End Of Week Charts

Posted on September 6, 2013September 6, 2013 Posted in Bonds, Commodities, Currencies, Macro, Solar Cycles, Stocks35 Comments

No real up move in equities into the new moon / end of lunar positive period, but US indices have potentially carved out a rounded bottom the last couple of weeks.

The Nikkei still remains unresolved, having broken up out of the smaller wedge but been contained in the larger triangle:

Commodities pulled back overall, particularly precious metals, as the US dollar mustered a rally. Gold and silver were at some point going to take a break after a 20%+ rise off the lows, so it’s what happens next that’s important.

Source: Trader Dan

My target on gold and silver remains a retest of the breakdown – on gold this would be the 1450-1550 area. I would then take half profits. So, I am looking for gold to make a higher low and continue the uptrend in due course.

The US dollar is at an important juncture. A breakdown would fit with a commodities rally. A break-up could be enabled by tapering.

Source: Chris Kimble

Syria action and Sep 18 FOMC expectations are going to remain in play next week.

Regarding prospects for September tapering, the economic data has been overall good. Here the latest ISM composite for the US.

Source: Bespoke

Global composite manufacturing and service PMIs also came in overall very healthy this last month.

Source: Markit

Although there remains the divergence between developed and emerging economies.

A stronger US economy and increased expectations for tapering have continued to push up treasury yields, with the next chart showing the possible eventual target of 3.5-4% yields:

Source: D Short

Russell Napier’s stock market history work states that cyclical bulls have typically ended with the over tightening of yields together with excessive inflation. Yields may still be low by historic norms, but they have doubled from the lows in the last 4 months and we should not expect historically normal higher yields in the current environment of high debt and negative demographics. So, this doubling has been bad for the housing sector and other interest-sensitive groups. Excessive inflation has not yet materialised, and the fortunes of oil are key to this. It still looks technically strong and has the 2011 highs within its reaches, so that missing problematic inflation may arrive.

The key is “excessive” inflation and “overtightening” of yields, i.e. it has to be set against the economy. A strengthening economy can cope with higher yields and higher inflation, but not if it starts to weaken or if the latter two rise too far too fast. Moneymovesmarkets still see evidence in global narrow money for a turn down economically by the end of the year. This may provide the window over the next couple of months for commodities to gain momentum, we shall see.

Playing in to that is the solar cycle. Here is the latest NASA forecast, and they are sticking with a summer peak. For a higher smoothed max we would need to see a rapid uplift in sunspots now, but that depends if their forecast is more accurate than SIDC’s, so let’s see.

Source: NASA

State Of The Markets

Posted on September 2, 2013 Posted in Bonds, Commodities, Currencies, Indicators, Macro, Solar Cycles, Stocks36 Comments

Is this a cyclical top in equities, the end of the bull market since 2009? If it is, then by the normal topping process, bonds should have topped, stocks should be making a topping range over several months, and commodities should take over and top last, if we are to comply with historic norms. On the below chart the CCI commodities index is in green, the MSCI world stock index in orange and 30 year treasury yields in red.

Source: Bloomberg

Treasuries look like they topped in mid-2012 (yields inverted), and if equities are topping out then I have extrapolated how I see things should unfold. A completion of the topping range for equities, with at least one more rally up, and that rally being weighted towards late cyclicals, such as energy producers and basic materials companies, as commodities themselves outperform, to ultimately make their top as the economy tips over.

The next chart shows a longer term picture of the CRB commodities index versus the SP500. I have highlighted the last two cyclical tops, showing the multi-month topping price ranges in boxes and the lagged commodities peak in both cases shown by the lines. We potentially have the first half of a topping process on equities now, evidence for which I will detail next, and we see the commodities index tentatively turning up.

So let’s look at typical cyclical topping features. On US equities we saw a peak in May and then a marginally higher high in July, but on breadth divergence, which is one such sign. Below are two breadth measures showing the divergence (the Summation Index on the 2nd chart):

Source: Cobra

Source: Stockcharts / DecisionPoint

We should also see the batton being passed from early to late cyclicals in the process. As yields rise, interest sensitive groups start to underperform. Below I have compiled two early cyclicals: Homebuilders and Technology sectors, versus two late cyclicals: Energy and Basic Materials sectors:

Source: Bloomberg

We can see that since the start of the year Tech has performed flat whilst Homebuilders have been on the decline since the May peak. Energy has taken over, but Basic Materials have not yet joined. Drawing in other early and late cyclical sectors, the overall picture is one of a shift from early to late sectors to some degree, but tentative. I would like to see a more compelling shift develop to add futher weight.

Also in a topping process we typically see 90% distribution days and a shift from stocks making new highs to stocks making new lows. We saw such a 90% down day last week, but do not see strong evidence of a shift to percentage new lows.

Other historic norms in a topping process are a tightening of rates through bond yields (check) and excessive inflation developing. We do not see excessive inflation, but that could occur if crude oil becomes a speculative target. If equities have stalled then under these easy money conditions it is possible that speculative money flows into oil and other commodities, linked to geopolitical developments or solar maximum. The solar maximum is historically correlated with both conflict and speculation, so they could materialise inter-related. However, whether the smoothed solar max is ahead or behind us continues to outwit the experts, frustratingly. Here is SIDC’s latest update, still running with the two possiblities:

One more signal of a cyclical top would be the rolling over of leading indicators. Typically commodities top out once indicators are already in decline, sucking the remaining life out of the economy, whereas stocks are forward-looking. Currently, we see a mixed bag of indicators. Conference Board leading indicators have largely weakened of late, but manufacturing and service PMIs have shown general improvement. ECRI leading indicators for the US show a clear change of trend but this needs to continue to weaken and drop beneath zero, as per the action prior to the last two recessions:

Source: Dshort

What I believe should occur is that commodities start to make strong gains here, taking the reigns as late cyclicals. Stocks should rally again, with the commodity related companies providing the thrust. Then inflation starts to be evident, and a demographically-challenged global economy starts to roll over in leading indicators, at which point stocks end their topping process and begin to decline, whilst commodities go rally to a peak in early 2014. In short, it would be historically normal for commodities to outperform here and in doing so puncture the global economy (which is weak due to collective demographics), which would tip over collective leading indicators into the negative. If this is a cyclical top in equities, then all this should happen promptly, i.e. this thesis should be quickly validated or invalidated.

Two investment banks have recently come out with crude oil targets of $125 and $150. Clearly geopolitical (Syria currently) is a wildcard, but the evidence shows that the previous peaks in crude oil have been speculation-driven. As mentioned above, in these conditions of easy money, if stocks have lost their momentum, then an unloved commodities sector (and ditto emerging markets which are also fairly bombed out) could become the new target and quickly bid up. Disclaimer of course: I want this to happen, as I am long a basket of commodities. However, I believe the evidence now looks much more compelling for this to happen. Martin Pring echoes this and believes commodities have begun a new bull. China is displaying improvement, which is as the largest consumer of commodities, is important to the backdrop. Latest PMI today is back up:

Gold has the potential to run up some way higher, as sentiment is still languishing despite the recent rally:

Source: Acting-Man / Sentimentrader

Chris Puplava speculated that the US Dollar could break down from its range. Such a development would also likely be a catalyst for commodities. But, the FOMC output in the middle of this month, with potential QE tapering on the cards, is likely to influence the markets, as will developments regarding Syria. Nonetheless, I would take the stance that either a normal commodities late outperformance and broad rally is on the cards, or it isn’t. I.e. QE and geopolitical will provide short term movement, but I’d suggest won’t ultimately decide the course. I see increasing evidence that we are seeing the pieces fall into place for a commodities sustained rally, but again note the disclaimer and also note the timescale I believe is applicable, i.e. it should happen without delay, and the recent upmoves in precious metals and oil should continue shortly and spread over to other commodities.

Let’s take an updated look at Japan. The Nikkei has formed a triangle on the weekly, hopefully evident to all:

Source: Stockcharts

I don’t believe it’s clear which way that’s going to resolve. However, a similar but inverted picture on the Yen shows a candle last week that could mean this is a bear flag before further drops:

Source: Stockcharts

If the Yen breaks down that should benefit equities. However, the cheaper Yen has made imports to Japan more expensive, and Japan is a big energy importer. The Government’s aim of reviving inflation looks to be going well:

Source: Sober Look

However, this is largely the result of fuel and utilities going up as imports become more expensive, which is clearly no good for the economy (however, note that its exporters have benefitted). If commodities were to rally hard then Japan would suffer. However, as that development is just my speculation at this point, there is also positive evidence in the Japanese economy, which is what I would expect given their current demographic tailwind. We see the latest PMI shows strength, and makes last month’s drop look more like a blip:

Source: Markit

So, until or unless commodities, particularly oil, start to rally hard, I would side with Japanese equities breaking upwards. However, if US stocks are making a cyclical top then I would expect global equities to turn down once the topping process is complete and I would not see Japanese equities going the opposite way. Once again though, if US equities are making a cyclical top then we should see commodities rally again to provide the tipping over, and Japan would then suffer accordingly. In short, I will hold off adding to my single Japan long position, pending further developments.

This week we have the new moon on Thursday and the end of the lunar positive period at the weekend. I expect stocks can mount a rally this week and that may well be the next leg up in the topping process. I have updated all models this morning and the geomagnetic forecast for the next 3 weeks is overall down to flat.

Roundup

Posted on August 22, 2013 Posted in Commodities, Demographics, Indicators, Macro, Stocks95 Comments

Dust settling on the FOMC meeting minutes. Will know by the end of today the true market reaction. But gold has consolidated beneath the next resistance level which I believe is promising for a breakout to the next level shown:

Meanwhile I am unsure with US equities whether they can now rally as we move beyond the full moon and out of the lunar negative period, or whether the continued downtrend in geomagnetism together with a lack of bottoming out in sentiment and oversold (as suggested by Chris Puplava below) mean they have yet further to fall. If I could suggest a middle ground it would be that they muster a rally and then fall again in a kind of ABC correction.

Source: PFS Group

For Japanese equities, this is the picture:

I suggest it is also unclear. Either equities could rally here out of the smaller descending wedge together with the longer term support, or they could break down lower than the June lows to make an overall ABC correction from the peak. I would feel more confident about the former option if leading and coincident data had not been so much worse this month than last. Still, I may yet act here, will see.

All the CB leading indicators are in for this month apart from Eurozone:

Source: Conference Board

But combining German, French and Spanish readings, the Eurozone number is likely to be weaker than last month’s 0.5 but still positive. The stand out is China, with a rise to 1.4%, and this is echoed in the latest flash PMI reading, a sharp improvement:

Source: Markit

This bodes well for commodities.

The latest picture for narrow real money as a leading indicator suggests that economic momentum will top out in October / November and begin to fade at end-2013, according to Simon Ward:

Source: MoneyMovesMarkets

This would fit well with a scenario of stocks completing their topping process in the Autumn and commodities accelerating to a peak after stocks. It has been historically normal for stocks to peak ahead of the economy (once leading indicators are trending down) and for commodities to peak last once the economy has already dropped into a downtrend.

My last chart is courtesy of Megane Faber showing trends in CAPE valuations of all the major countries, to which I have added the text of the demographic peaks:

Underlying Source: Megane Faber

By my demographic work, CAPE and P/E valuations must be understood relative to demographics. A high valuation can and will go higher if the demographic trend is positive, and vice versa for low valuations. What we face now is an unprecedented downward pull in demographics from USA, China and Europe, i.e. a massive proportion of the world’s GDP. The obvious candidates for future CAPE spikes at this point would be Brazil and India, as they are both in the world’s top 10 biggest economies and have positive demographic trends. However, they would likely need to first grow into bigger more self-sustaining economies and, if that were possible, it will take time given it would take place against the collective downward pressure from the majors. In short, I don’t see a major CAPE spike on that chart coming for some time.

Updated Charts

Posted on August 19, 2013August 19, 2013 Posted in Bonds, Commodities, Currencies, Geomagnetism, Indicators, Lunar Cycles, Macro, Solar Cycles, Stocks21 Comments

1. Geomagnetism – downtrend out to mid-Sept:

2. Sunspots – up again currently but still no clear trend:

3. Economic surprises – coincident data positive in USA and Europe, improving in China, disappointing in Japan and languishing in emerging markets:

4. Leading indicators – weakening of late:

Source: Conference Board

Source: Dshort

5. Climate – July joint hottest 10th month on record, so not at mega-extreme, but still at levels sufficient to potentially disrupt agri.

6. Silver – this seems to be the obvious target to me, horizontal resistance and a re-test of the breakdown. If it can get there I will take profits on half my positions.

7. Full moon on Wed and end of lunar negative period this coming weekend. My aim is to take half profits on Dow shorts within that period. I have no price target, just that time target. I expect equities will rise again to complete a multi-month topping process so don’t think this is the time to load up short. One more up-move, I suggest.

8. Treasury yields advanced again. Tough to call what the Fed will do at the mid-Sept FOMC, but a month’s developments to go until then.

To sum up, still looks like a topping process in equities. Commodities outperforming currently and USD weak – this looks promising for a late cyclical rally in commodities, whilst equities top out. If the solar max is still ahead at the end of 2013 that whole process would fit, with commodities topping out in early 2014. To further fit, China and emerging markets should improve whilst the developed economies weaken in terms of leading indicators. Let’s see.

Macro And Markets

Posted on August 8, 2013 Posted in Bonds, Commodities, Currencies, Deflation, Demographics, Indicators, Lunar Cycles, Macro, References, Solar Cycles, Stocks29 Comments

It’s the start of the lunar negative fortnight today. I think this lunar downward pressure can be realised in price action in US equities, for these reasons.

1. Bonds may put in a rally here. Yields look to be arching over.

Source: Sentimentrader

2. Rydex equities involvement and sentiment at contrarian levels:

Source: Sentimentrader

3. Diverging bullish percent over call put ratio – note the previous occurences here:

Source: Stockcharts

4. Breadth divergence. There are a few indicators showing this such as % stocks above 50MA, Mclellan Summation index, and, here, advance-declines (making a double top versus the higher high in equity prices):

Source: Cobra

No devastating decline in overall market internals. but enough to warrant a pullback. Countering this, the latest economic surprises, service PMI and manufacturing PMI, and overall earnings beat rate for the US have all been good. For a cyclical stock market top, we would need to start seeing some degradation in such data. However, if this is a topping process, then I expect we are only in the middle of it at this point, with a last push up to come ahead into September (assuming a decline can be realised over the next 2 weeks). By September I would then expect to see some macro reasons emerging to complete a topping process in equities.

I have doubled my short position on the Dow today and have specifically tallked about and targeted US equities because of the current divergence around the globe. The latest Markit PMIs really showed a vast difference between emerging and developed economies. Sober Look suggests this spread in economic cycle positioning:

Source: SoberLook

UK and Eurozone are looking particularly impressive and USA ticking along nicely. Australia has suffered since China lost momentum, and its central bank reduced rates again this week. This is the collective picture for the major central banks:

Source: Action Forex

Despite the QE tapering talk in the US, the graphic shows that we are still in an era of easing, with interest rate reduction still being pursued. As you know, I believe demographic trends are the source of the global economic weakness, ensuring we will be in an era of negligible rates for some time. Maybe the Fed will start to taper as early as next month, but I believe an end to QE and a renewed rate-increase policy will not be seen soon.

So, China has cracked, in my opinion, since its demographic trends reversed circa 2010. Those developing nations that boomed directly as China partners and those commodity-economies that benefitted from the long rising trends in commodity prices (through China demand) are currently suffering. This would include Brazil and Russia. India’s issues have been more internal and it needs reforms to help realise its demographic potential.

For most of the 2000s, this China plus emerging markets story was the fuel for the global economy, but now we are looking back towards the developed world to take the batton. Unfortunately, the US and Europe have significant demographic headwinds. I therefore don’t believe that we are now going to see sustained growth in the West. I continue to believe that either another rally in commodities will tip the world into a global recession, or the world is heading that way in a deflationary trend.

And that remains the key question for my account. Will my commodities longs prosper, or continue to sink? Right now, the commodities indices are potentially carving out a higher low than late June, which could spell an end to their downtrend. I believe this is the time for that to occur, because of my belief that equities are in a topping process. Historically they should now outperform and largely act as late cyclicals. I see this next month as critical for commodities. If they cannot make a higher low than June at this point, paricularly as the USD weakens, then it would look bearish for commodities.

Here is corn, showing a potential rally set up.

Source: Sentimentrader

And copper looks to be breaking out following a month-long basing pattern.

To draw the above themes together, can emerging markets strengthen into year-end, positively-infected by current developed economy performance? If so, the commodities rally would appear more likely. If on the other hand developed markets begin to join emerging economies in weakness, then a deflationary downdraft would be more likely. The wildcards remain the solar cycle (if the peak is ahead, then a speculative push in commodities could occur with increased geopolitical conflict an associated input) and climate (drought, flood and very high historical temperatures remain very much in play – it depends whether we see a devastating coming-together at the critical time and global location for agricultural crops).

OECD leading indicators just released today are more supportive to the first scenario of emerging markets strengthening and joining developed nations, with Russia stabilising and India improving:

Source: OECD

Roundup

Posted on August 5, 2013 Posted in Bonds, Commodities, Currencies, Deflation, Demographics, Geomagnetism, Indicators, Macro, Real Estate, Solar Cycles, Stocks21 Comments

This is the latest geomagnetism forecast versus the SP500. The forecast extends to the beginning of September and as can be seen has further transformed from a downtrend to a sideways/up trend.

The SP500 notably diverged from the model throughout July, more so than other indices which have more closely tracked the model. The outperformance of the US stock indices has meant p/e valuation has now increased to make the US amongst the world’s more expensive:

Source: FT

Is this justified? Not by demographics. Here once again is my real US equities plus real US house prices model versus 3 demographic ratios for the US:

That model has edged further up now in mid-2013 as real equities are back at 2007 levels and real house prices have edged up a little more (though are still a long way from the real 2007 peak). Yet the 3 demographic trends call for the model to collapse once again, as in 2001 and 2008. What makes demographics more potent this time around is that China has joined Europe and the USA in an unprecedented collective downward demographic pressure.

If we take the best of the three demographic measures, middle to young, only, then this is how it looks:

Source: PFS Group

Is it possible that the 2014-15 bottom is near enough and that stocks have taken off already? Well that p/e10 now stands at around 25, having bottomed in early 2009. That would mean p/es bottomed out around 5-6 years before the M/Y ratio, whereas in 2000 and 1982 the two peaked and troughed at very similar times. In the 1960s there was more of a gap, with demographics topping out a few years before p/es, but note it was demographics rather than p/es first, and this is echoed in my demographic work on Japan and UK, namely that if there is any lag it is demographics changing course first. In short, another cyclical bear in US stocks still looks the most likely course to me, and this is further cemented when we draw in all demographics measures, demographic pressures in China and Europe, and other US market valuations such as the Q ratio.

However, current leading indicator data is still largely positive for the USA at the moment (e.g. latest Markit PMI), and Europe is showing renewed strength (Markit PMIs, Conference Board). In fact it is the demographic-positive markets such as Brazil which are showing particular weakness. So what’s going on? I suggest commodities have played a key role in this. Lower input prices have boosted the developed economies and stocks. Commodity-economies such as Brazil have suffered. If commodities can rally again and make a historically-normal late-cyclical peak after stocks have peaked then I suggest the demographically-challenged major economies won’t be able to handle the renewed input price pressure. I believe the weak global recovery will topple over if commodities, particularly oil, rise in a meaningful way again.

Here is 30 year treasury yields with CCI comodities index, world equities index and Euro-USD. Euro-USD and commodities could be in a new uptrend that began in early July, IF they can make a higher low here.

Source: Bloomberg

But too early to say anything more. For me, it remains a game of patience, waiting to see if commodities can start to outperform here. Gold and silver had a very up-and-down week last week. Oil has maintained its breakout but appears to be stalling.

I believe the solar cycle still has a key role to play in the fortunes of commodities. Here is the latest SIDC update which continues to show two possibilities. If the solar max was Feb 2012 then I suggest commodities peaked out in 2011. If this were the case then I don’t believe a new secular bull market in stocks is underway because as per my work secular actually is demographic and the major economy demographics don’t support a new secular bull. I rather expect a deflationary recession to come to pass in due course. If the solar max is ahead as per the second SIDC option then I believe we will see the historically normal late outperformance of commodities from here into 2014 and that will tip the world into recession.

Source: SIDC

In the near term, I am looking at the window from tomorrow’s new moon through to Friday’s end-of-lunar-positive period to take profits on some equities longs and potentially add more short equities. I would like to see stocks advance further this week to do so.

All Round Update

Posted on July 31, 2013 Posted in Bonds, Commodities, Currencies, Deflation, Demographics, Geomagnetism, Indicators, Lunar Cycles, Macro, Solar Cycles, Stocks18 Comments

I’m back. Here’s an updated look at the main pillars of my work.

First, demographics. The key overarching macro issue going forward, in my view, is whether the combined price-deflationary and asset-deflationary demographic trends now in place between US, Europe and China will tip the world into recession and deflation despite the best efforts of central banks. Someone else has picked up on the theme and produced this:

Source: Nakedcapitalism

I continue to look at leading indicators for evidence. There is no doubt central banks have some impact on behaviour in the economy and financial markets by deploying policies to discourage savings, cash and fixed income, and to encourage lending, risk-assets investment and spending. But is it enough to offset the demographics?

The latest data shows Europe strengthening (PMIs, economic surprises), USA possibly having peaked (ECRI, economic surprises), and the overall global economy potentially weakening towards late 2013 but not until then (narrow real money). This week’s US GDP release surprised to the upside for last quarter, however the upside surprise matched the retrospective reduction in the previous quarter’s data. Nonetheless, the overall global picture is still fairly ‘safe’. Europe’s relative strength ahead should bode well for the Euro v USD, and a relatively weakening USD should bode well for commodities, and if we are to see the normal late cyclical outperformance in commodities (once stocks peak) then we need leading indicators to at least hold up a little longer.

If the unprecedented coming together of demographic downtrends in US, China and Europe mean the global economy is heading for recession no matter what (given China has now peaked demographically), then I believe this will mean a severe nominal decline in equities, as central banks will be revealed as impotent, and panic will ensue. If we slip into global recession without the ‘agent’ of commodity price acceleration then I would expect the SP500 to complete an overall megaphone formation since 2000 with a potentially lower low than 2009.

Next, solar cycles. Experts still don’t know if a solar peak is ahead or behind. Here’s the latest sunspot chart:

It’s clearly a weak sunspot cycle, and fairly messy. Some scientists believe there is a second peak ahead this year, which may exceed the existing smoothed max (Feb 2012). On the other hand, an overlay of SC5 suggests that existing peak may have been it:

Source: WattsUpWithThat

If the peak was Feb 2012, then I would point to 2011’s commodities speculation including a silver parabolic together with extensive Arab revolutions as normal behaviour patterns associated with solar maxima. It should mean that we have passed the speculative peak in commodities, that global temperature may have already peaked, and that we should expect the geomagnetic disturbance peak that follows a solar max normally 1-3 years later and is associated with recession. In this scenario I would expect commodities to continue overall weakness and deflationary recession to occur.

If the peak is still ahead later this year then we may see global temperature hitting extremes and more geopolitical trouble, together with a speculative peak. All three could push up commodities in a late cyclical outperformance into 2014 with bonds already having topped and stocks topping this mid-year. In this scenario I would expect an inflationary spike to help tip the global economy into subsequent recession.

Next, geomagnetism. All models have been updated for this week, and drawing in the next 3 weeks geomagnetism forecast, we see this (mapped against the commodities index):

A flattening out in cumulative geomagnetism in August following a downtrend May-July. By normal seasonality, geomagnetism should be troubling again by September and October. August-September would therefore be a suitable time for US equities to make a final peak in a topping process, if one began in May. Did one?

Well, so far the process is developing like a typical top. A marginally higher high is currently being played out with some weakening in breadth versus the May peak (% stocks above 50MA, Mclellan summation index). Margin debt still looks like it peaked in April, and in 2000 and 2007 this peaked 3-6 months before the stock market finally rolled over. However, this would all be invalidated if stocks push on again here and away from the topping range, with breadth strengthening again. US earnings may play a role in this and so far have made an impressive earnings beat, but a poor revenue beat rate. This means companies are making profits by cutting costs. This could be a warning if the economy shows signs of weakening, which brings us back to the importance of leading indicator readings as they come out. If central banks have been able to juice the economy just enough to offset demographics, through rate cuts, QE and verbal support (do what ever it takes) then it is feasible that this already long cyclical bull (by historical comparisons) continues. But I side with the multi-month topping process currently playing out until counter-evidence increases.

Next, lunar phasing. I have updated The Lunar Edge page and this is how the two of the most ‘sensitive’ indices to lunar phasing have performed so far this year:

The German Dax has delivered all of its annual gains so far within the lunar positive fortnights (4 days after full moon through to 4 days after new moon), whereas the Singapore Straits has really delivered no lunar edge of any note so far this year. Nonetheless, a strategy playing the lunar edge equally across both would still have returned well overall. I continue to look to the start of lunar negative periods for adding short and to the start of lunar positive periods for adding long, in order to time my longer term trades. On that note, the current lunar positive period ends by Friday next week. If equities have been able to rise further by then, I will look at taking profits where in profit, and adding short at that point if evidence continues to support a topping process.

Because we are in a lunar positive period currently, and Japanese equities fulfilled what I last suggested look liked occurring (the arching-over turning into falls) I have entered long Nikkei again, but just a starter position. My main exposure currently remains long commodities, with greatest weighting precious metals. I have various significant loss-making positions in commodities. I continue to believe that because of demographic trends precious metals will come again as the anti-demographic. I suggest central banks in US, China and Europe will continue to have to support the economy for some time to come and that renewed dovish talk will benefit gold. For other commodities, I return to the solar maximum unknown. If the solar maximum is ahead still, then I believe temperature and geopolitical disturbance and speculative mania can inspire a historically normal commodities peak following a peak in equities. Crude oil’s breakout in June gave this more credibility. Crude has now pulled back a little, and it will be important to see if this is consolidation before further gains.

If commodities as a whole have peaked and deflation continues to press them downwards, then I will be holding increasing loss-making positions. What to do? I will be looking to average down and time mean reversion. Nothing goes down in a straight line and I will be looking to convert them into winning trades in a ‘trade your way out’ style by leveraging up. Not easy, and no doubt some would view that as too risky, but that’s what I will be doing. Don’t follow me, etc, I’m just sharing with you what I’m doing, as the money management is as important as the analysis, right? But first, let’s see if commodities can outperform in the rest of 2013, as the previously detailed evidence suggests is possible. I want to give them a little more time to gather momentum, before using aggression.

Some key assets. Gold reached important resistance around 1344. Can it break through? If not then the basing process in precious metals will need some time longer. It is confidence restoration versus short squeeze, but if the latter is to occur then we will need triggers in the news. The US dollar has been in decline since the Fed backtracked on QE-tapering-hastiness, turned away at key long term resistance. However, it could yet be consolidation before another charge. I believe it will weaken as the Eurozone relatively improves, but the Fed’s actions will play a key role. Since I sold out of short-treasuries they tracked overall sideways. This could be consolidation before further rises in yields, but as there has been no pullback I don’t wish to yet rejoin.

I am writing this post US GDP release and pre FOMC output. Both market movers, and it will take until tomorrow for the dust to settle and we see where different assets want to go. But I wanted to get the post out as my trip gave me no opportunity. Thanks for your comments and emails whilst I have been away.

State Of The Markets

Posted on July 16, 2013 Posted in Commodities, Currencies, Demographics, Geomagnetism, Indicators, Macro, Stocks33 Comments

The SP500 followed the Russell 2000 and Nasdaq to new highs, on good breadth with healthy leading sectors. A marginal new high is normal in a topping process, but we would expect to see some kind of warning flags developing in terms of leading indicators if not in internals. We would also expect any new high to still be within an overall topping range, so not to run away too far. Here is one such topping model:

Source: Zevcapitalresearch

So might stocks get pulled back soon? Earnings reports are just getting going so too soon to assess beat rates, but earnings season usually produces a bullish or bearish theme. Geomagnetism continues to disturb and diverge from performance in some key stock markets. I have highlighted a historic rhyme below, which would be consistent with a topping process and then a fall in earnest in US equities:

I have updated all models on the site this morning.

ECRI leading indicators for the US have changed trend:

Source: ECRI / Dshort

And the ISM manufacturing and services composite is also trending down:

Source: Bespoke

World GDP is also in a steadily weakening trend, which is in line with my expectations based on the confluence of negative demographic trends now in place between US, Europe and China. I have marked their respective demographic peaks to illustrate:

Underlying source: Economist

Because of the demographics, my primary expectation is that the economic data will indeed continue to weaken and in due course topple the stock market. The alternative would be that the collective efforts of central banks are sufficient to prop up the global economy to a sufficient degree to maintain the low-growth-low-rates environment which is positive for equities. So all eyes on the leading indicators.

The US stock market is now in the top 3 most expensive by CAPE globally. Again from my demographic work, high price-earnings valuations can go higher if demographic trends are positive. However, the US is in a period of negative demographic trend so the expensive valuation is an anomaly that should be corrected in due course.

Crude oil has continued its upward trend and cemented its breakout. Gold and silver look to have carved out bottoms, though still tentative. The CCI commodities index has now been in a two week uptrend. So still early developments for commodities, but I maintain there is a greater likelihood of the historically typical process of commodities starting to outperform whilst equities make a multi-month topping process (with bonds already having topped), and eventually commodities topping last as they help tip the economy into recession. Another possible development in support of this would be if the US dollar broke down from its recent uptrend following Bernanke’s softer QE stance that came out last week. A chart by Niels here:

Source: Niels Orskov / Stockcharts

So as things stand, I maintain my overall expectation that stocks are in the first half of a multi-month topping process, with a marginal new high being carved out currently that should soon be turned back down. Commodities should outperform here forwards. Leading indicators should weaken sufficiently to prevent further advance in equities, but not too drastically to sink commodities. Moving into 2014 commodities should peak as they suck the remaining life out of the global economy, which is already vulnerable due to collective demographics of the major nations. Whether they can do this around the time of the solar maximum, as per history, remains to be seen, as the experts continue to diverge on forecasting when the solar maximum will be or was. The sunspot trend remains messy for now.

Trading-wise, if equities can rally a little higher here whilst we see a little more leading indicator or earnings degredation come to light, I will take off some more from the long side and add on the short side. Meanwhile I continue to sit on my ample commodities long positions.

Trading Update

Posted on July 10, 2013July 10, 2013 Posted in Bonds, Commodities, Currencies, Demographics, Geomagnetism, Indicators, Lunar Cycles, Macro, Stocks31 Comments

I have taken profits on Nikkei longs today and added short on the French CAC. We are now switching into the lunar negative fortnight, with a geomagnetic storm also in progress, and I believe we are in a multi-month topping process in equities. I expect the topping process to be an overall volatile range lasting into September before falls in earnest, but within that I want to sell into strength and buy into weakness.

The Nikkei trade has been a big earner as I was aggressive into the pullback, based on my demographic research. Now this is how it stands: close to a 61 fib retrace of the falls, and arching over:

I maintain the expectation that it will eventually break upwards out of its long term downsloping resistance, but wish to step back for the lunar negative period and with the belief that if global equities are topping another leg down in equities should be next.

US retail and discretionary broke out to new highs along with small caps, which is bullish, but marginal new highs are normal in a topping process. There is a possibility US earnings now pull back equities, as shown by the historic correlation between USD strength and revenue misses:

We also see encouraging signs that commodities may be beginning outperformance, with crude oil pushing on again yesterday and agriculture strong the last couple of sessions, despite USD strength. A topping process in equities beginning as commodities start to outperform would be very much in line with 2007/8:

Overbearish sentiment has been stretched like an elastic band on most commodities and commodity currencies for some time now, so mean reversion also supports a rally, plus Goldman and JPM have been putting out notes arguing for some fresh upside now in the class.

Sentiment has also been very bearish on treasuries for some time now, as yields have risen 70% from their lows. I am considering taking profits on short treasuries also. My thinking is that a pullback in yields is due, and I am wondering whether a combination of the fast-rising yields together with continued soft economic data (expectations based on demographics) will bring about a softening/backtracking in wording related to the announced pull back in QE. Such a development, either in yields or in policy, should then benefit precious metals. Just speculation, but as part of my overall case for a transition in the fortunes of asset classes this summer.

I continue to look for evidence in leading indicators for a weakening in economic data that the combined demographics of USA, Europe and China suggest should occur.

Based on the latest OECD data, we see fairly flat narrow real money and leading leading indicator, neither giving much clue as to future trend, but strong enough as things stand:

Source: Moneymovesmarkets

And to finish, Citigroup economic surprises for the US. We see economists clearly struggling with data expectations following 2008 in the wild swings oscillating up and down, but gradually getting to grips as the swings range narrows:

Source: Yardeni

If this were a stock we’d be expecting a resolution to the triangle, and as can be seen we may have one. Maybe there’s nothing to read into this, but if anyone has any thoughts I’d be interested to hear.

S O L A R C Y C L E S

Category: Macro

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