Category: Solar Cycles

Timing The Peak In Equities And Margin Debt

Posted on Posted in Solar Cycles, Stocks12 Comments

The less orthodox way, that is. Click to view larger, read the comments on the charts, then my comments below.

SolarMaximaParabolicPeaks

245 sunspots yesterday, third highest daily count of this solar cycle. The current cluster of solar activity, related to the recent southern pole flip, looks set to drag up the smoothed-max of SC24 and override the previous high of Feb 2012. No guarantees of course, until we see with hindsight. Also no guarantees that the sun does not yet become busier still. With SIDC’s CM prediction forecasting a mid-year smoothed solar maximum, there remains the potential for a peak any time up to then, which by association could mean a peak in US indices any time between now and then. However, SIDC’s SC foreast, NASA and NOAA models, confirmation of the pole flips, and our own Jan Benestad’s methods, support waning from now. So let’s see how this month progresses.

The gold and oil parabolic peaks of 1980 were unprecedented and historic. The Nikkei mania famous, and the numismatic bubble the only major one in its history. The dot.com boom the biggest mania of all time, by various measures, so does the current US stock indices rally measure up as a suitable solar-inspired excitement mania? If it is, then we will look back on it as the second largest and third longest equities bull of the last 80 years, where margin debt and investor credit spiked to dot.com peak levels (highest ever), where Market Cap to GDP valuation reached the second highest ever (first: the dot.com peak), where we printed some all-time record sentiment readings, including the highest ever II bull/bear spread, and stocks rose into their peak in a compressing parabolic, chasing price without earnings for 2 years into the peak. It definitely measures up.

However, caveat again. It does not preclude things going even crazier yet, before we roll over.  But whether we look at what’s going on with the markets or what’s going on with the sun, they are both sounding the siren for a top.

Below I’ve zoomed in on the daily action into the 1929 Dow and 1989 Nikkei tops (see post HERE for why these analogies carry weight). On a longer term view these were parabolic compressions, but we can see from the daily bars that at the peak there was no high volume climax and collapse (as might see in individual stocks), but rather a gradual transfer from bulls to bears, with some backing and filling until the bulls finally capitulated and a crash resulted.

Dow1929 Nikkei1989So we can look out for something similar occurring now the markets are correcting from their 31 Dec high. If equities break upwards to new highs on strong momentum then chances are we are going more parabolic yet before termination. If equities stay beneath their 31 Dec highs or make a marginal higher high on divergences, then the case will build for a topping pattern similar to the above.

If 31 Dec turns out to be the market top, it was the last trading day of the year. The last time a stock index topped out on the last day of the trading year was the Nikkei in 1989.

Solar Maximum Delivers Speculative Parabolics

Posted on Posted in Commodities, Deflation, Geomagnetism, Macro, Solar Cycles, Stocks10 Comments

Historically, solar maxima have correlated with earthquakes and peaks in temperature oscillation. They have also correlated with protest/war/revolution, inflation oscillation peaks and speculative parabolic peaks (often secular bull peaks). With both magnetic poles now having flipped for SC24 maximum, I’ve annotated the following chart from Solen:

6ja1The Japanese and Indonesian earthquakes were both amongst the highest Richter magnitude quakes ever recorded. The Italian earthquake was one of the most devastating ever in property damage.

2013 was the 4th hottest globally on record. Historically we have seen global temperature oscillate into a peak around the solar maximum.

The Arab Spring was a world-transforming series of major protests and revolutions. The Turkey, Thailand and Ukraine protests were amongst the largest ever in terms of participants.

We saw a series of commodity price parabolics peaking out towards the early part of the maximum, and we currently see a series of stock index parabolics (plus margin debt parabolic), which, with history as our guide, should peak out as the solar maximum starts to wane this year. However, we don’t know at what point that waning begins. By NOAA and NASA predictions it should be now, but by SIDC’s foreast it could be as of mid-2014. With 225 sunspots currently, it still appears to be in an uptrend:

A2Either way, the annotated top chart is unlikely complete. We could yet see further earthquakes, or greater temperature extremes in 2014, or more geo-political unrest, or more speculative mania. But without any more such developments, solar cycle 24 has re-affirmed those correlations.

Historically, the solar max then gives way to economic recession. Global recessions (if based on where real global GDP has been less than 3%) occurred in 2001-2 (SC23 max 2000), 1990-3 (SC22 max 1989) and 1980-3 (SC21 max 1979). Several factors may contribute to why this is. Geomagnetism, which is negative for sentiment, peaks after the solar max. Inflation, yields, rates and speculation all typically peak into the solar max, which collectively can tip an economy into recession. The chart below shows those correlations.

10may20131This time, we have not seen any interest rate rises, but we have seen a rate of change in bond yields in the last couple of years which is comparable to that marking previous tops. Inflation peaked out early in the SC24 max and is currently depressed, in keeping with collective demographic trends (money velocity has also diverged in line with demographics). There remains the possibility that commodities make a late-cyclicals charge and deliver a temporary inflation shock, but I’m not so sure.

Prior to all my demographics research earlier this year, I expected commodities to be the speculative target of this solar maximum, and to make their secular peak here, with gold the leading asset. However, by demographics gold has some years further to run, and is more likely to make its secular peak at the next solar maximum, or even beyond.

DemographicsDowGoldRatioGlobalGDP

That commodities have made secular peaks each 3rd solar maximum to date appears a pattern, but I believe is instead is demographic, but this will only be validated in the months and years ahead.

Let me explain. Japan enjoyed a long secular bull market from the late 1940s to the late 1980s, as shown in the first chart below, through 4 solar cycles. The second chart shows that this was because of a long demographic golden period, where productive-aged population ballooned, old-aged dependents stayed low, and child dependents were in decline.

26dece126dece2

The Nikkei peaked in 1989, in a parabolic, along with solar cycle 22. So it peaked at a solar maximum, but it took 4 solar cycles to exhaust the demographics.

The US demographic boom of 1980-2000 ran through 2 solar cycles. Stocks peaked in 2000, in a parabolic, at the same time as solar cycle 23.

The negative demographic period of the 1970s was a trend lasting just one solar cycle, and gold and commodities peaked out, in a parabolic, along with solar cycle peak 21.

In short, there is a history of demographics dictating secular market trends (so using secular market duration ‘averages’ is misleading), and of secular bulls peaking out at solar maxima (which average 11 years apart). We have negative collective demographic trends in the major nations lasting to circa 2025, before a flattening, which I therefore expect could deliver another full solar cycle of secular gold bull, to potentially peak out at the next solar max (which would be circa 2025). You may note though from the demographic composite that demographic trends look fairly woeful even out to 2050. It poses an interesting question as to whether this will be a different period for relative asset performance.

If commodities do not make a late surge in this solar cycle 24 maximum, then I believe we will tip into deflationary recession, as destined anyway by demographics, with the speculative manias and yields tightening assisting in this. That would then largely complete the correlations of a solar maximum.

If you are new to the site, reasoning and evidence for all these solar-related phenomena can be found by using the search facility.

Updates

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

1. Investors Intelligence bulls now highest since Oct 2007:

3jan1Source: Investors Intelligence

2. Short term trend exhaustion on SP500:

3jan2Source: Rory Handyside

3. Parabolic and compression on SP500 shown here:

3jan3Source: AfraidToTrade

4. Breadth divergence on SP500 as measured by % stocks above 200MA:

3jan7Source: Index Indicators

5. Crestmont P/E now 3rd highest in history after 2000 and 1929, and in 97th percentile:

3jan4Source: Dshort

6. Solar cycle 24 updates from NASA and SIDC – potentially a higher smoothed max, but either way a second peak, which fits with current speculation excesses:

3jan5 3jan6Sources: NASA and SIDC

7. Misc:

Lunar negative fortnight begins this weekend

Some geomagnetic disturbance in progress

US Q4 earnings season effectively begins with Alcoa 9th January

Portfolio rebalancings so can’t read too much into action at the start of January whilst this is taking place

China liquidity eased, but rates remain at elevated levels

Similar Solar Cycles And Market Peaks

Posted on Posted in Commodities, Solar Cycles, Stocks28 Comments

Here is the progress of current solar cycle 24 overlaid on previous solar cycles of similar amplitude (i.e weak sunspot cycles):

15dece1Source: Solen

Solar cycle 24 is going to be flat-topped, making SC16 and SC14 most similar in progression pattern.

Weaker solar cycles such as these generally produce less geomagnetism (geomagnetism being negative for risk markets), whilst flat-topped elongated peaks could produce a sustained period of sunspot-driven speculation (assuming sustained biological impact on humans). On the flip side, we might presume weaker solar cycles produce less human excitement/speculation overall, although markets history does not suggest so (correlating market manias with solar cycle peaks of differing amplitude).

So, a bit of weekend speculation on my part, but here are solar cycles 14&16:

15dece2 15dece3

The source is Solen.info again and I have added the market peaks.

Solar cycle 22, whilst of bigger amplitude, also had a flat top from 1989-1991, and we saw Japanese stocks peak out in 1989 then Japanese real estate in 1991. Solar cycle 20 was also flat-topped from 1967 to 1970 and we saw various markets peak out in turn in this window (as per my recent Solar Parabolics chart). The Dow’s big bull market into 1929 largely ran from the beginning to the end of the flat solar top. Therefore, I am wondering whether there is something in a flat-topped cycle producing a ‘period’ of human excitement and speculation.

Our current solar cycle, 24, is likely going to look flat-topped from 2011 to 2014 in retrospect. Commodities (by CCI index) peaked in 2011? Equities to peak as we turn into 2014? Both with bumper gains from the lows to the peaks.

I previously focused on the correlation between smoothed solar maximum date and market peak dates, and occasionally there was a notable gap, but this is resolved if the ‘range’ of the solar maximum is considered, rather than just the smoothed peak. There’s also logical appeal of sustained human excitement whilst peak sunspots are sustained. Again, just speculation on my part, but we can expect solar cycle 24’s flat top to end by mid-2014, and I therefore suggest we could see one of two possibities playing out. One, equities peak out within the next 6 months, commodities don’t come again, and we thereafter enter the typical post-solar-peak recession (deflationary). Or, two, equities are peaking now and commodities are breaking upwards out of their large consoliation triangles since 2011 to produce a typical late-cyclical final rally and help tip the weak economy into that recession.

15dece4

New secular stocks bull market?

Posted on Posted in Bonds, Commodities, Deflation, Demographics, Indicators, Inflation, Macro, Solar Cycles, Stocks8 Comments

Did a new secular stocks bull market effectively begin in 2009 or 2011, with the recent breakouts above secular bear resistance making for a golden buy opportunity?

26nove16Source: Marketoracle

Or is a secular stocks bear still in progress and we are on the cusp of a major shorting opportunity, together with a GOLD buy opportunity?

26nove17Source: Marketoracle

26nove2Source: Approximity

The case for the stocks secular bull market would be that valuations washed out sufficiently from the peaks in 2000 to the lows in 2009, that central bank stimulus is doing enough to offset collective demographic down forces, and that exponential technological evolution will drive increasing profitability and economic growth from here. Here are a couple of charts I produced last year, pre demographic research, showing the secular bear p/e valuations progress, with the lower chart showing how I expected breakout in 2013 followed by retest of the breakout level in 2014, before secular bull momentum took hold.

26nove9 26nove10

 

That projection was based on historic patterns, and still seems reasonable to me, if this is a new secular stocks bull. 2013 has indeed seen the ‘pentagon’ breakout in the major global stock indices, and a successful retest of the nose of the pentagon in 2014 would reset some of the froth we have built up this year as well as giving technical validation to the new bull.

However, since my demographic research, and broader thoughts progress, I have been more convinced of secular bear continuation, and the megaphone projection above. The case for secular bear continuation includes unprecedented collective demographic downtrends and overvaluation of equities by other measures. Here are Doug Short’s 4 valuation measures all showing historic overvaluation extremes, excepting the 2000 outlier:

26nove18Source: Dshort

There is a case for a breakdown to -50% if historic patterns are to be maintained, before a secular bull could be considered. The doubt is if 2000 was not an outlier but the new norm, namely a racheting up of higher and lower valuations, perhaps as a result of technological evolution also ratcheting up. Alternatively, valuations may change in context – namely that in this current era, ZIRP and QE have killed the attractiveness of cash and bonds, and we are therefore in an era where stocks are relatively more appealing:

26nove1And commodities? Deflationary demographics may have terminated the secular commodities bull before expectations, i.e. without a collective final mania. Or commodities may yet perform as late cyclicals, making a final ascent into 2014 that tips the fragile global economy into recession. The commodities indices are still in large triangles, since 2011, and whilst they remain so, the latter remains possible.

If, however, deflationary demographics are working their way through the commodities complex, then, by my research, there still remains a place for precious metals to shine, as the anti-demographic asset. The third chart down above in this post shows the progress of the dow-gold ratio, and also suggests the two secular possibilities. One, that the rising long term channel shows a repricing in the ratio in favour of equities (due to tech evolution) which means higher bottoms for the ratio and higher tops, i.e. the 2008-2011 lows were sufficient. Or two, that the fiat capital era has produced ever increasing extreme swings, which suggests the ultimate low in the dow-gold ratio is still ahead and will be the lowest yet.

Of course this will all become clear with the fullness of time. If demographics overcome central bank actions and tip the world into deflation, recession or both, then I expect stocks to lose and gold to win. If central bank actions together with tech evolution are overcoming demographics, then we should see a gradual strengthening in economic growth and profitability which should mean stocks (continue to) win and gold loses. Somewhere inbetween would be the scenarios in which rising yields or an inflationary shock (speculative run in commodities) or both tip the world into recession, which could reset stocks to some degree but keep both secular options open.

Back to the near term, we continue to see signs of froth in equities as well as signs of a melt-up in progress. That makes it difficult as it suggests it not prudent to go long here, but the short opportunity that it is setting up could be yet, 5%, 10% higher or even higher. Depends how crazy things might get, and if this the solar maximum then that potential is there.

26nove11 26nove1226nove526nove7

 

 

 

 

 

Stocks, Gold, Money Supply and Debt

Posted on Posted in Bonds, Commodities, Currencies, Deflation, Demographics, Geomagnetism, Indicators, Inflation, Lunar Cycles, Macro, Solar Cycles, Stocks15 Comments

Here is a chart from Gary Tanashian through SlopeOfHope’s charting facility, which could be argued legitimises the current steep ascent in US stocks:

24nove1Parabolic money pump, steeply rising corporate profits, and therefore equities going vertical (on a long term view).

In fact the sharply rising monetary base is directly contributing to those rising corporate profits, as government spending (debt) has been the key driver of corporate profits since 2008:

24nove2Therefore, if the US Fed begins to withdraw stimulus, disappointment in corporate profits is likely, as the chart shows the traditional profits driver of private investment has collapsed and not recovered over the last few years. Once again, this fits with demographics, and we should therefore not expect private investment to ramp up significantly again any time soon. So it’s in the hands of the US government and Fed. Maintain or increase stimulus, corporate profits should keep rising; decrease or end stimulus, corporate profits should retreat.

Turning to the monetary base, equities are not the only correlated class. In fact, gold has had a tighter correlation, until 2013. Here 2000-2012:

24nove3Source: Fool.com

Gold displayed a similar correlation with government debt, also until 2013.

24nove4

Source: RockSituationReport24nove5

Source: SlopeCharts

The first shows the debt limit, which will be back on the agenda soon, and surely must keep rising, whilst they retain the need to stimulate, which they will due to demographics. The second shows debt as a percentage of GDP, which actually fell back a little in H1 2013 (my extension on the chart). The reason for that was better than expected economic growth and a trimming in certain areas of government spending. Total debt continues to rise at a historically rapid rate.

So are these correlations with gold broken, or is gold set to come back? One more chart shows that the US dollar and treasury yields have been largely inversely correlated with gold and the pair strengthening for much of 2013 has been a key factor in gold’s decline:

24nove6Source: SlopeCharts

In my opinion, gold’s relations with money supply and debt levels are logically sound, and both money supply and debt should continue to rise into the future under the demographic trends. I therefore I expect gold can restore its bull market if the US dollar and treasury yields tip again into sideways or declining trends. If the US economy strengthens and a little inflation is restored, then this is unlikely to happen and gold will remain in the doldrums. However, demographics and debt suggest the Fed will have to keep fighting to maintain growth and keep deflation at bay (taper disappointment, yields suppression, new measures to attempt to inflate), which could bring about such a reversal in fortunes.

I still expect equities can go a little more parabolic first, under a typical solar maximum speculation push. However the warning flags already in place of dumb/smart money, trading volumes, margin debt and trading credit balances, and overvaluations (e.g. Q ratio) suggest it is most likely limited in duration and size. I would go with something like this from trader Moe:

24nove7Source: Trader Moe

A further 10% gain in a rapid time, with a catalyst being collective major breakouts in the major global indices, to get to some crazy extreme indicator readings, and a subsequent termination. My first checkpoint is the start of December, because the 3rd is the new moon and as of the 4th geomagnetism is forecast to ramp up again. If equities can rally hard and fast into that point, with a spread of indicators flashing, then I would suggest that could be the earliest point for declines to set in (barring any external shocks). If, however, equities can rally through the seasonally strong Xmas period, and solar intensity stays high into the beginning of 2014, then the next checkpoint would be early January.

 

Divergences, Ratios and Surprises

Posted on Posted in Commodities, Deflation, Demographics, Geomagnetism, Indicators, Macro, Solar Cycles, Stocks47 Comments

Here are the latest economic surprises indices for the major nations:

19sept5 19sept4 19sept3 19sept2Source: Citibank

Japan aside, economic surprises for most of the majors topped out as we turned into September. Historically there has been a fairly good correlation between economic surprises and stock market returns, but the correlation has deteriorated throughout 2013 and turned negative:

19sept7

Source: JP Morgan

Is there anything about that period from early 2009 to mid 2010 where correlations also were anomalously negative? My take is that by March 2009 most of the major stock indices were at p/e 10 or below, and thereafter we saw a period of post-panic bargain hunting at historic cheapness, despite and regardless of continued disappointing economic data. That doesn’t apply at today’s valuations.

Here’s another look:

19sep1I’ve charted the peaks in US economic surprises versus the SP500. It can be seen that from 2006 to 2012, trend reversals in economic surprises reliably brought about corrections in the SP500, but sometimes with the stock market eeking out a marginal new high and then rolling over. But since the end of 2012 the two economic surprises peaks have been largely ignored by the market.

There have been other notable divergences since the turn of the year.

Equities have diverged from geomagnetism:

19sept12

Junk bonds, which have historically correlated with equities fairly well under ‘risk-on/off’ sentiment, have parted ways with stocks and are actually down for the year. Commodities likewise:

19sept11Source: Yardeni

I have extended this commodities:stocks ratio chart from early 2012 to the current level in November 2013, showing the degree to which stocks are now valued versus commodities:

19sept13Source: Stockcharts

Down to 0.15, very close to the level reached at the 2000 equities peak.

Versus bonds, equities have also made a sharp run up in relative valuation this year:

19sept14Source: ispyetf

If this is the solar maximum at the end of 2013, then it would be normal, by history, for the secular asset class of the time to be bid up in a speculative finale, diverging from normal correlations and leaving models behind, in a final overthrow. If this is occurring with equities (perhaps disinflation has killed off commodities), then the above charts would be evidence for that, and we are left trying to look for clues as to how much further, both in time and price, the speculative finale has to run. If it isn’t equities, but rather commodities that are bound for a speculative finale (as they would rather befit the ‘secular’ asset class leading into this solar peak), then the above charts are warnings that the rug could be pulled from under equities at any time.

Right now, the balance of evidence suggests that it is stocks being bid up to a speculative finale, if my solar thesis is correct. Even without solar, we see various evidence for that, in my last post and this. See how margin debt has accelerated over the last 12 months, as it did prior to the last 2 major stocks peaks:

19sept10

Source: Dshort

And now look at the decline in trading volumes:

19sept15Source: Marketwatch

There are fewer and fewer participants in the market chasing it higher, and the margin debt and credit account levels (last post) suggest increasing leverage to do so. Unless more people and institutions come to the market, then that is a recipe for a steep decline or crash ahead. By demographics, those additional participants are unlikely to materialise. Recall that demographic trends in the US were up into around 2000 and have since been downward, continuing this decade. I suggest that is what we are seeing in the trading volumes ‘mountain’ above.

In summary, I believe the equities bull is on borrowed time and that risk-reward is stacking up on the short side. But it comes down to how much further in price and time stocks can extend first. If solar-inspired speculation is at work then parabolic becomes more possible. If on the other hand equities are to make a topping ‘process’ rather than a parabolic, then by normal measures this has not started in a meaningful way so should at least extend for several months and postpone a major decline until 2014. If commodities are to become the speculative target then they should take off as late cyclicals whilst stocks make a topping process. This remains theory only, and deflationary demographics are a headwind to this occurring, so I have my doubts.

On that note, if we look at when gold really took off in the past, it was under conditions of negative real treasury yields. Rises in yields over the last 12 months, together with shrinking inflation, have taken real yields positive and are a problem for gold. Deflationary winds, due to demographics, threaten to take inflation yet lower, whilst treasury yields by late 2012 had reached historic extreme lows, suggesting renewed downside may be limited. So, if I could speculate how fortunes could be reversed in gold, it would be either the world tips into deflation and gold performs more ‘uniquely’ (gold’s performance under deflation is limited in history, but I suggest it ought to perform as the default go-to asset under such conditions when all others are unattractive) – or – central banks take renewed action against the disinflation in progress by increasing rather than decreasing stimulus, e.g. the ECB launches QE and the Fed maintains QE rather than tapers.

19sept9Source: Dshort

State Of The Markets

Posted on Posted in Bonds, Commodities, Currencies, Deflation, Demographics, Indicators, Inflation, Lunar Cycles, Macro, Solar Cycles, Stocks7 Comments

Starting with the equally-weighted commodities index versus the world equities index:

17nov11Source: Bloomberg

Commodities remain depressed but still within a large triangle. Last chance though here as the triangle compresses and they test horizontal support again. Their underperformance, based on supply and demand, is consistent with the demographic trends now in place in most of the major nations.

World equities broke out of their mid-year range, rendering the potential topping process redundant. That means equities need either to start over a multi-month topping process at some point ahead, or make a parabolic top instead. The increasing rate of gains, shown by the trend, suggests the latter could potentially occur (or be occurring), and this is supported by increasing evidence of a solar maximum taking place now:

17nov13Historic solar maximums have been correlated with speculative manias, such as Nasdaq 2000, Nikkei 1989, gold 1980 (last 3 solar maximums). I anticipated that commodities would be the speculative target for this solar max but there is reasonable evidence that such speculation froth is taking place in equities, as the next 5 charts show.

Firstly, Hussman’s long standing bearish call on the markets has to be taken with a pinch of salt, but the ‘bubble’ technical overlay shows what could be occurring:

17nov6Source: Hussman

Secondly, the steep wedging of both the SP500 and volatility indices is also indicative, and suggests both could be heading for a pop:

17nov5Source: Chris Kimble

Third, the situation for free cash in margin accounts together with margin debt levels reveals a dangerous extension, which is also suggestive of excessive speculation:

17nov3Source: Dshort

And fourth, a lack of hedging to go with that:

17nov2Source: Sentimentrader

Finally, fifth, the rally is now much more weighted into the hands of traditionally ‘dumb’ money rather than ‘smart’ money participants:

17nov1Source: Sentimentrader

On the flip side, we do not see significant deterioration in breadth nor rotation into defensives that would ordinarily warn of a top in the markets. The next 2 weeks are the positive lunar fornight so there is a reasonable chance that equities continue to rally through that period, and indeed could feasibly carry that through the traditionally strong Xmas period into the beginning of 2014. I believe the technical breakouts and steepening trends in stock indices together with the solar-inspired excitement could potentially make for a parabolic finale here. It’s a tough one to call because of the extremes already reached in some of the indicators above. Complacency is high and it has been a long time since a 10% correction. Stocks are also overvalued, historically, as the Q-ratio and CAPE reveal:

17nov7

17nov8The 2000 outlier shows how much further overvalued stocks could feasibly yet become, but that anomaly aside we can see that by both measures warning signs are flashing. What could tip the market over? Rising rates (bond yields are back on the rise), an inflationary shock, or a deflationary shock. Normally, stocks would tip into a cyclical bear under excessive inflation. Right now we see the opposite. Take a look at the rate if disinflation in Europe:

17nov9Source: Yardeni

Add to this a crisis emerging again in emerging Europe, and I can see a case for the ECB taking to QE. If that were to occur, then maybe commodities can catch a bid again and make their speculative rally, under a brief but significant inflationary shock. Chris Carolan’s solunar model for crude oil paints the possibility that oil could come back here:

17nov12

Source: Spiralcalendar

If the whole class cannot rise again, then precious metals alone could, under a deflationary shock, i.e. the world tips into a deflationary recession. This could occur with further commodity falls dragging global inflation rates yet lower. Emerging markets such as India and Brazil are in trouble again with low growth and high inflation, sinking currencies and debt problems. And leading indicators suggest global growth could be tipping over as of year end in the developed nations:

17nov10Source: Moneymovesmarkets

Under deflation, equities would normally fall hard and fast, to the lower ranges for CAPE and Q ratio above. That would likely mean sub 2009 lows in nominal terms. But under inflation, equities normally more slowly wind down to those valuation levels, and in nominal terms the damage is less severe. Under deflation the US dollar should rally, whereas under inflation the US dollar should break down. The US dollar was on the cusp of a major breakdown several weeks ago but has since rallied away from oversold and overbearish conditions, leaving both possibilities on the table, and its performance from here should be a key signal.

Right now, the deflationary outcome looks the most likely, which would make a short on the stock indices a very tasty trade. However, before that there is the potential for stocks to climb further, and possibly at an increasing trajectory. That makes for difficult timing. With the positive lunar fortnight right ahead, and momentum still with equities, I am expecting stocks can rally further in that period, barring any external shocks. But with various high danger levels already reached for this stocks bull, I am looking to build short here, not chase long. Regarding commodities, I continue to watch and wait, still long the complex, but not adding. I believe precious metals will come again, due to the unprecedented demographic downtrends, but am less sure about the broader complex due to the demographic impacts on demand. But let’s see – the moment of truth draws nearer – see below – and I don’t want to try to front-run or second-guess it. A speculative and final rally in commodities remains a possibility whilst the complex continues to consolidate up high. Yet if they cannot rally, and break down below the major support, I believe the global tipping into deflation will accelerate and kill equities in due course.

17nov14Source: Martin Pring