Category: Macro

In Charts

Posted on Posted in Macro, Stocks2 Comments

US equities sentiment is not at an overbullish or overbearish extreme.

Source: Shaeffer Research / Investors Intelligence

US equities are also neutral by intermediate overbought / oversold indicators.

Source: Index Indicators

We need to look elsewhere therefore for clues about direction.

US earnings this quarter have a beat rate of 69%. That makes it one of the best of the last decade, if applied on this historical chart.

Source: Bespoke 

Forward guidance has been good too, so that’s all positive for equities.

Yet, economic surprises continue to plunge.

Source both:  Bloomberg

The last time we saw such a plunge from the high extreme swiftly into negative territory, equities range-traded for a couple of months and then dropped sharply (July 2011). It was a time when Euro debt came to the fore, and Spanish debt has done so again.

Source: Bloomberg

Euroland economic data is currently bad. Asia is looking brighter, although there is some mixed data out of China. Nevertheless, the Shanghai Composite has made a higher low, broken above the down sloping resistance and now needs to make a higher high above the horizontal resistance to make a compelling new bull trend.

Source: Bloomberg

The Australian ASX is at a key point, the merging of both long term down sloping resistance and horizontal resistance.

The Hang Seng made a bullish breakout, as shown yesterday. Plus as also previously noted, commodities display some technical and sentiment reasons for bull moves ahead.

All together that makes a mixed picture. Some key bullish / pro-risk developments, and some important bearish / safehaven developments. Recall that historic parallels (solar cycle secular commodity conclusions) showed overall sideways action in equities with volatility whilst commodities broke away to their bullish conclusion. The current mixed picture would support that overall sideways action in equities, but we perhaps need some other development to give commodities acceleration. That could be through further central bank intervention, in response to persistent Euro debt trouble, continued falling economic data or to replace Twist with something when it ends in June.

For now then, I continue to watch leading indicators and developments in the key areas noted above, and await assets moving to extremes in sentiment or overbought/oversold readings.

Update

Posted on Posted in Commodities, Currencies, Macro, Solar Cycles, Stocks1 Comment

The Dow made a new high yesterday but closed beneath it. The other indices did not yet see new highs.

The Hang Seng has made a pretty compelling breakout – a successful backtest of a bull flag and then a pop today with China data good again and the Shanghai Composite performing well.

The threats of declining and negative Economic Surprises, weakening US leading indicators, and Spanish CDSs close to record highs, all remain. But for now, equities look technically bullish. I continue to expect some weakness to occur into this coming weekend, so let’s see how today unfolds.

The latest POMO schedule was released here and shows a programme of both buys and sales, not making much of a push or pull either way.

Commodities look to have potentially made an important trend break here.

Source: Chris Ciovacco

Certain commodities are still at extremes of pessimism or bearishness. However, yesterday’s positive US data and hawkish Fed tones have pushed up the dollar and pulled back gold. The commodities complex may struggle if that holds. Euro PMIs today may affect sentiment one way or the other.

In short, good reasons to fancy commodities here (China growth signals, excess pessimism), but as always patience may be required.

The latest solar maximum prediction from Nasa was released and continues to forecast a solar maximum in Spring 2013.

Source: NASA

In The Balance

Posted on Posted in Commodities, Macro, Solar Cycles, Stocks24 Comments

The US dollar appears to be on the verge of breaking down, but it isn’t a done deal yet.

Source: Andrew Nyquist

The Chinese stock index is on the cusp of a breakout. A Shangai breakout and a dollar breakdown would really give commodities some acceleration. However, no China break out either as yet, and a reversal into the triangle is possible.

Source: Bloomberg

AAII bullish sentiment has really washed out, which is supportive for US stocks.

Source: Bespoke

European stocks are underperforming, and Euro debt continues to weigh. Spanish CDSs have eased a little, but only to just below record highs. I expect them to come again.

Source: Bloomberg

Economic Surprises continue to collapse.

Source: Bloomberg

Geomagnetism appears to have ebbed today, but 4 days of disturbance has tipped the model projection over to a slightly downwards bias, with particular downward pressure into next weekend’s full moon.

We have US earnings exceeding, a washout in bullish sentiment, and a double bottom on the S&P500 at the backtest of the 2011 old highs, together with a lack of major topping indicators at the 2012 highs, all supportive of further upside for stocks. Then we have collapsing economic surprises, Euro debt, and geomagnetism all exerting downward pressure. And we have the US dollar index and Chinese stock index both at crunch points.

The combination of excessive pessimism in multiple commodities, higher sunspots which should encourage commodity speculation, and lagging in both Euro and Shanghai correlations as shown below, makes it likely commodities are about to perform.

Source: PFS Group / Stockcharts

If commodities are about to perform, then a breakdown in the US dollar and a breakup in China stocks would make sense, and those developments should in turn pull up equities too. But as yet we remain in the balance, and if we get movement the other way in the dollar/China, due to Economic Surprises, Euro debt, and/or geomagnetism/full moon then it may mean a little more time is needed. But to reiterate my expectations drawing together previous solar maximum / secular commodity conclusions, commodities should start to outfperform whilst stocks track overall sideways with volatility. I remain lightly long stocks and heavily long commodities.

On a personal note, Spring is here in the UK, and the outdoor pursuits are calling. I have a list of research threads to look into related to trading and the markets, some provided by readers, some of my own sourcing, but I expect to address them in the next off-season, towards the end of 2012. I fully intend to maintain posting and analysis several times a week, but additional deeper, original pieces of research are on hold for now, so if you put a suggestion my way, it’s on my off-season to-do list. The UK good weather season isn’t as long as some others, so time to make the most of it.

 

Update

Posted on Posted in Commodities, Currencies, Macro, Solar Cycles, Stocks3 Comments

The sun has woken up. Current sunspots are more in line with a rising trend.

A geomagnetic storm is in progress, so caution. But the extended geomagnetism forecast continues to show a flat to upwards trend ahead, which should provide support for risk assets.

I have updated all the short term and medium models, on their relevant pages.

Economic Surprises for major economies finally went negative yesterday – a bearish development.

Source: Bloomberg

European PMIs were weaker than expected, suggesting Europe is not out of recession yet. Leading indicators for Germany and China came in positive.

The US dollar remains undecided in the nose of its triangle, but running out of room. I maintain the expectation that the FOMC outputs may push it one way or the other.

Source: Stockcharts

Spain, Italy and France CDSs continue to rise. Portgual CDSs have fallen away and out of the limelight. But the bigger trio have the potential to overwhelm the markets if this continues.

Apple earnings today after the bell.

Solar Peak Secular Asset Conclusion

Posted on Posted in Commodities, Macro, Solar Cycles, Stocks20 Comments

Here is a table showing just the last 3 secular commodities bulls and associated solar maximums. I have created a forecast along the top row for the current cycle, based on them.

I found it help clarify what could come to pass. Gold could potentially not peak until late 2013. But peak inflation should occur fairly close to the solar peak, suggesting oil/food, at least, should surge ahead of that, and gold should be performing well by association. Real equities valuations could potentially not bottom for another few years, if a recession begins later or a double recession occurs. It doesn’t alter my strategy or positions. It perhaps implies a little more patience is required in seeing it all play out.

The chart below shows the current Dow chart overlaid on the 1980-82 Dow chart. 1980 was the US election year like now, and it was also a parallel secular commodities and solar maximum. A similar unfolding would see equities track sideways to upwards into the elections later this year, before down into their final low in 2014. I would note though that the solar maximum takes place after the elections this time, not before like back then.

Source: Charles Githler (Hat tip Juan)

Turning to the current markets, Tiho did another great summary yesterday at his Shortsideoflong blog, and my thinking is very much aligned with that. I will just add that I continue to expect a bit more pro-risk upside into this weekend’s new moon, so that means today, but I expect to keep my bounce longs as the upside hasn’t been decisive. As my equities longs are fairly small, I would happily add lower if this turned out to be an extended B wave in an ABC down. Sunspots continue to increase. Economic Surprises continue to flounder. Asia continues to outperform currently.

This Week

Posted on Posted in Commodities, Currencies, Macro, Stocks14 Comments

Friday’s action was a reversal of Thursday’s strength, including a potentially decisive channel exit for Apple, and Spain CDSs reaching new highs.

I maintain the expectation of upside into the end of this week, into the new moon. There are some key US earnings out this week. Last week’s opening set produced a beat rate of 75%. If Spain becomes more accute, or earnings disappoint, and we make a lower low on the indices, I’d be looking for more evidence of capitulation or positive divergences, such as on the Nymo. Only Spain debt is showing signs of stress currently. There is no notable contagion elsewhere. However, it is a large economy with peak debt rollover requirements this year, so clearly a threat.

Economic Surprises remain in their overall downwards trend, whilst still positive, and ECRI leading indicators remain in their uptrend, now at 1.4% positive. PFS recession leading indicators show no current likelihood of the US slipping into negative growth.

Gold miners are into week 9 of a potential perfected DeMark buy set up this week. The US dollar is pressing for the decisive triangle breakout against the Euro.

Two great posts by Tiho at his Shortsideoflong Blogspot on Friday and today.

OK, to sum up, I expect a push up in stocks into the end of this week. If we get that, I may exit my bounce longs. If not, I’d look to add more lower down on signs of capitulation or positive divergences. In the medium term, I still expect overall sideways action for stocks, with global leading indicators still on the up, but economic surprises on the down, with us having seen no regular major top indicators at the March top, and having fairly swiftly reached oversold Nymo and a washout in bullish sentiment. I maintain the better opportunities are in gold and miners, which are due lift off. But the US dollar may hamper this. Continued stress in Spain debt may weaken the Euro versus the dollar.

Update

Posted on Posted in Currencies, Macro, Stocks6 Comments

China GDP came in lower than expected but new lending much higher. Ryan Puplava makes the case for the Chinese economy and stocks to be bottoming here.

Source: PFS Group / Wolfe Trahan

If so, that should provide a push on commodities.

William Dudley of the NY Federal Reserve yesterday suggested they were ready to deploy QE3 if things deteriorated, which adds to the recent mixed messages but perhaps provided one reason for gold and the Euro to rally yesterday. The US dollar index has accordingly dropped to the bottom of the triangle nose.

Source: Stockcharts

Clearly, the triangle is running out of room. Spain CDSs remain critically high, though Italian debt sales yesterday went better than expected. US earnings are only just getting going, but Google last night beat expectations. US economic surprises made a leap up yesterday, but so did surprises for all the major economies. I remain of the expectation that the dollar will eventually break down, in a commodities finale, but in the shorter term I am not sure which way this will break. Sentiment still gives no clues either way.

AAII bullish sentiment for stocks has collapsed, following the recent correction in equities.

Source: Bespoke

This collapse perhaps echoes the swift collapse in the Nymo and move to capitulative breadth in that we might expect upside in stocks from here rather than downside. Capitulative Breadth dropped from 7 to 2 following yesterday’s rally, so back to neutral. We often see a positive divergence in Nymo to mark a low, which could mean a W bottom in stocks. There is a geomagnetic storm in progress today. Combined, we could see a pullback in equities shortly, to make the second half of the W bottom, and this is perhaps echoed in having reached the backtest of the broken uptrend:

Source: Andrew Nyquist 

Positive pressure should resume into the end of next week and the new moon, following the passing of the geomagnetic storm.

Opportunities

Posted on Posted in Commodities, Macro, Stocks1 Comment

Got back from vacation last night, and my priority was to look for any glaring opportunities, covered below. I will catch up gradually on mails, comments, etc. I have updated the short term models page and will update the others in due course. Below are models for the Dax and CRB which show potential upside from now into the end of next week.

Stocks finally corrected then, and yet we now see a very oversold Nymo – below – which is a good signal for a bounce. Plus, Rob Hanna’s Capitulative Breadth indicator jumped to 6, where 7-10 historically implies capitulation and a market bottom of some kind. Together, they suggest the market won’t fall away here but will bounce soon, if not to a new high then to a partial retrace of the falls. I have therefore bought stock indices for a bounce.

Source: Stockcharts / Cobra

Gold and gold miners are the other opportunity I see. Here is gold miners bullish percent versus the gold miners ETF at a level which has historically been a great buy.

Source: Stockcharts 

By various oversold/overbearish indicators, gold and gold miners look a buy opportunity here. Bernanke’s remarks whilst I was away that implied no QE3 caused another sell off in gold, but I believe that’s just part of the final clear out of weak hands. Gold does not need QE3 whilst negative real interest rates, central bank demand, money supply increases and real inflation data all remain supportive.

Regarding ‘threats’: China slowdown, Euro debt re-escalation and Economic Surprises downward trend, there is some positive news on the former, but worsening on the latter two.

Here are the latest OECD leading indicators. China has flipped to the positive since last month’s readings.

Source: OECD

ECRI’s leading indicators for the US also finally moved into the positive. Euro debt has flared again though, through Spain. Here are Spain CDSs. Italy CDSs are also trending up but not quite as critical as Spain.

Source: Bloomberg

Here are Economic Surprises for the main global economies, which continue their downtrend but remain just positive. US Economic Surprises are similar.

Source: Blooomberg

The situation in stocks, Euro debt and economic surprises shares some similarities with the first half of 2011. Then, stocks exited their strong uptrend in Feb 2011, as Surprises dropped and Euro debt came to the fore, but stocks traded overall sideways into July, with opportunities long and short. As we did not see major topping signals with our recent March 2012 top, I suggest we may be in for something similar, and the quick reaching of Nymo and CBI bounce signals supports this. My projected bounce window is into 21/22 April, so the end of next week.

US earnings kicked off yesterday and will be influential on the markets, but we won’t get a feel for an earnings trend until next week.

This Week

Posted on Posted in Bonds, Commodities, Currencies, Macro, Stocks18 Comments

On the macro front, a persistent dropping in Economic Surprises (echoing last year) makes it likely the stock market rally will soon pause or end, if it hasn’t already begun that process. However, we still don’t see a general set of extreme overbought/overbullish indicators in equities. If stocks continue to go up and surprises continue to decline, then a short will become more attractive, but I would be looking to other factors in assessing how attractive.

Source: Bloomberg

One such factor would be the potential resumption of debt worries to the fore. Spain is the only country looking likely to do this currently, with Portugal, Italy and Japan CDSs going the other way. But as can be seen from the Spain chart, previous highs are not that far off again. If this upward trend continues then it is likely to scrape at global bullish investor sentiment.

Source: Bloomberg

Another factor is China. Concerns over a slowdown are playing on commodities, and new orders surveys have produced mixed results. China doesn’t want to cut interest rates whilst maintaining that property needs cooling, but is more likely to cut bank reserve requirements again in April. Until evidence becomes more persuasive of China easing and/or China growth improving, this is another potential dampener on US equities sentiment.

Source: Danske Bank

For now then, investors, particularly in US stocks, remain unconcerned about economic surprises, Spanish debt and China slowing, but this is often how it works. The bull extends as negatives grow, only for a sudden collective shift in sentiment, with participants becoming of the view that the market has moved too far, too fast. Of course, if surprises start to improve again, Spain does something to ease CDS pressures or news from China gets better, then equities and pro-risk in general could yet advance further.

One other macro factor to mention is that the latest POMO schedule has been released and net sales begin April 9th. That may be another downward pressure factor, as per McClellan’s relationship chart between the two, that I previously posted. Countering this, the Bank of Japan added to stimulus last week.

A look at treasury yields and the dollar reveals a delicate position in both. 10 year yields completed their obvious move up to the s/r line shown, and now the question is whether they can penetrate and rise above that line, or whether that was just a counter trend rally. The Fed’s actions and words may have some influence in this, and the next FOMC is April 24/25.

Source: Stockcharts

The US dollar index is likely to break one way or the other soon. As per with treasuries, dovish or hawkish words or actions from the Fed are likely to play into this, but also the general macro factors listed above, and their pro/anti risk connotations.

Source: Stockcharts

Gold and miners remain overbearish and should therefore likely soon take off. Soft commodities rallied on Friday as inventory reports revealed steeper drops than expected for corn and others, but broadly speaking commodities are languishing versus equities, so we likely need a confluence of factors to bring about sustained strong gains.

There will be no posts or model updates now until 11 April, as I am away on holidays, and taking a proper break from the markets. I will respond to mails/comments on my return.