Category: Currencies

Markets Update

Posted on Posted in Commodities, Currencies, Indicators, Stocks9 Comments

Commodities have made a bullish breakout, with copper the latest to join.

Source: Chris Kimble

As we stand, soybeans, wheat, gold and silver have all reached levels of overbullish sentiment. A consolidation may therefore be ahead.

The US dollar broke down beneath rising support, and the Euro broke up. That’s supportive for commodities.

Source: Seeitmarket (plus my dollar support line)

10 year Treasury yields continue to make an inverse Head and Shoulders pattern.

Gas and crude oil inventories continue to fall back towards their longer term averages. Although both are still out of their historical ranges, the trend in both is of a shrinking of stocks.

Sources: IEA and Bespoke

That perhaps reflects an improving US economy, as evidenced by ECRI leading indicators and Citigroup economic surprises both moving into the positive:

Source: ECRI

US economic surprises – source: SoberLook

The key question is, is the US about to roll over and join countries such as China, Germany and Japan in economic weakness (coincident and leading) or are the latter about to turn up and make for a global reflation? Conference Board and OECD data later this week will provide more clues on that, but the trends in certain key stock indices, commodities and currencies are currently pointing to reflation. Also, by solar cycles, growthflation is the norm into the solar peak – both growth and inflation – therefore a reflation would also fit.

The improvement in the USA does not prevent the Fed from delivering stimulus this Thursday. It has a dual mandate and they are clearly not happy with the jobs part. The markets are anticipating QE3 (likelihood from Bloomberg indicator now 99%) and this is because the last two Fed communications have more heavily hinted towards it.

I believe that QE anticipation, together with the upward pressure into the new moon, and the technical breakouts of late last week, all should support pro-risk leading into this Thursday’s FOMC outputs. What I am looking to see is, do we arrive there overbought and overbullish. If we reach those levels in stocks pre-FOMC-outputs, I will be looking to take some profits.

Looking at sentiment, bullish percent over put/call ratio has a little room to move higher, compared to previous peaks, and to oscillate in that kind of region for longer.

Source: Stockcharts

SP500 stocks above 50MA can also push a little higher, and oscillate there for a period.

Source: IndexIndicators

Sentimentrader indicators at a bullish extreme could also rise a little higher yet.

Source: Sentimentrader

All three show stocks at bullish sentiment levels, but not quite at extremes that would signify a reversal. Tom De Mark’s target for the SP500 is now 1478. I suspect that by that kind of level we would see these sentiment readings at historic extremes, and combined that would make a strong case for profit-taking.

Whilst the SP500 broke out, the Dow and the Russ 2k are still flirting with quadruple tops, so it is not a done deal that stocks accelerate upwards here. Whilst the Dow Transports showed continued bullishness yesterday…

Source TSP Talk

…the Nasdaq reversed most of its breakout gains and is delicately poised, suggestive of either a successful backtest of the breakout or a breakdown back into the range, leaving a bearish fakeout that is the opposite of the Tran fakeout shown above.

To sum it up, I am sat on my long commodities, long stocks indices and short treasuries positions, with no compelling reason to exit any of them currently. Of the three, I am still looking to exit long stock indices as priority, as per my secular/solar projections. I believe stocks will be supported into this thursday’s FOMC, and I believe the greater likelihood is of Fed stimulus at that meeting. However, given the high levels of expectation, there is the risk of disappointment and a sell-off. I am watching to see how pro-risk fares the next couple of days, and waiting for the latest global leading indicators and will then judge whether to take any profits into the FOMC. If the Nasdaq were to break down today/tomorrow, back below the yearly highs and making for a failed breakout or fakeout, I would judge that as significant, and may trim back. If on the other hand stocks push higher, the remaining US indices break up, and we hit the Demark price and sentiment extremes zones pre-FOMC, I would also be looking to take some profits.

Roundup into the ECB

Posted on Posted in Bonds, Commodities, Currencies, Stocks13 Comments

1. Copper has popped above resistance, in a similar manner that gold did:

Underlying Source: Trading Charts

2. The Chinese stock market has reached a Demark buy set up:

Source: Market Studies (hat tip Gary)

3. The Dow Transports broke down yesterday. Ed Yardeni rationalises the relative weakness of the Transports to the Dow (Industrials) as it has two main components, Railroads and Air Freight. The railroads index broke to a new high, reflecting the stronger US economy, whereas the Air Freight is what’s dragging down the Transports due to the weakness elsewhere in the world.

Source: TSP Talk

4. Meanwhile, the small caps index has caught up and is displaying a bullish cup and handle formation:

Source: TSP Talk

5. The latest global country P/Es reveal that much of Europe is at secular bottom valuations, whilst USA remains one of the most expensive markets in the world:

Source: Megane Faber (valuations as at end of August)

6. The US dollar is at support. Today’s ECB meeting outputs and next week’s FOMC outputs could either generate a dollar bounce or a breakdown.

Source: Stockcharts

7. The bigger picture for the US dollar shows a currency still very much languishing near the lows.

Source: Stockcharts

8. The easing of European debt concerns continues and is supportive for the Euro.

Source: Scott Grannis

9. Treasury yields still show potential for a H&S bullish break up, having pulled up the last couple of sessions:

Underlying Source: Stockcharts

10. The bigger picture for treasuries reveals that the recent run up echoes previous important peaks that led to sharp falls over the next 12 months for treasuries back to the lower support.

Underlying Source: Stockcharts / James Craig

In summary, a bottom for Chinese stocks and a breakup in copper would perhaps foretell improvement in that part of the world, which in turn could resolve the Tran issue. Euro debt has settled down, making the number 1 issue the weakness in the non-Western economies and particularly China. Despite that, US and European stocks have consolidated just beneath new 2012 highs, and technically look ripe for a breakout. Treasuries could potentially fall over the next 12 months, providing the backdrop for the secular commodities finale that I project. Gold and silver have broken out and are into the positive period of seasonality for the year. The dollar is at a cross roads. If the Fed announces QE3, or some other currency diluting initiative, which appears increasingly likely, then I expect it to breakdown and also help fulfil the commodities finale. There remains the potential for disappointment, both by the ECB and Fed, and in turn for these assets at important junctions to resolve the other way, but I maintain the weight of evidence is pro-risk currently. Lastly, various European country stock indices are at secular low valuations. For the long term investor, buy and hold of these indices should return handsomely with a 10 year view.

Final Third 2012

Posted on Posted in Bonds, Commodities, Currencies, Indicators, Lunar Cycles, Macro, Solar Cycles, Stocks16 Comments

One third of the year left to go. As of a couple of weeks ago the SP500 was up 12% for the year, whilst the average hedge fund was up just 4.6%, with just 11% of hedge funds exceeding the SP500 return of 12%. 2011 was also a tough year for hedge funds, compared to previous years. In my personal experience, 2011 and 2012 have seen certain reliable analysts calling it wrong, some usually reliable indicators pointing different ways rather than in alignment, up/down moves of shorter length, and some degree of disconnect between some usually connected assets. In my opinion, this is all due to the transition period that we are in, from K-winter (gold, bonds) to K-spring (stocks, real estate), bringing about come confusion in assets, indicators and analyst calls. The transition is gradual – the nominal bottom in stocks and real estate likely already occurred, the inflation-adjusted low likely ahead, the secular bottom in treasuries is perhaps occuring right now, the secular top in commodities I project next year. A messy, gradual transition rather than a clean switch.

I have found 2011 and 2012 trickier than previous years for those reasons listed above. Having to go against analysts that I respect, having to choose between indicators, having to make sense of assets going different ways. Ultimately, secular and solar anchoring has seen me through I believe, and will continue to do so. I am currently 20% up for the year. My target, as every year, is 40%, which makes me behind target with 3 months to go. Usually I try to steer myself to towards the year-end target as best I can (over-exposing and under-exposing, bigger and smaller risks). I achieved my 40% in 2008, 9 and 10 in that manner, but fell short trying last year, making only 15%. This year I don’t have the same approach, because I am looking out to what I project to be the secular peak in commodities in 2013, a potential opportunity for parabolic gains. My plan then is to maintain my bulk long commodities positions into 2013, rather than trying to partially close down and trade shorter term into year end. If my projections are correct, then commodities should continue to rise in Q4 2012. What I consider most important to my year end tally is calling when to exit equity longs. At some point I want to exit the bulk of those, and that may be before year end 2012.

On Friday at Jackson Hole, Bernanke added weight and justification to his easing bias, whilst falling short of committing to it. The reaction was pro-risk, and US stock indices still look like they are in a bull flag preparing for a break out over the year’s highs, as shown below. Currently, we are back up to the top of that flag. I have also marked the new and full moons. We saw one lunar inversion at the beginning of July, but otherwise the typical lunar oscillation has been in play. On Friday we made a bottom with the full moon and can now potentially make a high around the new moon of Sept 16.

The potential is there, both by technical picture and lunar phase, for stocks to break out. If they can break out then a melt-up would be likely, providing great returns for equities longs. We have the ECB meeting on Thursday this week, with the potential for interest rate cut and bond buying programme announcement, and we have the FOMC on the 13th September with the potential to announce QE3 or some other novel measures. Of course, both provide the potential for disappointment too. A lack of action could lead to a siginificant sell off. Also on the flip side we currently have a geomagnetic storm in progress and more geomagnetism is predicted for today and tomorrow.

The Dow and Nasdaq are in similar positions, but a quick look at the Dow Transports shows a more precarious position. Dow theory says this is a negative divergence. Let’s see if the Transports can catch up here, or alternatively breakdown.

Source: TSP Talk

Sticking with the USA, economic surprises continue to rise in an uptrend, ECRI leading indicators turned positive on Friday, and Presidential seasonality suggests upside into November. The US economy continues to perform better than most in the world and that should mean support for the US dollar.

Source: See It Market

As can be seen above, the US dollar is now at support and an important junction. I suggest that the FOMC outputs next week could influence which way this goes. A lack of QE should mean support for the US dollar due to the better US economic data. However, QE3 should rally the Euro at the expense of the dollar, and the technical chart for the Euro provides weight for that occurring:

Source: Chris Kimble

For my projections of an overthrow in equities in the final part of 2012 and then a parabolic finale in commodities in 2013, announcement of QE3 would really seal the deal I believe. Money would pour into pro-risk and commodities would benefit from the weakening dollar. Let’s see.

A look at treasuries shows us that the stronger hints of QE have reversed yields in the short term but also set up a potential inverse head and shoulders.

Underlying source: Stockcharts

Both QE1 and QE2 led to prolonged periods of rising treasury yields, after the initial move the other way, as money poured out of bonds into pro-risk. So again, QE3 would likely provide further fuel for pro-risk. It is on my mind that previous cyclical stocks bulls ended with treasury yields rising to levels where interest rates stifled the economy. Whilst we have the kind of ultra low rate levels here that echo the 1940s, I would still expect them to rise into the end of the cyclical bull to some degree. Currently, they are moving the other way, so let’s see if this large H&S now plays out.

Ed Yardeni produced a chart showing the SP500 has diverged from its fundamentals since June this year. My geomagnetic-lunar model charts also show stocks going opposite ways since June (all models updated this morning).

Source: Yardeni

Together that would ordinarily provide a good cross-reference for a short. However, speculation increases into the solar peak, and as per my Peak v Peak page, at the last solar peak we saw stocks break away from the geomagnetic model for some time before returning to it post solar peak. It is not something measurable, but I can point to each secular parabolic peak in stocks and commodities occurring close to the solar maximums as evidence that this occurs. I therefore look at the divergences in Yardeni’s and my own models and suggest this may be occurring.

Sentimentrader have produced two new charts that add weight however to the bear case:

Source: Sentimentrader

Hopefully those two charts are self-explanatory. As per my last post though, Technical US Stock Indices, there is evidence supporting the bullish case too. And so we return to my opening comments about indicators pointing opposite ways.

Looking wider, we continue to see poor technical performance in emerging market stock indices. There is a significant divergence in European and US indices versus Asia and Latin America, reflecting the weak leading indicators in those regions. On the plus side, economic surprises for emerging markets continue to rise in an uptrend:

Source: Bloomberg

So are the economies of China and Korea and Japan (and Germany) to improve? If not, can US leading indicators really continue to trend upwards without being infected? All eyes on the next round of global leading indicators these next two weeks from OECD and Conference Board.

Euro debt accuteness remains contained and well off its highs of H1 2012, so for now that remains supportive for stocks. The US fiscal cliff looms at the end of 2012, and once the US election is out of the way, presidential seasonality is no longer supportive. The ruling party has the option to implement unpopular policies in the first two years. It may therefore choose fiscal policy which increases recession risk. I maintain the projection of global recession 2013-2014 as per solar/secular history, and this could be one factor, together with parabolic commodity prices and bond yields rising. China may also de-rail to provide a backdrop to a new secular commodities bear starting next year. The question remains whether China can remain strong enough to fulfil the commodities secular peak before that occurs.

In summary, I am looking for my exit point for stock indices longs (not commodities), as by time I believe this could occur any time as of now into early 2013. The technical picture is mixed and indicators are mixed, but US stock indices are within touching distance of a breakout to new highs. For now I am going to stay put, and await ECB and FOMC decisions this week and next, along with the latest global leading indicator data. Market tops are usually a process, so more evidence should build whilst stocks range trade, if this is to be a major top.

New Highs or Double Top?

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

…for US equities? As we stand, the SP100 already made new highs. Apple has since broken upwards to new highs. The Nasdaq, Dow and SP500 are all back at their March 2012 highs (the SP500 including dividends is now at an all time high). Either it’s time to get out of all US stock indices longs, or the melt up is just about to begin. In stark contrast to the US stock indices predicament, the Chinese stock index is at 3-4 year lows.

Source: Bloomberg

Supportive of US equities breaking upwards from their March highs, we have (i) global and US economic surprises still in an uptrend, (ii) Spanish and Italian CDSs still in a downtrend, (iii) money exiting US treasuries as 10 year yields have risen from 1.4 to 1.8 in just 3 weeks, and (iv) ECRI US leading indicators trending upwards, almost back to positive:

Source: Dshort / ECRI

Turning to global leading indicators, this last week’s data from the Conference Board delivered positive readings looking forward for USA and Spain, but badly negative readings for Japan and Korea. So it is unlikely that US and European equity advances are based solely on hope for QE in those two regions. This East-West divergence is likely to be resolved one way or the other: Asia and emerging economies turn up, or US and European equities top out. So which is it to be?

I deliberated on Friday at the new moon about whether to take some profits, but decided against. Geomagnetism is currently tame and it means the lunar-geomagnetic model currently has a mild uptrend into mid-September (all models upated this morning). Furthermore, the occasions historically when lunar phasing tends to fail in trading  are usually when there is a strong up or down trend. Clearly lunar phasing is not the only influence on trader sentiment, so in times of strong momentum one way or the other lunar phasing may be overridden. The current crawling up the upper bollinger band on US indices is reminiscent of the strong uptrends of the last two years that followed mid year consolidations. So I am suggesting there is a chance we are in a similar sweet spot for stocks.

I maintain that two developments would bring about a melt-up: (i) breakouts to new highs, into clear air and (ii) a turn up in leading indicators. German leading indicator data has just been released this morning, coming in at minus 0.8. That’s worse than last month’s reading and adds to the muddy picture in global leading indicators. So whilst a breakout to new highs in US equities looks technically more probable than a double top here, we can’t say we have the support of the global leading indicators. For this reason we see certain global stock indices still festering, and the likes of copper still languishing, rather than a full risk-on party.

What if global leading indicators didn’t turn up? Is it possible we could still see my forecast come good of an overthrow peak in equities in late 2012 and then a secular peak in commodities in 2013? Something like in 2007-8 where stocks first outperformed and then peaked whilst commodities took over and peaked longer and higher?:

Well, looking back to the last secular commodities peak of 1980, both stocks and commodities did make such moves even though leading indicators had been trending downwards for some months. In other words, speculation drove them on despite the worsening fundamentals, and this fits with my theory that increasing sunspots into the solar peak brings about speculative climaxes in risk taking and buying.

Getting technical again, US stock indices do not yet show overbought or overbullish readings. Were they to reach those levels, I would be much keener to offload some longs and take profits. The Euro is also showing signs of solidifying its base above 1.2 versus the US dollar. Gold is similarly building up its base and as can be seen below could be close to a break out of horizontal resistance, having successfully broken and backtested falling resistance.

In summary, at the moment the general overall picture is supportive of my forecast and my long pro-risk positions. Whilst there remain issues and areas of doubt – as there always are – I feel comfortable sticking with my trades as they are for now and continuing to watch indicators and data for further developments. We are at another siginificant point however, in whether US stock indices (and gold) can breakout or are sold back. Whilst a failure (in both) would be a set back for the bulls, it may mean more time is required, rather than it isn’t going to happen. But for equities bears this is the last stand and if this is to be a major double top then we should look for overbought and overbullish readings coming to pass as well as increased negative divergences supporting the exiting of longs.

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.

State Of Play

Posted on Posted in Commodities, Currencies, Indicators, Macro, Solar Cycles, Stocks6 Comments

Let’s start with the big 3 macro: economic surprises, Euro debt and leading indicators. Economic Surprises for the G10 nations show increasing evidence of having bottomed and entered a new uptrend:

Source: Bloomberg

Economic Surprises for Emerging Markets even more so:

Source: Bloomberg

Turning to Euro debt, overall PIIGS risk continues to ebb from its 2011 highs:

Source: Bloomberg / Scott Grannis

Homing in on the big two, Spain and Italy, we see 5 year CDSs having entered a consolidation the last few weeks. It is too early to say if a downtrend is emerging, or a pause in the uptrend:

Source: Bloomberg

Moving on to global leading indicators, here is a summary of the latest readings from the Conference Board, showing that we do not yet see general positive signs ahead for the global economy:

Source: Conference Board

There have however been four consecutive weeks of rises in ECRI’s leading indicators for the US. Whilst still negative, they have been trending upwards again:

Source: ECRI / Dshort

Drawing in US earnings, the earnings beat rate so far has been around 60%, fairly average historically, whilst the revenue beat rate has been around 48% which is some way lower than the average of around 60%. This continues to reveal that companies have maintained earnings rather by cutting costs rather than genuine growth, which in turn reflects the economic weakness that we have been experiencing.

So the key question remains whether we are now to see a turn up in growth. I maintain that we will, due to lower commodities prices in H1 2012, due to a natural upswing in growth, and due to a new round of global easing and stimulus currently occurring. That brings us to the Federal Reserve meeting outputs of tomorrow and the ECB meeting on Thursday. What should we expect in terms of further action? I suspect the Fed will reiterate its commitment to act without actually acting, but go with more dovish wording, whereas I suspect the ECB will deliver something tangible. Since Draghi propelled the markets last week with his ‘do whatever it takes’ wording, the markets are expecting something concrete. If we get nothing on Thursday, those gains may be retraced. Thursday is the full moon, and we would normally decline into a full moon. There is still the possibility of big declines the last 2 days into and on it, if the Fed and ECB disappoint, however it rather looks like we will make an inversion.

I have updated all the models this morning. We have a particularly tame 3 weeks ahead in terms of forecast geomagnetism. That provides a backdrop for pro-risk to rally. Presidential seasonality also supports this for equities:

Source: Bespoke

In addition, the oversold and overbearish readings for both the Euro and precious metals also provide fuel for a pro-risk rally and dollar retreat. Chris Puplava’s chart here shows that open interest and real interest rates both support an upward move for gold, with the US dollar apparently holding it back. A mean reversion in Euro-dollar therefore could sustain a rally in gold, which would be technically very important as it would mark an upside resolution out of its 9 month triangle.

Source: PFS Group

Agri commodities have consolidated a little, having reached overbought levels. Fundamentals are still currently supportive with more normal weather conditions perhaps returning as of September, which keeps harvest fears at the forefront for now.

Treasuries made a large reversal on Friday from all-time highs. It is too early to judge whether that marked a significant top. On the one hand, the overbought and overbullish parabolic recent move is ripe for an enduring reversal, but on the other hand the Fed is still a supportive player in that market.

OK, bringing it all together, the question on my mind is whether I want to take some pro-risk profits off the table here into the FOMC and ECB. For anyone new to my site, my portolio of positions is currently 100% pro-risk, with the biggest weighting long commodities (precious metals, agri, energy) then long equities (various global stock indices), then short treasuries in a much smaller weighting. I currently have no currencies positions. Drawing together the secular and the solar I anticipate a pro-risk rally in H2 2012 through to the solar maximum of 2013, but with equities wilting before we reach the solar maximum whilst commodities make their final blow-off secular top. Equities could therefore top out before the end of 2012 but not before they’ve had a pop to new highs.

Right now the picture looks more supportive of that general scenario that I have been promoting for some time. Economic surprises now look supportive, Euro debt is showing signs of coming off the boil again and US earnings are good enough. Leading indicators remain the area of concern, but if I am right in my reasoning for why they should begin to improve then I believe that provides the final piece of support for a move to new highs in pro-risk. Chinese leading indicators in particular are important for commodities. However, soft commodities have had a thrust due to global wierding and precious metals have the support of reinforced negative interest rates from the latest central bank interventions. Precious metals enter their seasonally strong period of the year as of August, with Indian wedding demand one factor, and global wierding remains supportive for soft commodity prices for the near future.  By solar cycles, inflation should peak around the solar maximum, and the price rises in softs that began in June should feed through into in inflation 6 months later. If they can further their rises and oil was to also rise on H2 growth (or supply issues) then we could indeed see that acceleration in inflation into Spring 2013.

So right now I am going to maintain all my positions and not take any profits. However, if pro-risk pushes up significantly more today and tomorrow before the FOMC outputs then I may trim back. I will let you know in the comments if so.

Charts Of Interest

Posted on Posted in Bonds, Currencies, Indicators, Stocks4 Comments

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.