Category: Macro

Bear And Recession Ahead?

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

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

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

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

Source: Fed Reserve Bank of Cleveland 

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

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

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

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

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

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

Source: Calculated Risk

Source: Markit/Eurostat

Source: Taintedalpha 

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

Source: TradingCharts 

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

Source: Bloomberg 

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

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

Source: Bloomberg

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

Source: Thomson Reuters / Scott Barber

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

Source: Seasonalcharts

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

Underlying Source: Stockcharts 

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

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

Source: Dshort 

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

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

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

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

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

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

This Week

Posted on Posted in Currencies, Macro, Stocks16 Comments

Global economic surprises remain flat to down. Leading indicators for Euro-land fell to minus 0.8. Globally, some countries have slipped negative, others remain positive. ECRI US leading indicators came in at 0.1. Draw it all together and the picture is one of weakening but mixed leading indicators and current data disappointment. Add to this fear over Greece, with impending elections in June, and Euro CDSs still on the rise, and it is perhaps not surprising that we sold off and moved down to oversold and overbearish in pro-risk in a variety of indicators. However, now that we have hit those levels, a snapback rally should occur. Regardless of outlook, a period of mean reversion should come to pass.

I consider two possibilities for how this will arise. The first is that we bottomed with the Capitulation point I wrote about a week ago and that the tentative pull-up from there that took place is cemented as the low. The second is that we need to make a lower low, with a positive Nymo divergence, before we rally. In doing so we would perhaps hit oversold/overbearish extremes in those indicators that haven’t yet delivered, such as Investors Intelligence sentiment and Rydex market timers. The full moon occurs a week today and we normally see downward pressure into it, which would support the lower low option. Supporting the rally-from-here option, we are particularly stretched in the Euro-Dollar, with its pro/anti-risk implications. MACD positive divergence, excessive Euro shorts, extreme Dollar bullishness. Here is the USD index chart:

Source: Stockcharts

The US dollar is trying to break out on those extreme contrary readings, which suggests it could reverse here and make that little break to the upside a fake out. If it is to do so though, it needs to occur right away, which would support the rally-from-here option. Clearly, newsflow has the power to trigger here. Since capitulation a week ago, stocks rallied without any real positive developments on the macro front. For this reason I suggest the rally was thus far fairly weak. But should some positive news come to light, then the mean reversion should accelerate.

So let’s see how this week pans out. No position changes for now. If we make a lower low with positive divergence into June, I will attack on the long side again. If we rise up from here I will alternatively be looking for negative divergences and weak internals if I am to take profits on longs. I believe the macro picture make it likely the ECB will cut rates in June and China will ease/stimulate in some way. The FOMC is just 3 weeks away and Twist expires then. I suggest the Fed will also deliver ‘something’, as nothing would amount to tightening (given Twist will expire). The President may also be keen on something to juice the markets, as the chart below makes clear:

Source: Big Picture / Bianco Research

Several technical indicators that I have previously referred to (such as nominal Nymo, insider buying) point to this being an important bottom, suggesting we can rally into mid-year. By solar cycles, we should see a natural turn up in growth and inflation and speculation. I expect that to occur, but boosted by central banks intervention in this soft period. The secular position that I wrote about supports upside too. So, I remain a bull, with longs. But the acid test will come as we make the mean-reversion rally ahead. If this is supported by central bank actions and improving leading indicators and economic surprises, then I expect to be proven correct. If however the picture remains weak and negative divergences abound, then I would alter stance and sell into the rally.

Update

Posted on Posted in Commodities, Macro, Stocks22 Comments

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

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

Source: Alphahorn

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

Source: Quantifiable Edges

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

Source: IndexIndicators

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

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

Capitulation

Posted on Posted in Macro, Stocks26 Comments

At yesterday’s close, Capitulative Breadth hit 7, so into the 7-10 zone that historically brought about a bottom.

Nymo is into the extreme oversold zone, at -100, and we saw a large daily volume candle yesterday, both signalling a bottom.

Source: Cobra / Stockcharts

This morning in Europe pre markets open, the SP500 and Nasdaq have hit the lower channel lines shown here in Alphahorn’s charts:

Source: Alphahorn

If we don’t bounce today then I suspect we will crash, make a cycle inversion into this weekend’s new moon, and then rally on Monday, but my expectation is rather that we print a daily hammer candle today, from this out-of-hours (for Europe and US) selling, due to the indicators above, and shared yesterday and the day before. I have added to Hang Seng longs this morning, and will buy more pro-risk if we fall further today or even crash. I maintain these are golden opportunities for a significant bounce as we print one oversold or overbearish extreme after another.

On the macro front yesterday, US leading indicators came in at -0.1, but Korea a woeful -1.5. If LIs turn down en masse then the picture changes, so let’s see. US economic data also disappointed yesterday and with Euro CDSs continuing to rise, global government and central bank intervention draws closer, both out of necessity and likelihood.

Equities Update

Posted on Posted in Macro, Stocks13 Comments

Yesterday, Capitulative Breadth moved up to 5 from 2 (with 7-10 historically marking bottoms for stocks).

The percentage of Dax stocks above the 50MA is zero, making for an oversold extreme.

Source: Indexindicators

Down pressure for US stocks has reached a historic extreme, which has previously led to significant bounces within a couple of days.

Source: Sentimentrader

SP500 bullish percent over put/call ratio is down at the levels of the 2009 and 2010 corrections, but not as deep as 2011.

Source: Stockcharts

The message is the same: a bottom or a bounce should be close. I reiterate my expectation that leading into and around this weekend’s new moon upward pressure should emerge. So I foresee a bounce lasting into the middle of next week, and thereafter we shall see.

This weekend is also a solar eclipse, and it gives rise to a subsquent Puetz crash window, June 4 – June 13. Puetz crash windows I have previously found to be hit and miss, but wanted to put it on the radar. With a rerun of the Greek elections scheduled for June 17, some Greek citizens withdrawing deposits from banks, and Euro CDSs still climbing, there is clearly fuel for fear to overwhelm the markets. Based on recent history though, governments and central banks will intervene in any significant escalation, supporting markets. If the situation in Europe is again diffused, then positive leading indicators and a further tick up in economic surprises will likely return the fore, fuelling a period of mean reversion for pro-risk away from oversold and overbearish extremes, and out of the safe havens of treasuries and the dollar.

On The Attack

Posted on Posted in Bonds, Commodities, Currencies, Macro, Stocks23 Comments

It is a contrarian’s dream, right here right now. These are the opportunities that make me lick my lips: oversold and overbearish extremes. This morning I have added long Hang Seng, FTSE 100, silver, oil.

Starting with equities, NYSE oversold extreme has historically marked bottoms:

Source: DecisionPoint

Put/call ratios at levels that have historically marked bottoms:

Source: Decision Point

Source: Cobra / Stockcharts

AAII sentiment at bearish extreme, plus high percentage of II sentiment neutrals which has historically siginified a trend change. UBS here highlight the lack of high volume capitulation. Yesterday gave us a voluminous daily candle, but capitulative breadth only reached 3. It is possible today we could see that capitulation, followed by a hammer v-bounce. Let’s see.

Source: UBS

Nymo positive divergence. Again, UBS’s chart, with their interpretation that we will see a significant bounce then further downside. I repeat my point that whether you side with my longer term projections or not, a period of mean reversion will follow when pro-risk hits oversold and overbearish extremes.

Source: UBS

Sentiment is at bullish extreme for the US dollar. Euro-dollar RSI is in the extreme oversold zone.

Source: Profitimes / Sentimentrader

The USD longer term is now at horizontal resistance.

Source: James Craig / Stockcharts

Gold sentiment is extreme bearish.

Source: Profitimes / Sentimentrader

Silver sentiment also, levels that histrorically marked bottoms.

Source: Sentimentrader / Profitimes

Rydex precious metal allocations are at extreme lows.

Source: Jordan Byrne / Sentimentrader

Gold miners are at oversold and overbearish extremes.

Source: Jordan Byrne / Sentimentrader

Gold commercial and open interest is at contrarian extreme.

Source: Jordan Byrne

Commodities are at long term historic low valuations compared to treasury bonds.

Source: James Craig / Stockcharts

Treasury bonds are at all time highs, paying negative real returns.

Source: James Craig / Stockcharts

Various agri commodities are in the overbearish extreme sentiment zones, including orange juice, coffee, wheat and cocoa. The global temperature figures for April came in at the second warmest on land since records began. Dry weather gave agri commodities a push up yesterday, counter to the pro-risk sellling, as harvests are likely to be affected.

Source: NOAA

Lastly, the macro front. Leading indicators point to growth ahead, with the exception of Euroland.

Source: Conference Board

Economic Surprises have stablised in the last couple of weeks for the major economies. Leading indicators suggest we may see them turn up ahead.

Source: Bloomberg

But the overarching issue currently is Greece and Euro debt. Spanish CDSs are at a record and still climbing, plus Greece is going back to the polls with a probability of installing a government that does not agree to the bailout terms from the ECB. The fear is that Greece is expelled, makes a hard default and brings down major European banks.

Source: Acting Man / Bloomberg

I am not belittling the Greece and Euro debt issues. But we have been here before, the last 2 years. Politicians will take action, central banks will take action. The oversold/overbearish extremes scream opportunity, to me. If the Greece/Euroland saga rapidly spirals into the worst case scenario, and pro-risk plunges much further before reviving, then I will take some account pain. But I always keep powder dry. If we do plunge much more overbearish and oversold I will attack again lower down. But I believe the bottom is close at hand.

More Opportunities

Posted on Posted in Macro, Stocks50 Comments

I’ve added to long stock indices positions this morning (SP500, Dax and Hang Seng). My original position was fairly small. Here’s why I’ve added.

AAII bearish sentiment has moved to the levels seen at last year’s market bottoms. In other words, bullish sentiment has very rapidly evaporated.

Source: PragmaticCapitalism / AAII

There is a positive divergence on the Nymo, which has historically signalled a bottom.

Source: Cobra / Stockcharts (plus my green positive divergence lines)

To reiterate my view: I expect equities to track overall sideways with volatility into next year’s solar peak, something like the action in the box below. That means I’m looking for opportunities for shorter term moves, up or down, where the indicators line up.

Source: Charles Githler

Economic Surprises continue to languish, Euro debt continues to fester. However, OECD leading indicators paint an overall positive picture ahead. The period into the solar peak is typically one of growthflation. I reiterate that I expect a natural pick up in growth or one with central bank assistance. There is some evidence here that we may swing up naturally ahead.

Source: OECD

Opportunities

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

More selling yesterday, but then intraday reversals that produced hammer candles (stocks, oil). Hammer candles often mark bottoms, but capitulative breadth still didn’t trigger. Ryan Puplava compiles some oversold indicators and divergences that are suggestive of an imminent rally, but he also notes that market breadth has weakened.

This is how the SP500 stands. There is a trio of supports coming together around 1341, if we head lower, and that would potentially put us sub RSI 30.

The Russell 2000 has either made a triple bottom or is playing out a large head and shoulders to a considerably lower target.

Source: StockSage

Stocks are reaching towards overbearish but sentiment could drop lower yet before a reversal.

Source: Stockcharts

Stocks are heading towards oversold, but could also drop further yet to reach extreme.

Source: Indexindicators

The Chinese stock index needed to make a higher high to confirm a new bull trend since the start of 2012 but has pulled back at a double top, shown. If it can break out, it will be suggestive of China growth and associations with commodities.

Source: Bloomberg

10 year treasury yields are back to all time lows.

Source: Stockcharts

30 year treasuries back to all time highs.

Source: Stockcharts

I have added to short treasury positions. Doug Kass is bearish on treasuries here (hat tip Juan), calling it the trade of the decade.

The US dollar remains in a range, despite the Euroland troubles. As yet this is not resolved.

Source: Stockcharts

Spanish CDSs have nudged back up, but other than Greece CDSs, Euro debt hasn’t catapulted up again in this fresh round of fear.

Source: Bloomberg

Right now, it looks like 2010 and 2011 again – mid year pro-risk retreat with Euro debt back to the fore and slowing growth. I find it hard to believe we will see the same again, as the market always likes to surprise. So what if not that? Well, the run up into the solar peak is typically one of growthflation. The mid year should be lower geomagnetism, by seasonality, which is supportive. Sunspots should continue upwards, which is supportive. And stocks generally fair well mid year in US election years. I suggest therefore that we need either a natural pick up in growth here (economic surprises ticked up for all regions yesterday but we need to break the downward trend; China and emerging markets could take over as the driver) or we need central bank assistance, such as ECB action to deflate Euroland issues again, and the Fed to replace Twist in June. But either way, I rather expect we will see a more pro-risk friendly mid-year.

Gold miners’ cheapness relative to the gold price, overbearish sentiment and oversold RSI sub 30 make them still a great opportunity here, I believe. I added to long gold miners.

Source: Stockcharts

Source: Andrew Nyquist

Silver is sub RSI 30 and overbearish sentiment. I added to silver longs.

Crude oil is also oversold. I added to oil longs.

Orange juice has halved in price since the turn of the year due to ample supplies, but is now oversold and extreme overbearish. I opened a long OJ position.

Source: TradingCharts

Nothing (so far) has shifted me from my view of how things will play out into 2013, namely a commodities surge, and even if I were wrong, oversold AND overbearish assets eventually mean-revert. If we move further to extremes in commodities, treasuries pricing and sentiment in the sessions ahead I will add again. These are great opportunities, in my view. The picture for equities is more in the balance, with some indicators of a bottom but some reasons to expect further selling. Developments in the macro picture need close monitoring, as evidence of a pick up in data or government intervention could cause a surge, or equally, continued deterioration could cause a big sell-off.

Sunday Update

Posted on Posted in Bonds, Commodities, Macro, Stocks19 Comments

Quite strong selling on Friday, but Rob Hanna’s Capitulative Breadth indicator stayed at zero, suggesting the selling in stocks is not likely over.

Source: Andrew Nyquist

Commodities took a hit as well, particularly oil, as attention turns to slowing growth. The economic surprises for the developed economies continue to tumble at an alarming rate.

Source: Bloomberg

Compensating to some degree we see China is overall looking positive ahead (though still tentative in some areas).

Source: Yardeni

US earnings finished last week with 3 bad days of results, taking the overall beat rate from 69% down to 61%, quite a drop. No longer a very impressive beat rate. ECRI US leading indicators came in at zero this last week, a further drop back and now threatening to turn negative again.

Money has poured back into US treasuries, taking the yield back down towards the previous lows. But Spain and Europe CDSs have paused, not contuning their climb for now.

In Zeal LLC’s latest essay they suggest stocks will make another push up before rolling over properly, and this echoes the lack of major topping indicators at the 2012 highs to date. My own historical comparisons suggest an overall sideways range for stocks into next year’s solar peak, so I’m on the look out for opportunities short or long, when indicators align one way or the other. Short term then, I am expecting some more selling to take out the April low, in the early part of this coming week, and will be looking for bottoming indicators to reveal themselves. Upward pressure should emerge again as we move towards 21 May, around the new moon. If we do make another push up to highs in stocks, perhaps after that, then I will be looking for negative divergences and topping indicators.

Gold did its best to defy the selling on Friday. We still have those contrarian buy signals in precious metals, miners and certain agricultural commodities. It’s possible that we could see commodities outperfom stocks here if China data continues to improve whilst Western economic data languishes. However, if selling gains momentum it is more likely all will fall together. Gold could potentially rise alone as a safe haven, particularly if participants become more expectant of QE based on poorer data. The next FOMC is June 20. That gives them 6-7 weeks to assess further trending in data. It is also when Twist expires. If data continues to decline, and the Fed does deliver a stimulus programme of some kind, then maybe that would set up the final commodities launch that I am expecting into 2013. Well, let’s see how data trends develop into June.