Category: Solar Cycles

Developments

Posted on Posted in Bonds, Commodities, Currencies, Indicators, Macro, Solar Cycles, Stocks15 Comments

Back from hols and it was a good week for pro-risk and my account. Can pro-risk go further? I maintain that it can. By solar and secular cycles, we should see a blow-off top in pro-risk, with stocks overthrowing (H2 2012) and then wilting (end of 2012 / start of 2013) whilst commodities make a parabolic secular finale (into the solar peak of Spring 2013 and terminating around summer 2013). So do the technicals, indicators and macro data support this?

Firstly, we see the SP100, soybeans and corn at new 3 year highs:

Source: Stockcharts

Soybeans – Source: Tradingcharts.com

Corn – Source: Tradingcharts.com

Those developments give more confidence that commodities did not already make their secular peak and that other equity indices could break out. However, it’s tentative for now as these new highs are marginal and until other pro-risk follows suit. Furthermore, we continue to see opposing indicators that present a confused picture. Here are four indicators from Sentimentrader.

Commercial shorts on the SP500 suggest a market due a pullback – although the two occurrences in 2010 and 2011 led to more gains before a pullback. The Farrell sentiment index suggests the SP500 is a buy. Economic uncertainty has reached a level that also could imply a buy. Lastly, risk appetite is up to the kind of exhaustion level that could mean pro-risk needs to pull back – although in 2006 and 2009 we saw stocks push higher whilst risk appetite spent more time at this kind of level.

Source all: Sentimentrader

Drawing those indicators together, it is a mixed picture, but bullish developments in the weeks ahead have the edge.

As previously noted, the rally in equities has been more defensive than a normal healthy rally, but there is potential evidence that this is turning:

Source: Ryan Puplava

US equities have not reached either overbought or overbullish yet.

Source: Technical Take

Source: IndexIndicators

Both show there is room to push higher yet. Meanwhile, overbought and overbullish indicators for the German Dax are a little higher but also room for more gains yet.

Grains had reached levels of overbought and overbullish but have spent the last 3 weeks or so consolidating and relieving those indicators. The fundamentals support further gains ahead.

Gold and silver remain at the low extremes of sentiment (public opinion, Hulbert), suggesting the breakout move will be upwards out of the mutli-month triangles. This is supported by the recent acceleration in soft commodities, recovery in the oil price, and renewed global efforts to maintain negative real interest rates.

Treasuries have pulled back, and there is a good chance of this continuing, due to the parabolic unsustainable rise coupled with having reached overbought and overbullish extremes.

Turning to global macro, Euro debt has continued to pull back from accute:

Source: Scott Grannis / Bloomberg

Citigroup economic surprises continue to maintain a rising trend for the US, emerging markets, and G10 nations (shown below).

Source: Bloomberg

However, global leading indicators continue to languish. China trade data on Friday was particularly bad. The latest OECD readings show a precarious global economy. ECRI leading indicators for the US look reasonable. Conference Board leading indicators for the key nations are below and show a picture that is notably more negative than positive:

Source: Conference Board

US earnings this season have come it at around a 59% beat rate, compared to a 62% average since 1998. More of a negative than a positive.

Geomagnetism has been fairly benign the last 3 weeks and the forecast for the next 3 weeks is likewise. That has finally given the geomagnetism models an up turn.

The SP500 remains significantly above the geomagnetism model, and this is reflected in the SP500 being one of the most expensive global indices by p/e valuation. So at some point we should expect the SP500 to correct, but when? Well, I maintain not yet – that stocks should first go on to make new highs in a cyclical bull overthrow finale. I believe the SP100 is the first to lead the way.

Into previous secular/solar peaks (secular asset peaks align with solar maximums), increasing sunspots had the effect of inspiring speculation excess in human behaviour. I believe that’s what we are seeing unfolding here, but it’s not directly measurable. We need to look for the signs. Pro-risk assets going to new highs. Risk appetite high and staying high. Pro-risk assets leaving behind the geomagnetism models (for a period). Excessive speculation in the context of the current economic situation.

There is some evidence for each of those, but we are just getting started. We need to see more stock indices move to new highs. We need to see gold and silver break out upwards. A period of Euro outperformance versus the dollar. And most likely additional fuel by global central banks.

In short, I have no current reason to doubt what I have maintained for some time will come to pass (as per the first paragraph in this post), but it will become much clearer one way or the other as the remainder of 2012 plays out. The current picture is mixed, but there is increasing supporting evidence.

For now, I am looking once again to lunar phasing for a near term position tweaking. Namely, the new moon is this Friday, which suggests positive pressure into the end of this week, supported by tame geomagnetism. If pro-risk pushes higher into this Friday, I may trim back my overall pro-risk positions again, and will notify you if so. However, I will be looking for evidence of overbought/overbullish and technical resistance. I will also be looking at developments in leading indicators or central bank  action between now and then. September and October is typically a more difficult time for pro-risk, however this has not historically applied in a US election year, plus this is the run-up into a solar peak.

State Of Play

Posted on Posted in Commodities, Currencies, Indicators, Macro, Solar Cycles, Stocks6 Comments

Let’s start with the big 3 macro: economic surprises, Euro debt and leading indicators. Economic Surprises for the G10 nations show increasing evidence of having bottomed and entered a new uptrend:

Source: Bloomberg

Economic Surprises for Emerging Markets even more so:

Source: Bloomberg

Turning to Euro debt, overall PIIGS risk continues to ebb from its 2011 highs:

Source: Bloomberg / Scott Grannis

Homing in on the big two, Spain and Italy, we see 5 year CDSs having entered a consolidation the last few weeks. It is too early to say if a downtrend is emerging, or a pause in the uptrend:

Source: Bloomberg

Moving on to global leading indicators, here is a summary of the latest readings from the Conference Board, showing that we do not yet see general positive signs ahead for the global economy:

Source: Conference Board

There have however been four consecutive weeks of rises in ECRI’s leading indicators for the US. Whilst still negative, they have been trending upwards again:

Source: ECRI / Dshort

Drawing in US earnings, the earnings beat rate so far has been around 60%, fairly average historically, whilst the revenue beat rate has been around 48% which is some way lower than the average of around 60%. This continues to reveal that companies have maintained earnings rather by cutting costs rather than genuine growth, which in turn reflects the economic weakness that we have been experiencing.

So the key question remains whether we are now to see a turn up in growth. I maintain that we will, due to lower commodities prices in H1 2012, due to a natural upswing in growth, and due to a new round of global easing and stimulus currently occurring. That brings us to the Federal Reserve meeting outputs of tomorrow and the ECB meeting on Thursday. What should we expect in terms of further action? I suspect the Fed will reiterate its commitment to act without actually acting, but go with more dovish wording, whereas I suspect the ECB will deliver something tangible. Since Draghi propelled the markets last week with his ‘do whatever it takes’ wording, the markets are expecting something concrete. If we get nothing on Thursday, those gains may be retraced. Thursday is the full moon, and we would normally decline into a full moon. There is still the possibility of big declines the last 2 days into and on it, if the Fed and ECB disappoint, however it rather looks like we will make an inversion.

I have updated all the models this morning. We have a particularly tame 3 weeks ahead in terms of forecast geomagnetism. That provides a backdrop for pro-risk to rally. Presidential seasonality also supports this for equities:

Source: Bespoke

In addition, the oversold and overbearish readings for both the Euro and precious metals also provide fuel for a pro-risk rally and dollar retreat. Chris Puplava’s chart here shows that open interest and real interest rates both support an upward move for gold, with the US dollar apparently holding it back. A mean reversion in Euro-dollar therefore could sustain a rally in gold, which would be technically very important as it would mark an upside resolution out of its 9 month triangle.

Source: PFS Group

Agri commodities have consolidated a little, having reached overbought levels. Fundamentals are still currently supportive with more normal weather conditions perhaps returning as of September, which keeps harvest fears at the forefront for now.

Treasuries made a large reversal on Friday from all-time highs. It is too early to judge whether that marked a significant top. On the one hand, the overbought and overbullish parabolic recent move is ripe for an enduring reversal, but on the other hand the Fed is still a supportive player in that market.

OK, bringing it all together, the question on my mind is whether I want to take some pro-risk profits off the table here into the FOMC and ECB. For anyone new to my site, my portolio of positions is currently 100% pro-risk, with the biggest weighting long commodities (precious metals, agri, energy) then long equities (various global stock indices), then short treasuries in a much smaller weighting. I currently have no currencies positions. Drawing together the secular and the solar I anticipate a pro-risk rally in H2 2012 through to the solar maximum of 2013, but with equities wilting before we reach the solar maximum whilst commodities make their final blow-off secular top. Equities could therefore top out before the end of 2012 but not before they’ve had a pop to new highs.

Right now the picture looks more supportive of that general scenario that I have been promoting for some time. Economic surprises now look supportive, Euro debt is showing signs of coming off the boil again and US earnings are good enough. Leading indicators remain the area of concern, but if I am right in my reasoning for why they should begin to improve then I believe that provides the final piece of support for a move to new highs in pro-risk. Chinese leading indicators in particular are important for commodities. However, soft commodities have had a thrust due to global wierding and precious metals have the support of reinforced negative interest rates from the latest central bank interventions. Precious metals enter their seasonally strong period of the year as of August, with Indian wedding demand one factor, and global wierding remains supportive for soft commodity prices for the near future.  By solar cycles, inflation should peak around the solar maximum, and the price rises in softs that began in June should feed through into in inflation 6 months later. If they can further their rises and oil was to also rise on H2 growth (or supply issues) then we could indeed see that acceleration in inflation into Spring 2013.

So right now I am going to maintain all my positions and not take any profits. However, if pro-risk pushes up significantly more today and tomorrow before the FOMC outputs then I may trim back. I will let you know in the comments if so.

The Macro Picture

Posted on Posted in Commodities, Indicators, Macro, Solar Cycles, Stocks16 Comments

Citigroup Economic Surprises for the G10 nations:

Source: Bloomberg

Citigroup Economic Surprises for Emerging Markets:

Source: Bloomberg

The message is one of a potential bottoming in June, but we need to see a clearer uptrend emerge for the G10.

Turning to leading indicators, the latest OECD data continues to show a weak picture in China and Europe, but the overall OECD nations area maintaining growth, albeit unimpressive.

Source: OECD

Moving on to the Eurozone debt troubles, the pressure deflation in Spanish CDSs following the Eurozone summit outputs of the end of June has now been reversed and CDSs are back near to their highs.

Source: Bloomberg

Meanwhile the risk of systemic failure in the Eurozone is declining:

Source: Scott Grannis

The message is that more action is going to required to satisfy the markets on Euro debt but that with Spain, Italy and Greece equities priced at secular bottoms, they are prices for systemic failure which isn’t likely.

Overall in terms of the big 3 (economic surprises, leading indicators and Euro debt), we don’t yet see the kind of positive combined momentum that would support a big move up in pro-risk. However, the global policy response, in terms of rate cuts and stimuli, has yet to make itself fully felt and is unlikely complete. Last week we saw fresh UK QE, China, Euroland and Denmark rate cuts added to previous global moves. August 1st is the next FOMC outputs, where we will see whether the US adds any further stimulus.

So the question, I believe, is how pro-risk performs in this window where we see continued macro weakness but continued new global policy responses.

One other macro development is that of global wierding on agri commodities, which gives us a supply side push on prices, regardless of economic outlook. Record global temperatures in April and May have brought about droughts that have spurred grains to an almost 30% gain in the last month and have by association pushed up all softs. Now, agri commodities are looking overbought and due a rest. The severe weather continues but El Nino is expected to make a full return this summer which should improve conditions for drought-affected farming. It is therefore a question of how great the impact is on plantings and harvests before less extreme conditions return.

Turning to solar influences, sunspots and geomagnetism are working opposite ways. Sunspots continue to rise in a general upward trend towards next year’s solar maximum, and this should spur speculation and inflation. But, geomagnetism continues to be disruptive and the cumulative trend continues downwards, rather than pulling up in line with mid-year seasonality. I have updated all models this morning. Here is the medium term picture for the CRB commodities index showing that cumulative geomagnetism trend is still down:

There is the potential within that for a little upside into the end of next week, the 20th July, around the new moon, before we experience a bearish combination of a significant period of geomagnetism and a full moon around the turn of the month into August – which coincides with the FOMC. Disappointment out of the FOMC is the potential therefore.

Lastly, US earnings season began yesterday with Alcoa. JP Morgan report on Friday but the major earnings don’t really get going until next week. There’s usually a theme to US earnings season (it is sold off, or bought up). The out of season earnings and significant forecasts downgrades both suggest it could be a season offering a good beat rate, which could therefore be bullish for stocks. However, we will need to wait to next week at least to see if that is the case.

SC24 v. SC14

Posted on Posted in Commodities, Solar Cycles, Stocks14 Comments

Leif Svalgaard suggests solar cycle 24 could be similar to solar cycle 14, which had a long flat top, which is in line with Jan’s comment.

Underlying source: Leif Svalgaard – my notes added

So how did that affect the secular asset cycle back in the early 1900s? As you can see from my notation, the secular peak (which was in stocks) occurred on the nose of the official solar peak, which was near the front end of the flat top. So, if SIDC and NASA are correct in their predictions for a Feb/Mar 2013 official solar peak, then we might expect the secular peak (in commodities) to occur close to that, rather than towards the end of the flat top, if such a top extends out into 2014.

Agri Commodities Awake

Posted on Posted in Commodities, Indicators, Macro, Solar Cycles, Stocks, Uncategorized24 Comments

I have updated all the models, on their respective pages.

Geomagnetism continues to be a good guide. Here I have highlighted the periods of higher geomagnetic disturbances corresponding to periods of correction for the stock market. The question is whether the most recent period if now over, or continues. Seasonality suggests we should experience fewer disturbances through to August, which if so, would be supportive of upside for pro-risk. That would fit with a period of mean reversion coming to pass away from recent extremes of oversold and overbearish in pro-risk.

The shorter term geomagnetic lunar models continue to perform. The last two lunar turns were on the nose and the cumulative geomagnetism trend has provided an overall route map for the markets. Here are the Dax and the CRB commodities index, with the tails showing the forecast for the next 3 weeks. As yet the model does not show a renewed upturn, but commodities, being below model, have room to pull up.

Which brings me to the title, as in the last week we’ve seen soft commodities wake up and put in daily gains of up to 7% in some foodstuffs, as the hot dry weather in key producer parts of the world comes into focus. Agri gains have been made despite other pro-risk assets pulling back. As I previously stated, whether the extreme weather continues into the end of July is likely to determine whether or not we see a run away rally in soft commodities to new highs in H2 2012.

I have previously shown charts displaying close relationships between the different commodity classes, so if softs do take off in a meaningful way, that should provide the impetus for precious metals to break out.

The all-commodities chart since 2000 doesn’t look too bullish:

Source: Bank of Canada / Reed Construction

Yet, take out energy and a secular bull appears very much in tact. Fluctuations and weakness in oil and natural gas have largely accounted for what some analysts have identified as technical weakness in the overall commodities picture. Commodities ex-energy:

Source: Bank of Canada / Reed Construction

As you know, I believe the secular commodities conclusion is ahead, following next year’s Spring solar maximum. Increasing sunspots inspire speculation and growthflation. The current window of economic weakness is providing the opportunity for another round of global central bank supportive and stimulative interventions. More needs to be done in this regard, but I expect the natural pick up in growth, speculation and inflation combined with the aid of the central banks to come to fruition.

Currently, we continue to see problematic levels for Spanish and Italian CDSs. Economic Surprises continue to languish. Chinese leading indicators came in better yesterday at +1.1% (Conference Board), but other leading indicators have been largely negative. I am not belittling these issues, but refer you again to the secular position and recent extremes in indicators, whereby we are more likely to see pro-risk rise on slight improvement in these areas, rather than fall again.

Here is someone else who shares my view that secular stocks bulls need redefining from the nominal lows, and concurs that the new secular stocks bull began in 2009, noting the similarities to the last two secular nominal lows.

Source: Federated Investors

And here is a chart from Scott Grannis showing how US housholds have largely completed their secular deleveraging, allowing the private sector to releverage from here (despite the increase in public debt). This also fits with US housing increasingly showing it bottomed already.

Source: Scott Grannis 

Evidence increases that we are into a secular inversion period. The timing is however critical – when to switch out of commodities and bonds and into stocks and real estate, in terms of longer term buy-and-hold. I maintain the blow-off top should still be ahead for commodities, which provides the best opportunity out of the 4 classes into 2013 – I believe. But that will be the final pop, as relative cheapness of stocks and real estate to bonds and commodities reach historic extremes.

Markets Update And The Secular

Posted on Posted in Commodities, Indicators, Macro, Solar Cycles, Stocks14 Comments

So it’s been range trading but with an upward bias for the markets into the coming weekend’s Greek elections. Greek stocks got a 10% pop yesterday on unofficial polls pointing to the pro-austerity party winning. Natural Gas also advanced over 10% – the two biggest dogs of recent times sharing a bumper day together.

Economic Surprises continue in their downtrend. The latest leading indicator readings for the UK came in positive and Korea just slightly negative – the global picture continues to be mixed at best. Italy and Spain CDSs continue to flirt with records. The UK government announced measures to improve credit. Now we see what the FOMC delivers next Wednesday. I don’t expect QE, because the US economy is doing relatively OK and it would likely only serve to push up asset prices rather than boost the economy, but I do expect a Twist extension, or something similar, as letting Twist expire and doing nothing would amount to tightening. I expect they will downgrade their wording on the economy and recommit to doing more if things worsen.

If the Greek pro-austerity party wins and the FOMC delivers something similar to my expectations, I expect that to be enough to rally pro-risk. Stocks, commodities and the Euro continue to display oversold/overbearish readings, so mean reversion remains the most likely. If something less pro-risk friendly occurs in the next week, and we see falls in pro-risk, then I expect the pro-risk rally just to be postponed a little. TSP Talk highlight some historic rhymes that reflect the two scenarios of rally-now or rally-later:

Source all: TSP Talk / Decision Point

Everyone can see the inverse Head and Shoulders on the stock indices currently, which by textbook would see us break up and rally significantly in the coming week, but a couple of historic rhymes also show that a drop and higher low could come to pass over the next few weeks before a rally.

I have trimmed back my pro-risk positions very lightly today, taking profits on some of those that picked the bottom, but leaving the vast bulk in tact. The Greek elections and FOMC are uncertain. The new moon occurs Tuesday but geomagnetism is expected to lead into it. It feels a bit more of a lottery than usual, but nevertheless, I remain heavily long pro-risk expecting that we will see (i) a mean reversion rally away from oversold/overbearish (whether that has already begun or needs another low ahead first) and then (ii) a commodities secular bull rally conclusion from here into next year’s solar maximum together with an accompanying rally in stocks that ends before commodities make their final mania.

So how might my secular expectations from here come good?

First, a natural pick up in growth and inflation, as per action into previous solar maxima. Speculation in commodities will be the key driver of the inflation side. Evidence of a pick up in leading indicators and economic surprises, particularly in the US and China, would confirm a pick up in growth and encourage that speculation into commodities, but as yet we don’t see that.

Second, co-ordinated global policy responses in easing and stimulating would also provide the push in growth and inflation. This process appears to be underway with recent intervention in China, Australia, UK and others. How quick and how comprehensive the global action is from here, remains to be seen. The European debt accuteness needs further action, as the Spanish bank programme failed to satisfy. Some kind of action by the Fed is expected, and most likely needed, to satisfy the markets.

I continue to expect we will see a combination of the natural pick up in growth (very supportive monetary and fiscal conditions worldwide, oil and commoditiy prices recently receding) together with a series of global policy reponses, so both elements, but for now this remains tentative.

Thirdly, a supply-side push on commodities. Into solar maxima we historically have seen war, protest and revolution. As sunspots rose in early 2011 we saw the Middle-East and African uprisings and UK protests. As sunspots are rising again currently we are seeing an increase in protests in Russia and fighting and protesting in Syria. Iran remains a potential flashpoint as a key supplier of oil. A perceived supply disruption would push oil prices and by association food prices. Again, this remains just potential for now, but there is also a possible supply-side push in food, without oil’s input. In the first half of 2010 we saw several months of global temperatures being at all-time records, whilst soft commodity prices remained fairly depressed. The result was a major rally in food prices in the second half of 2010 as those record temperatures devastated plantings and harvests. Here in 2012, food prices are again currently depressed, and although global temperatures weren’t extreme in January-March, in April we saw the second highest ever global temperatures for that month on land, and May’s stats, just released, reveal that May was the hottest May ever on land.

Source: NOAA

The result is current drought and excessive dryness in US, Argentina, Russia, Korea and Australia. If we see another couple of months of such extremes, I expect food prices to surge again in the second half of 2012. Recall that global stockpiles remain low, but record plantings depressed prices. If these plantings are decimated by dryness and drought, then the critical stockpiles come back into focus. Food and gold prices reveal a close correlation, so a push in food would likely be accompanied by a push in gold, as an inflation hedge.

Fourth is the secular position for equities. Recall that my charts comparing historical secular stocks bears reveal that at this point stocks are unlikely to see much lower in nominal terms again, and that we should be looking upwards to stocks, not down. We should see a rally in stocks here, which is also supported by presidential cycle seasonality, but which ends before the commodities final mania ends. There is an interesting situation with European equities, whereby they have reached their secular bear valuation buy signals at this point.

This table is from Goldman Sachs taken in mid-May, showing the cyclically-adjusted P/E ratios for key countries:

Source: Goldman Sachs

Historically, a secular bear ends when CAPE reaches below 10. You buy at that point and are rewarded for the next 10 years with an average return of around 15-20%. Furthermore, very good buy opportunities have arisen when FYPE (forward earnings valuation) exceeds CAPE. As you can see, Spanish and Italian stocks are well below 10 and the FYPE exceeds the CAPE too.

For reference, the lowest CAPE historically that we have ever seen was 3, reached by both Thailand and Korea. Guess what? Greece has now beaten that with a CAPE of sub 2. So, with some confidence we can say that buying Greek, Spanish and Italian equities at this point is likely to pay off handsomely over the next 10 years, but clearly the risk is for more downside before the upside eurupts.

Here is the chart again showing that the p/e for Germany is back at the last secular lows.

Source: SG

Here we can see the Eurostoxx index has made a third major low in this secular bear market. 3 major lows have defined historic secular bear markets, before a new secular bull erupts.

Source: Scott Grannis

Here is the UK cyclically-adjusted P/E. It is also back to where it was at the similar point in the last secular bear (around 1979). I note that it made its nominal low in the middle of the last secular bear, which looks a little different to the equivalent US chart which made its p/e low at the end.

Source: SG

Of course not all stock indices around the globe will peform the same. Not all stock indices will end this secular bear market with CAPE under 10. Here is Japan’s chart:

Source: Vector Grader

In the last secular bear, Japan’s ending CAPE was around 20. This may be accounted for by it being a leading index then, going on to its amazing peak in 1989.

Is the US the leading index now? Could we have bottomed with the US at CAPE 20 and European stocks in single digits? Well I think not yet, but we are getting close. I believe some other major indices need to drop beneath CAPE 10, not just the PIIGS, but we can see the likes of the UK and Brazil are close. I believe that more comprehensive drop beneath CAPE 10 will occur with a bear and recession following next year’s commodities finale. But the likes of Spain and Italy are so cheap now that I wonder whether they may now go on to outperform, and not look back. It’s either that, or they go on to join that club of the cheapest CAPEs ever. Clearly we need some more enduring and satisfying policy responses in Europe to enable them to rally sustainably, but at the same time once we have those in place, European stocks are likely to be much higher.

In summary, I think the message is clear that we are reaching towards the end of the secular stocks bear in terms of valuations. I don’t believe we need to see US stocks halve in order to reach under CAPE 10, as we can see from the range of ending CAPEs in the last secular bear. I expect that once we see the likes of Germany, Brazil and China under CAPE 10 we are done, and I expect that point to come next year or the year after, in a cyclical bear following a commodities mania conclusion linked to 2013’s solar maximum.

One Week Later

Posted on Posted in Bonds, Commodities, Currencies, Macro, Solar Cycles, Stocks10 Comments

As expected, we saw a reversal at the start of last week. Capitulative Breadth hit the 7-10 capitulation zone on Monday (and has since dropped back to zero due to the rallying). Monday began with more sellling then made an intraday reversal and daily hammer candle – another bottom signal. We printed the missing positive Nymo divergence between the lows of 18th May and 4th June, and positive RSI divergence between the two also. The week then progressed bullishly but Friday’s action in pro-risk, particularly in commodities and the Euro, looked weak for a while but by the close had reversed strongly. The media assigned rumours of a Spain banks bailout coming at the weekend to the reversal. This duly occurred on Saturday and we will see market reaction this coming week (Spanish CDSs had pulled back a little last week, we shall see if this can be sustained this week). Technically we were due an enduring rally in pro-risk, as per the many indicator extremes I posted in my last few entries. Central bank fuel for such a rally was mixed however. China and Australia cut rates. The Bank of England stayed put. The ECB did not cut rates. Bernanke did not telegraph further QE, as some had also speculated, but left the door open to do ‘something’ – or nothing – at the June 20 FOMC, subject to the latest economic developments. And now Spanish banks bailed out by the EU.

ECRI leading indicators for the US dropped to -2. Chinese data disappointed again this weekend (Chinese stocks made bearish technical action last week, contrary to most pro-risk, and despite the rate cut). Citigroup Economic Surprises languish and haven’t made a turn-up ahead of stocks bottoming, if that was a bottom, as they did in 2011 and 2009. So the economic picture remains weak and the question is whether central banks have begun another round of easing and aiding and stimulating, with last week’s announcements just the beginning, or whether they feel they can largely stay put and see how things develop. Well, suffice it to say that if the picture does not improve they will likely intervene more, but what we need to know is whether we will see more downside for pro-risk ahead if they don’t do more currently.

Let’s return to the techincal picture. Look back in my previous handful of posts to see the extremes reached in terms of overbullish/overbought treasuries and dollar and oversold/overbearish commodities, Euro and stocks. One thing missing for equities was an Investors Intelligence sentiment washout (whereas AAII had made such an extreme). Last week percentage II bulls finally dropped into the historic extreme low zone, but percentage bears did not, i.e. still quite a few neutrals. Accordingly, the bulls minus bears chart still doesn’t show a historic extreme:

Source: Shaeffer / Investors Intelligence 

Also, Chris Puplava notes the lack of panic selling compared to 2009, 2010 and 2011 major bottoms.

Source: PFS Group

On the other side of the ledger, equity fund flows have hit historic pessimistic extremes, matching real investor action with the sentiment shown in AAII. Also, treasury yields made an inverse parabolic move into the beginning of Monday that resembles other historic blow-off parabolic moves that normally don’t come again for some time. The action as of Monday was a v-bounce that could mark the reversal, and if so, that could spell an enduring move into pro-risk from here.

Source: Chris Kimble

The S&P500 looks pretty bullish. As per Chris Ciovacco’s chart below, we appear to have broken out and backtested important resistance. The question is whether stocks can go on to make a higher high than the end of May at the start of this coming week. If they can’t, then an inverse Head and Shoulders pattern could be in the making as long as stocks don’t exceed last Monday’s lows.

Source: Chris Ciovacco

NASA’s updated solar prediction still forecasts Spring 2013 for the solar peak, and still forecasts it to be a weak solar maximum historically. The sun is fairly active currently, which is bullish, and this should continue into next year. Some geomagnetism early-mid last week has pushed down a little on my short term model, but the message remains of a likely bottoming here, with seasonal upward pressure into July. Near term, there is the scope for upward pressure this coming week into the new moon of 19 June. I will update all models on Tuesday, with the extended NOAA forecasts, but here is the up to date Dax:

Expecting upward pressure into the new moon, I don’t plan to take profits on any of my pro-risk longs yet. The next couple of weeks give us the BofJ meeting, the Greek elections, the FOMC and other Euro meetings. Between them there is the potential to really give this rally some momentum and start to fulfil the historic positive seasonality in an election year from June to November. Or there is the potential to disappoint the markets and leave the focus on weak data and Eurozone issues.

Here is what I think. Pro-risk is overdue a counter trend rally here, a sustained upmove that provides some mean reversion for the stretched oversold/overbearish extremes. I expect us to to make that rally now. If pro-risk is heading for another lunge lower, to perhaps give us the missing II sentiment and panic selling extremes then I expect that to occur after we have made a decent retrace upwards for a few weeks. The clues will be in the health of that up move and the developments in economic surprises and leading indicators – i.e. if we rally up but all that deteriorates further then I’d be looking to take profits. However, rising sunspots, seasonally less geomagnetism, presidential seasonality all support mid-year upside. The blow-off move in treasuries suggests an enduring flow into pro-risk from here also. Extremes in US dollar COT and bullish sentiment, and the reverse in key commodities also support an enduring flow the other way. The secular position is closely linked to the solar cycle position, and we should expect a speculative push into pro-risk, with commodities accelerating into a final upmove. I consider us in a different position to 2010 and 2011 as we reach up into the solar peak less than a year away. I think it is more likely we print a strong mid-year this year, rather than a repeat of the last two years. I continue to expect a natural turn up in growth, as per the growthflation of historical rhymes, and a central bank invervention inspired turn up in growth also, at this point. Clearly though, I am frontrunning, and we need to see the evidence build to support that view. For now, we are tentatively trying to start a pro-risk mean reversion rally, and no more.

One last chart. An alternative view of secular cycling using consumer confidence readings, with my notes added. Consumer confidence topped out just before the secular stocks / solar peaks of 1968 and 2000, and bottomed out just before the 1980 secular commodities /solar peak. It made twin lows then, like it has in the current secular commodities bull, as shown by the circles. In keeping, consumer confidence should have made its secular bottom, and supporting this the nominal levels reached reflect the last secular lows. A pullback in confidence should be ahead into the secular commodities peak of 2013 and subsequent bear market, but within a new longer term uptrend.

Underling Source: Daneric / Sentimentrader

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. 

Cycle Inversion

Posted on Posted in Solar Cycles, Stocks17 Comments

We did not see the usual upside into the new moon of this last weekend. Instead we fell all the way into the close of Friday and then rallied on Monday, making for a cycle inversion. I still do not know why cycle inversions occur, and won’t be happy until I do. If full moons have hardwired negativity and fear into humans over evolution due to nocturnal hunting and sleep deprivation, then we can follow why suicides and depressions admissions are higher around full moons, and stock market returns lower. Why then, might this reverse just occasionally, and we rally right into a full moon, and the opposite into the new moon like the one of this last weekend?

Solar trader Jan and I have discussed and maybe it could be as follows. Into this last weekend, bears were in control of the market, bulls had stepped aside. The positivity and optimism of the new moon did not inspire bulls to join due the increasing severity of the declines, but rather cemented bears in their conviction: i.e. the bears became more positive and optimistic about their positions. Just a hypothesis, but maybe it could be something along those lines.

What’s interesting is that in 2011, my 3 lunar cycle inversions appeared to be significant – see chart below. The first marked an end to the uptrend out of 2010. The second marked the end of the sideways consolidation and start of the sharp correction, and the third marked the end of the of the sharp correction.

Again, this is just a hypothesis that maybe they are significant. But the rest of 2011, the market fairly well tracked the lunar phase oscillation as we would expect.

In 2012 we already saw one occur in February, which perhaps marked the end of the up-move out of 2011, as oil and gold topped in February and indices as a whole started to track overall sideways. Then this last weekend’s inversion could spell the end of the sideways consolidation or the end of the correction. The seasonality of geomagnetism would support the market beginning to rally again here. As would the secular position, posted yesterday. As would the major washout readings in sentiment, CBI and oversold indicators. If you are of a different persuasion, it could mark the end of overall sideways correction and the beginning of massive falls.

Just a hypothesis, guys, on cycle inversions. I post it for interest, and we’ll look back later in the year on whether it was a major turning point.

I have updated the short and medium term model pages. I am not around much today and tomorrow.