Category: Indicators

Near Term Timeline

Posted on Posted in Indicators, Macro, Solar Cycles, Stocks11 Comments

Here is a timeline of events into the end of 2012. I place more weight and validity on some of these than others, but it helps to lay it all out. If I’ve missed something you consider important, let me know.

1) US Earnings start tomorrow with Alcoa and continue until Mid-November

2) 12-15 October Carolan crash window

3) US Elections are 6 November

4) Lame Duck Congress session 13 November for decision on fiscal cliff

5) Correction in commodities, and potentially equities too, into around 21 November, based on Gann, before mega commodities rally erupts lasting all 2013

5) Late November market top predicted by Eurodollar COT futures

6) 28 Nov – 7 Dec Puetz crash window

7) 22 Dec last major Bradley Turn of 2012

8) 31 Dec / 1 Jan fiscal cliff comes into effect, if no postponement or change, i.e. tax rises and spending cuts which will hamper the economy

9) Presidential election seasonality suggests equities should consolidate a little here in October and then make a push higher around the election, and potentially even higher by year end:

Source: Bespoke (plus my update in thicker blue of 2012’s SP500)

Source: SeasonalCharts

10) Geomagnetism is seasonally at its tamest in December and January, which coincides with (or belies) the ‘Santa Rally’

Drawing it all together, if we don’t see a crash into this coming weekend (Carolan’s work as highlighted by readers), a little consolidation here in mid-October would be normal seasonally, and is perhaps fitting as we await the ‘theme’ of US earnings (which will not become clear until next week), and for the US election polls to make their telling late swings. Based on the latest odds, President Obama will be re-elected, and this fits with the stock market having made its largest historical gains under his Presidential term. Furthermore, in this scenario historically, a re-elected Democrat President has led to bigger subsequent gains in equities than a switch to Republican. So, as things stand, the rally around the election that has been historically normal, may indeed come to pass again – assuming the polls suggest Obama to win, followed by his actual victory. Perhaps an associated US Dollar rally around the elections could fit with a consolidation in commodities, before they embark on a major rally, as per Gann.

The fiscal cliff will then come back into focus, and we will see whether the fiscal tightening is allowed to come to pass (which will be negative for the  economy) or whether it is postponed or amended. Whilst no President will want to risk sinking a precarious economy, the first year of a Presidency is often used to implement unpopular policies.

We have a market top forecast by Eurodollar COT futures at the end of November, together with a Puetz crash window. Whilst Puetz windows have been very hit and miss, the two combined adds more weight. I am expecting a cyclical bull top in equities ‘soon’ (based on secular and solar anytime as of now through to Q2 2013), but want to see the usual topping indicators present, e.g. a topping range with negative divergence in breadth, overbought and overbullish readings, yields and inflation up, leading indicators and economic surprises trending down. So if enough of these are flagging by late November, which would fit with Eurodollar COT plus Puetz, then I’d be getting out of equities. However, if reflation is just getting going currently, then that may be too soon, and we might look to beyond the Santa (benign geomagnetism) rally of December/January for a top (unless geomagnetism is unseasonally bad).

Bradley Turns I also find very hit and miss, but if 22 Dec is to be valid, then by the theory it can be a top or a bottom. If equities top out late Nov and make a Puetz crash then 22 Dec could mark a bottom, and this would roughly coincide with a bottom predicted by Eurodollar COT. If technical and macro topping indicators are absent in late Nov, then maybe stocks could make a top 22 Dec. Well, with all these potential markers and triggers, we will get more clues as we move through the checkpoints in October and November.

To return to where we stand this week, US earnings will begin, as will the Carolan crash window. I find it hard to produce a case for a crash at the end of this week. In the US, economic surprises have moved up to a new high for H2 2012, as have ECRI WLI leading indicators – both are decisively in the positive and trending upwards. Global leading indicators have improved, and it would take a quick and major reversal to bring about a market panic. Rather, reflation is likely due to 6 months of central bank rate cuts and renewed stimulus, and with leading indicators tentatively reflecting this, I rather expect the markets to await more data. Euro debt remains subdued, and US earnings (by relation with ISM PMI) are most likely to be unimpressive but above expectations. Lastly, we don’t see topping indicators aligned in equities – there are a couple of flags but not enough to mark a top. We see excessive frothiness in gold speculation but given its 9 month coiling prior to this current rally, I expect a consolidation only.

The reflation I expect (assisted by the collective central banks effort), and see tentative evidence for (in leading indicators and assets), fits with solar cycles: an inflationary finale in 2013. To be more precise, we should see pro-risk rise strongly before commodity rises become excessive, killing off equities and tipping us into recession. Treasury yields should rise into the cyclical bull top for equities, and the longer term treasury channel action that I have previously shown suggests that should indeed occur over the next 12 months (supported by Gann projections too). Because of this cross-referenced picture, I don’t side with an imminent top and crash in equities, but remain open to one if the usual topping signals and indicators align. So as always, one day and one data item at a time, but I rather believe we are heading for an inflationary speculative froth before anything bearish and deflationary occurs.

If solar cycles do fulfil, then there are other associated expectations leading into 2013’s solar maximum. One, solar maximums are correlated with increased earthquakes. Should a major earthquake occur, then the implications for the markets would depend on location, but earthquake occurence could help tip the global economy into recession. Two, solar maximums are correlated with protest and war. Should conflict increase in the world then it could both assist in tipping the global economy into recession and also in fulfilling the secular commodities bull conclusion, if energy and food are affected.

Iran has remained in the spotlight due to its potential for energy supply disruption and conflict in that region of the world. Now, hyperinflation has taken hold, with monthly inflation up to 70%, in part due to the sanctions imposed on the country. Internal social unrest has begun, and is likely to escalate. Historic examples of hyperinflation correlate with subsequent war and social/political upheaval. Refuge is also sought in gold, and Iranian gold purchases have been escalating in line with the currency debasement. I believe these circumstances could play a key role in fulfilling solar cycle predictions of a secular commodities and inflation finale next year, anticipating regional conflict around Iran, oil supply disruption and oil price escalation, and the knock-on effects for other commodities. This could be viewed as either solar maximum conflict and war fulfiilling a solar maximum inflation/commodities blow-off top, or the other way round. Certainly, now inflation has escalated out of control in Iran, there isn’t going to be a way back, so it’s a question of how the social and political impacts unfold from here.

Friday Roundup

Posted on Posted in Currencies, Indicators, Stocks5 Comments

Yesterday’s action was bullish for pro-risk. The Nasdaq completed its successful backtest of key support by launching away from it. Oil completely reversed its heavy losses of the previous day. The Dow Transports pulled further back up into the range, making the recent drop out of the bottom look like a fakeout.

Source: TSP Talk

The Hang Seng has broken out of its long term triangle, to the upside.

That breakout is still tentative, but other Asian indices echo this, such as the Kospi:

Source: Bloomberg

Now let’s see if the Shanghai index can follow through on its tentative trend reversal next week, that it began before this week’s holidays.

The Baltic Dry index yesterday pulled another 6% away from its lows, and copper has recently broken out of a triangle to the upside.

Source: TradingCharts

And the US dollar broke down from a bear flag.

Source: TSP Talk

All in all, the picture is currently supportive for pro-risk and for reflation. Both AAII and II investor sentiment turned less bullish this week, putting both further neutral, and not indicating a top. So whilst there are a couple of topping flags for US equities, as noted in the last post, I don’t believe that’s enough at the moment to bring about a reversal here. Rather, if reflation is just getting going, and if Asian equities are just breaking out, then it seems more probable that the rally endures for some time yet.

Lastly, Yardeni’s fundametals versus stock market divergence in the US has now been partially resolved with the fundamentals turning up to point the same way as equities.

Source: Ed Yardeni

Friday Roundup

Posted on Posted in Commodities, Currencies, Indicators, Macro, Stocks7 Comments

1. Chinese stocks are making another attempt at bottoming, and this one has promise. A falling wedge, positive RSI divergence and a potential fakeout beneath support as stocks rallied strongly yesterday and again today (today’s rise not shown), taking us towards 2100.

Underlying Source: Cobra/Stockcharts

2. The German Dax bounced yesterday at rising support. The technical situation is shown below – for my bullish case, the most important is to hold above the March 2012 highs – a previous resistance that should now be support. If the Dax can hold that rising support line then the next target is the cyclical bull highs to date of mid-2011.

3. The US SP500 index is already at new cyclical bull highs and so holding above that s/r line is again the priority for my bullish case. Again, it will be interesting to see if the index can hold the rising support and after a little small range consolidation around this weekend’s full moon, resume bullishly with that angle of trajectory. Recall that Presidential seasonality supports further gains all the way to the November elections, and whilst I wouldn’t specifically trade that phenomenon, it has been fairly reliable historically.

4. The Dow Transports continue to languish, but a little indecision at the bottom of the range could spell another reversal back into the range. It’s an important one to continue to watch.

Source: TSP Talk

Here is Ryan Puplava’s assessment of whether stocks are likely in a topping process here or not, and the Transports divergence is the only flag currently, he suggests:

  • A shift out of risk assets and into defensive sectors. (false)
  • Leading economic numbers and Fed surveys roll over (false)
  • Transport or Industrial indexes not confirming each other in new highs (true)
  • A lower high, or at least a break, in the market trend (false)
  • Momentum failure (false)
    • Flat/sideways market from support to break (false)
    • Momentum divergence at a higher high (false)
  • Distribution with 2400 or more declining issues on the NYSE in a given day (false)

Source: Ryan Puplava

5. Gold is also climbing a rising support and if about to face resistance close to 1800. It arrives here on fairly frothy sentiment, however, given its preceding 9 month range coiling and its peak seasonality period currently, I don’t place too much weight on the frothy sentiment. I rather suspect it will have a run where sentiment remains elevated. But let’s see how it deals with that horizontal resistance.

6. Euro-USD pulled back having reached overbought/overbullish, and could pull back a little further to rising resistance. The key question is whether it has made a medium term trend change given the renewed confidence in Euroland and the dollar-debasing US QE-without-end. We know that QE1 and QE2 announcements made for enduring rallies into pro-risk (after the initial spike and correction couple of weeks), which would suggest Euro-dollar, commodities and equities all rallying. There are no guarantees third time round, but market participants may lean more pro-risk, aware of that history.

7. The correction in pro-risk this week has done a reasonable job of deflating other overbullish/overbought indicators, in equities and crude oil amongst others. As previously noted, equities typically flirt with extremes for a period before rolling over, as opposed to hitting once and then collapsing, and we are generally looking at first touches.  Indicators such as stocks above 50MA and bullish percent over call/put have reset sufficiently to enable stocks to rally again, if that’s the will of the market. The two US equity sentiment surveys of II and AAII both continue to show fairly neutral readings, and as I am looking for the next market top to be a cyclical bull market top, we really should see these reach extremes.

Source: Schaeffers Research / Investors Intelligence

Source: Bespoke / AAII

8. Natural Gas has been the stealth hit of 2012. Below is a weekly chart as of the end of last week and this week it has risen to 3.3. If you bought at the bottom in April, you would be up 75%. Well, my story is this: I was one to buy in long in 2010 and 2011 as it dipped several times below 4 (at what appeared excellent historic value and historic extreme cheapness versus oil), only to see dire performance continue and even worsen. Hence my aggregate position is still underwater but as the excess gas inventories have been declining it looks like it may eventually turn a profit. I consider this asset to really have been a good example of ‘the market can stay irrational longer than you can stay solvent’. My exposure was never that significant in my account, but it has taken a lot of patience to see a turnaround.

Source: TradingCharts

9.  On the macro front, we saw a couple of bad US data reports this week, the worst being durable goods orders. As a result, US Economic Surprises has taken a sharp fall and although still positive, needs watching closely in case of a trend change. Due to aggregate leading indicators trending up, I don’t expect that to be the case, but let’s see ECRI’s latest reading later today.

Source: Sober Look / Citigroup

As can be seen from the Dhort chart (hat tip Antonio), there is a relationship between the durable good orders and the SP500 performance that makes the data dip alarming:

Source: Dshort

There is a history of volatility in the durable goods number but that dip is one of the most dramatic. It’s a flag, but not on its own enough to make me want to take profits on stock indices longs at this point. With the improvement in aggregate leading indicators, the positive technical picture for equities, the renewed global stimulus, and the Presidential seasonality, the balance is still bullish. But for that to remain, other forthcoming data (of a leading style) needs to return better. Something to watch next week.

10. US earnings season starts the week after next and there is a fairly compelling relationship between the ISM PMI and SP500 earnings year over year (hat tip Gary). As can be seen below, the latest data for August was just below 50, i.e. around zero growth. The expectations for this earnings season are for earnings growth over the same quarter last year of -3.4%, i.e. a drop. That does potentially set us up for earnings to come in between zero and -3.4, i.e. to be bad but to beat expectations, which would normally be enough to rally equities. Clearly, both the ISM PMI and the analyst expectations are only guides, but there is a potential scenario there to fulfil the technically bullish picture for stocks, in October.

Source: Calculated Risk

Have a great weekend everyone.

Saturday Update

Posted on Posted in Bonds, Commodities, Indicators, Stocks14 Comments

1. 10 year treasury yields continue to make an inverse head and shoulders pattern targetting yields of 2.2:

Source: Stockcharts

2. Both the Euro and the Dollar are at S/R that could make for a near term reversal:

Source: Chris Kimble

3. New highs / new lows for the US stock market hit a record high. This could signal a near term reversal, but the implied rally breadth has historically meant continued bullishness subsequent to that, more often than not.

Source: Stockcharts / Greg Schnell

4. SP500 stocks above the 50MA have reached +1 standard deviation, but historically this indicator has usually oscillated in that range for a period before stocks topped.

Source: Index Indicators

5. SP500 bullish percent over put/call ratio has reached the 110+ extreme zone. Again, this indicator has usually gone on to oscillate in this zone for a period before stocks topped.

Source: Stockcharts

Sentimentrader’s indicators now show 40% in the extreme (bearish for stocks) – the highest percentage since January 2011. However, in their own words, with price at new highs this would be a concern if price action became toppy. It is a sign of a strong uptrend, but with near term reversal potential if price signals.

I don’t see price at this point looking toppy. Friday’s session was mixed for stocks, making a gain that finished in the middle of the day’s range. That’s fairly normal after a big up day on Thursday. The Nasdaq and SP500 have spent a week above their breakout, having successfully backtested it, which is bullish. The Hang Seng and Russell 2000 just broke out on Thursday/Friday. Unless price is reversed Monday/Tuesday then this is also bullish. Dow Transports have held above their triangle breakout, having a reversed a fakeout out of the bottom. Stocks breadth has led price, which is bullish. Chinese stocks are attempting a bottoming formation after reaching a Demark selling exhaustion count.

Demark’s last quoted price target for the SP500 is 1478. We didn’t get there yet. I believe stocks can push up a little higher early this coming week, giving a bit more room for the latest breaking out indices to subsequently consolidate above their breakout S/Rs. I respect the overbought/overbullish indicators that we are seeing and am alert to a correction soon, particularly when drawing in the Euro and dollar S/R positions and precious metals overbought/overbullish readings, but currently the evidence is for a consolidation in a continued bullish uptrend. So my approach is to maintain long positions through any correction, until evidence changes.

6. Coffee has a speculator net short position at a 7 year high. Here is the monthly price chart, and the weekly chart which shows a dynamic W bottom is being made. I am going to consider adding to my coffee position on Monday:

Source: Tradingcharts

Post FOMC

Posted on Posted in Bonds, Commodities, Currencies, Indicators, Stocks10 Comments

The Fed delivered more than expected, with the big gains in pro-risk evidence that it wasn’t all priced in. Some key differences to prior: (i) QE delivered at market highs rather than lows (ii) Fed commitment to be accomodative even after recovery is entrenched (iii) specific targetting of improving jobs situation (iv) open ended (v) negligible rates out to 2015. With ECB bond buying and Fed QE, pro-risk has some key support going forward.

The RUT, Hang Seng and silver all broke out, and the dollar broke down. The Nas, SP500, Dow and junk bonds all broke further free. Treasury bonds had a mixed session, but that’s to be expected. Initial support for bonds, as the Fed will be a direct buyer again, should give way to a sustained move against bonds, per previous QE:

Source: Scott Grannis

Stock market breadth improved. Corporate insider buying/selling is at a level more consistent with market bottoms than tops.

Source: Istockanalyst

But today we do find various assets into both overbought and overbullish indicator extremes, such as precious metals and the Euro. The SP500 new highs/lows indicator also suggests overbought:

Source: Cobra / Stockcharts

Sentimentrader’s research post yesterday’s session suggests a consolidation may come to pass over the next couple of weeks before further gains. This fits with my own take. Technical breakouts in assets together with double QE (Europe and USA) are bullish, but overbought and overbullish indicators are to be respected. A consolidation over the next 2 weeks, the period into the next full moon, to relieve those indicators whilst maintaining the technical breakouts, would make sense.

My account is currently 30% up for the year, now on track for my 40% target. Clearly I am delighted with that and don’t want to jeopardise the gains, particularly as the bulk of the positions are open. But I don’t find reasons to pare back positions currently. The biggest risk remains global leading indicators. Yesterday CB produced the latest data for Korea which came in at zero, a 3 month high (which Japan and UK also managed). Today Spain came in at -0.6 (following -0.3 last month and -0.6 the month before). So Spain still weak, but some potential positive trends elsewhere. We need more data, over more time, to assess. But with regard to my forecasts of an overthrow in stocks to end their cyclical bear (accompanied by increasing inflation and treasury yields), and then a parabolic finale in commodities and inflation, I see an increasingly supportive picture. Euro debt settling down, economic surprises repaired, 6 months of rate cuts across the world by central banks, US and ECB QE, technical breakouts in stocks and precious metals, inverse H&S on treasury yields and probability of fulfillment, US dollar breakdown, and recent new highs in grains to deliver food price inflation as of Q4 2012. Weakness in leading indicators does not offset all this.

Technicals Into The FOMC

Posted on Posted in Bonds, Commodities, Currencies, Indicators, Macro, Stocks7 Comments

This has been the story of my 2012. Took profits on stock indices longs from 2011 in the first couple of months of 2012, whilst retaining my secular commodities longs. Endured some pain as commodities fell into May. Bought stocks and commodities aggressively around 9-18 May as oversold and overbearish indicators aligned. Both then bottomed out and have since rallied. I took maybe 10% off in profits and have retained the rest.

I use the CCI commodities index above as it is equally weighted.

So, as things stand, all is well and I’ve got some very profitable positions (thanks to a little leverage), but with continued significant exposure. Do I want to cut some exposure, to mitigate a reversal in either class, or do I want to hold firm and play for continued upside in pro-risk for the remainder of the year? Here’s how things stand technically.

The Dow has broken above quadruple resistance and joined the SP500 and Nasdaq at new highs.

The Dow Transports appear to have completed a text book fake-out move, now breaking out the other way.

Source: TSP Talk

The Russell 2000 is at resistance.

The Hang Seng is also at resistance.

The Dax is challenging cyclical bull market highs.

10 year treasury bond yields continue to make an inverse H&S formation, which is bullish for pro-risk.

Source: Stockcharts

Junk Bonds have just broken above resistance.

Source: Bespoke

Silver is at resistance.

Source: Chris Kimble

The US dollar has reached levels of overbearishness.

Source: Sentimentrader

Equities sentiment is overly bullish by NAAIM (shown below), but not so by AAII (36% bulls, versus historic extreme zone 45+) or by Investors Intelligence (shown below).

Source: Sentimentrader

Source: Schaeffersresearch

In summary, it’s finely poised into today’s FOMC action (or non-action). The bullish breakouts in the Nas, SP500, Dow and Junk bonds are reversible at this point, as they are  only just at new highs. The bullish reversal in the Trans is positive. I suggest the edge is for a breakout in the Hang Seng triangle, rather than a breakdown, due to the Shanghai index having made a Demark seller exhaustion count, but continued ranging in the triangle’s nose is possible. Silver sentiment, silver resistance and dollar sentiment are suggestive of a forthcoming counter-trend move, i.e. a pullback in silver whilst the dollar pulls up.

Turning to leading indicators, CB produced the latest data for Japan and the UK this week. Japan came in at -0.8, still negative but a 3 month high. UK came in at +0.1, also a 3 month high. So a little encouraging, but I need to see more global LIs trending positively. The OECD’s latest global indicators come out today.

PIIGS CDSs and bond yields continue to ease. The German legal approval of ECB bond buying an important step.

So, to today’s FOMC. High expectation of QE, though unlikely fully priced in if delivered. If we get QE, I expect the US indices to pull away, and the indices at resistance to breakout. Furthermore, I believe it would seal the deal for my secular/solar projections into 2013 of inflation, dollar decline and commodity acceleration to a peak.

On the other hand, the Fed may choose to stop short of a new QE programme, acting to extend low rates, making an open-ended commitment to regular purchases of securities (Robin Harding), or choosing something unorthodox to tackle its main problem, jobs. Something stimulative but short of full QE could lead to a short term sell off which is then reversed on digestion.

Lastly, the Fed may choose to bide its time, carefully choosing words rather than concrete action. US leading indicators are on the rise and recent commodity price rises are likely to increase inflation down the line. If no action if forthcoming, I would expect a significant sell-off, and that sell-off would likely reverse US indices and junk bonds back  beneath their breakouts, making for bearish fakeouts.

Of the three scenarios, I rate the last (no action) as the slimmest likelihood. The Fed’s last two communications have been more heavily-hinted towards action. Plus I view things a little unorthodox: I expect the secular/solar projections to come good – I expect market participants, economists and central banks to unwittingly fulfill them (in this instance that rising sunspots make humans more speculative and pro-risk – QE is both).

There is room in equities sentiment for a push higher, and to reach Demark’s 1478 level on the Sp500. We are also in a bullish window heading into this weekend’s new moon, with negligible current geomagnetism.

I believe probability is on my side, and so am going to retain all my pro-risk positions into the FOMC (subject to OECD leading indicators not having deteriorated significantly – due noon UK time). This is the bears’ last stand. Not the bulls. A retreat in stocks and commodities would put us back into the  trading range. Whereas, a jump today in equities and precious metals and junk bonds would seal the breakouts and put pro-risk into clear air.

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.

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.

Technical US Stock Indices

Posted on Posted in Indicators, Stocks15 Comments

1. AAII bullish sentiment this week has fallen back to 34.7. It can be seen that bullish sentiment in this recent rally did not hit the kind of extreme levels of 50+ that previous signified a top.

Source: Bespoke / my update

2. Investors Intelligence sentiment showed a marginal increase in bulls this week but, again, sentiment has not reached bullish extreme levels that previously signalled a top, as evidenced in the chart below.

Source: Schaeffers Research

3. Bullish percent over call/put ratio similarly has not reached the kind of extreme of important market tops, which would be up at 110+.

Source: Stockcharts

4. SP500 stocks above the 50MA has pulled back a little, but also did not reach into the upper extreme band yet.

Source: Index Indicators

5. NYSE advance-declines are at new highs for this cyclical bull, showing that breadth is strong. As marked in red, the previous cyclical bull top of 2007 showed a negative divergence in this indicator which is currently absent.

Source: Cobra / Stockcharts

6. Commercial hedger net short position is the biggest current threat to the bullish positon for US stocks.

Source: Sentimentrader

7. But this can be contrasted with penny stock speculation which is suggestive of the opposite – a low in the markets should be here.

Source: Sentimentrader

8.  Drawing the broader range of Sentimentrader indicators together it can be seen that there are more indicators at bearish extremes than at bullish extremes, but the percentage at bearish extremes is not calling for a top here. Previously bearish and bullish extremes hit 30% before marking an important reversal.

Source: Sentimentrader

In summary, technical indicators point to markets more bullish than bearish and more overbought than oversold, but in both sentiment and price not at levels that would signify a top. Plus breadth is supportive. Concerns a few weeks ago over defensives leading stock indices upwards and a lack of small cap participation have been rectified in the last couple of weeks where rotation has made for a catch up in those underperformers.

There is no doubt a level of expectation regarding Jackson Hole and a clearer message regarding QE, but what the technical picture reveals is that even in the event of disappointment, stocks could still go on to breakout upwards here before signalling a top, as it is normal for these indicators to hit extremes before a reversal, and we are not  there yet.