top in stocks here. But with Economic Surprises continuing to fall away, geomagnetism pulling the models down, and based on historic rhymes, a rounded top or flatting out or consolidation is likely. The Vix is down at its bottom bollinger band, potentially ripe to pick up again. Given the likely trend change in treasuries, reflecting the economic pick-up, stocks will remain attractive. But with gold and gold miners at pessimistic and oversold extremes it seems likely that soon we see some money flows that way. Even if you believe that precious metals topped out last year, then they should enjoy a rally, as per this post-mania parallel chart (chart from several weeks ago – silver is around 32 at the time of writing):

Source: Willem Weytjens

I maintain precious metals are due for more than just a bounce though, and will have more on this next week.

Solar Minima And The Financial Markets

Posted on Posted in Commodities, Solar Cycles, Stocks8 Comments

If the mass human excitability that Tchijevsky identified leading into and around solar peaks translates into maximum risk-taking, speculation and buying in the financial markets, then might the mass human apathy associated with solar minima translate into conservatism, safety and maximum risk-asset selling?

The last solar minimum of December 2008 is shown below. Note that despite the official dating, solar minima are in reality drawn-out rounded affairs lasting a couple of years. The March 2009 bottom occurred in this period.

Could that be the nominal bottom of the stocks secular bear? I have advocated that it should be, using history as our guide, but interestingly, I have found that the nominal bottoms of the last 3 secular stocks bears all occurred not only in the middle of the secular bears, but all within 2 years of the official solar minima.

Here is 1932:

Source: Sergey Tarassov

Taking this further, I have established that within 2 years of each solar minimum over the last 100 years we have experienced panics and crashes if not outright secular nominal bottoms, as shown:

First, the stock market panic of 1901 (solar minimum Feb 1902). Then the financial crisis of 1914 (solar minimum August 1913) which involved closing key global stock and commodity markets for several months. Had they not been closed, it is expected the crashes would have been worse than 1929.

We had a crash in 1921 in stocks and commodities (solar minimum August 1923), a commodities crash in 1952 (April 1954 solar minimum), the sterling crisis in 1964 (October 1964 solar minimum), Black Monday 1987 (solar minimum July 1989) and the Asian financial crisis in 1997 (solar minimum May 1996). All saw massive falls in risk assets.

We reached the nominal secular stocks bear bottoms in 1932, 1942 and 1975, corresponding to the solar minima of September 1933, February 1944 and June 1976 respectively.

Forecasting ahead, I therefore expect that the next cyclical stock market low will be higher than March 2009 and that late 2008 / early 2009 bottom will turn out to be the nominal secular bottom, falling close to the solar minimum. Also forecasting ahead, I expect another crash or panic sometime in the window 2018-2022, around the next solar minimum. Drawing solar cycle predictions together, I expect a secular commodities peak in 2013, a cyclical stocks and commodities bear 2013-2014, a new secular stocks bull to erupt 2014/5 and make a 3.5 year up cycle on to the verge of the solar minimum, at which point a crash or panic should occur as apathy and conservatism overwhelms risk appetite.

Markets Update

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

Yesterday’s upward thrust in stocks, on good breadth and volume, supports my favoured scenario of a push on into 21-23 March.

There is a potential divergence in % stocks above 50MA that could spell a period of sideways range action after that.

Source: IndexIndicators

A significant divergence is now present on my medium term model for the S&P500, whilst noting that the Dax is on model, having been playing catch up from underperformance.

A couple more sessions of contined upside for stocks and we will start to hit overbought and overbullish measures again. I still have a couple of stock indices longs and will be looking to exit them at the end of this week or the beginning of next if that occurs.

A key development yesterday was an upwards break in treasury yields – the rounded bottom is gaining momentum. There is a large wall of money in treasuries that could start to flow towards risk assets.

Source: Stockcharts

My expectation, based on my previous analysis, is that commodities should be the main recipient, and that commodities should outperform stocks leading into next year’s solar peak. Yet, what we are currently seeing is the opposite.

Here are commodities versus the medium term model – very much on model. Yet I was anticipating stocks aligning with the model whilst commodities pull away. So what’s up?

The US dollar is strong again. Good economic data from the US is helping support the USD, as well as no further indication yesterday of more, or further extended, dollar-diluting programmes. As I previously noted, the US dollar is in a delicate long term position, which I expect to break downwards, helping propel commodities to their secular conclusion. However, right now we lack a trigger for that, and with fairly neutral sentiment towards the Dollar and the Euro, that doesn’t give us a reason either.

Of course a strengthening USD does not make a commodities rally impossible. Another key factor is China. Recent Chinese data has been softer than expected, and whilst expectations are for Chinese easing/stimulus, as yet the Chinese authorities are being cautious. Here are the latest OECD leading indicators, and whilst we now see a definite up turn in most countries, China isn’t following suit yet.

Source: OECD

Here’s gold. The smaller wedge is the first potential reversal opportunity. Failing that, the confluence of long term rising support, falling s/r and the 23 fib look like the next most likely bounce point.

Marc Faber is still a longer term gold bull, but anticipates gold could fall to $1500 here. Such a move would put it below all the key moving averages that have supported the secular gold bull to date and so I think it’s unlikely, but, much like the USD, it is delicately poised, and I am closely following both.

Solar Cycles, Agri and Equities

Posted on Posted in Commodities, Solar Cycles, Stocks2 Comments

Here is a chart showing the relation of between live cattle prices and solar cycles. It can be seen that cattle futures peaked very close to the last 3 secular commodities solar peaks of 1917, 1947 and 1979. This suggests cattle prices should peak close to the next anticipated secular commodities solar peak of Feb/Mar 2013.

Source: Sergey Tarassov

If we bring cattle futures prices up to date in the chart below, we can see that prices have been accelerating upwards since 2010, which appears in line with historic behaviour as sunspots pick up.

Source: TradingCharts

Both the EU and the US are forecast to produce lower meat output in 2012 and 2013, as farmers rebuild herds amongst tight supply and strong demand (from countries such as Russia and Turkey). It is not expected that supply in cattle will catch up until 2014.

Therefore, by solar cycles, cattle prices should rise into next year’s solar peak, and the demand-supply situation supports this happening. Prices have been rising quite consistently and strongly already however, and may not give traders an easy entry point.

Turning to corn, we see a similar strong relationship between prices and solar maximums for the last 3 secular commodities solar peaks of 1917, 1947 and 1979. Again, this suggests corn prices should rise into next year’s anticipated secular commodities solar peak.

Source: Sergey Tarassov

Corn futures prices took a dip after their early 2011 peak and perhaps offer a better entry point currently, particularly as current droughts from Mexico to Argentina are expected to shrink corn stockpiles to a five-year low. However, whilst shrinking inventories are expected to push up prices over the next 6 months, record planted acres are expected to make for bumper harvests later in the year. The wildcard in this is the weather.

Source: TradingCharts

Now according to new NECSI research, investor speculation rather than regular demand-supply factors was instrumental in the two food price spikes of 2008 and 2011, and furthermore, they predict a third speculation-driven spike by 2013.

 Source: NECSI

This fits very well with what I have previously written regarding the influence of rising sunspots into the solar maximum inspiring human behaviours of buying, risk-taking, and money circulation. The drive to speculate makes for risk excesses in either stocks or commodities into solar peaks, and into 2013 we see evidence that speculation will peak in commodities, with the history in cattle and corn prices above adding to that.

Turning to equities, there is a historically similar route map in the 2000s so far to that of the 1850s, i.e. a historical rhyme. If we amalgamate that with other such close historical rhymes, such as 1887, 1923 and 1906, the ‘average’ route map looks like this:

Source: Sergey Tarassov

That fits very well with my own findings in how the stock market performed into previous solar commodity peaks, namely overall flat, and also that the low is likely to be around 2014, but a higher low than in 2009. It also fits with a recession 2013-2014 and stocks starting a new secular bull in 2014, as a lead indicator before the recession ends.

The next two charts are spectrograms for the Dow Jones Industrials index stretching back in time, the first being older and the second more recent. These capture all the actual cycles, based on real major turns, and layer them over each other. Where we see spikes, these represent the biggest confluences of the same time cycles.

Source both:  Sergey Tarassov

Forget theoretical cycles, here we are seeing what actual cycles are observed repeatedly in this index, and there is a notable confluence of a cycle of 3.5 years in both charts. Now the current cyclical stocks bull began in early 2009, and 3.5 years later would be late 2012, which if turned out to be the cyclical top, would again fit very well with topping out ahead of the solar peak and recession, and diverging from commodities at the end, which go on to a parabolic top at or following the solar peak.

Another notable confluence on the above two charts shows that there is a cycle at work lasting 9-12 years, which happens to be the length of a solar cycle. Based on my work, we would expect to see the solar cycle visible in such an analysis, and that is a very close fit.

Which brings me to this link, which is CXO Avisory’s piece finding no notable correlation between the sunspot cycle and stock market returns. They demonstrate different approaches to finding a consistent relationship between the two, and find none. Well, if I took a similar approach to this chart of mine below it would average out at a negligible correlation too.

But that’s because the cyclical bull from 2003 to 2007 is not related to sunspots. If I look specifically at returns from solar minimums to solar maximums then I get something more persuasive, with an average 70% return in that 3-5 year period.

And to demonstrate the difference, here are the returns for the other period, down from the solar maximum to the next solar minimum:

That’s an average 25% return in that 5-8 year falling sunspot period, compared to a 70% in the 3-5 year period of rising sunspots. Not only is that a substantial difference, but the 5-8 year period is significantly longer than the 3-5 year period, and in fact the difference in average returns per year is 18% in the rising sunspots period versus 4% in the falling sunspots period.

So whilst I do not deny CXO’s results, I suggest the issue is in what they are looking for. The relationships between sunspots and the financial markets lie in solar peaks, and not only that but alternating with commodities in pro-risk speculative peaks that correlate with solar peaks. Furthermore, the spectrogram further up the page displays evidence of a cycle in stocks around the same length as the solar cycle, supporting this peak/turn relationship, but CXO’s analysis is looking for a close relationship at all times rather than up into and around solar peak turns.

In short, if we consider that rising sunspots inspire human risk-taking, buying and speculation, but that other factors would also drive people to similar behaviour, then in periods of negligible sunspots we might get strong cyclical bull markets for other non-sunspot related reasons.

What’s Ahead

Posted on Posted in Bonds, Commodities, Currencies, Stocks5 Comments

FOMC tomorrow. First major Bradley turn on the 16th March. Major Gann turn around the Equinox 21-23 March, which equates to the next top on my models. US Earnings Season begins again 10th April. Seasonal geomagnetism to peak in March-April and sunspots to ramp up again in the weeks ahead.

Take a look at the damage from the solar storms of the last few days:

That is an impressive spike. Now take a look how the models have tipped over on my Short Term and Medium Term models page. The message is clear – a market correction, or at least some volatility, is due. So I reiterate what I suggested at the end of last week: I expect either the markets to tip over and correct imminently, or for them to continue higher into 21-23 March, make a significant divergence from the models in doing so, and then correct.

Economic Surprises for both the US and the major economies continue to fall away from their peaks, and here’s a reminder of how stocks performed in 2009-2011 after Surprises twice peaked (blue line):

Essentially, upside was limited, the market was on borrowed time before it corrected. That said, the ‘borrowed’ time could last a couple of months, so I would want to see evidence of the market topping out from other sources, before shorting. So how do things look?

Insider selling continues to be at an extreme. Short Yen positions are also at the extreme. The former suggests stocks should pull back, and the latter that money should pour into the safe haven Yen. But these two aside, we don’t see extremes. The consolidation in pro-risk has reset some of the indicators that had were toppy, suggesting more upside may be required to reach an overbought and overbullish reversal.

If we look at the technical picture for the S&P500, we see it is flirting with its 2011 high, with potentially clear air above if it can break out, but also that it is within a rising wedge which would normally break to the downside. For my first scenario above of imminent correction, the index could potentially double top today with its high of the start of March, reversing at that horizontal resistance. For my second scenario of a push upwards into 21-23 March, the index could break out but within the wedge and overthrow to 1400 before a correction.

Meanwhile, the US dollar has been rallying, which has taken the wind out of commodities to some extent. If the Fed is dovish tomorrow, extends Twist or similar, we could see a reversal, and precious metals gaining ground again. However, if they do nothing, the USD could maintain popularity. It remains in a very delicate long term position, and whilst I continue to believe that it will ultimately break to the downside in a mirror of the 1970s, we need a trigger for that to occur.

Source: Stockcharts

I look at both precious metals and at mining stocks and see evidence for a big move up coming up, but not quite yet. Fed action tomorrow could provide a trigger, but failing that, a little more time looks needed. Treasury bonds continue to make a rounded top, yields a rounded bottom. If this is the prelude to a notable change in trend, then the Fed may have a reason to step in.

OK, let me sum up with my favoured scenario: stocks push on higher into 21-23 March, making a big divergence from the models and reaching overbullish/overbought again. I think that would then make for a nice shorting opportunity, and a subsequent period of mean reversion. I suspect that because most indicators have eased off from being toppy we need to push up to hit extremes again. Those extremes, plus some big divergences, would make for a higher probability trade than right now.