Category: Stocks

Current Markets And Macro

Posted on Posted in Currencies, Macro, Stocks14 Comments

Yesterday during the US session I was watching the support/resistance line on the Nasdaq shown:

It marks the March/April 2012 highs, and the battle below and above that level in August and September is clear to see. Having broken out above it in September, the market is now retesting the breakout and yesterday, marked by the arrow, saw the index briefly break down beneath it only to rally strongly into the close and hold above it. I believe that may be significant, and today’s out of hours action (Europe morning) is so far bullish. But, there remains the possibility that we are making a bear flag in a protracted correction, and the SP500 (below) and Dow are higher above the March/April peaks with more room to consolidate downwards.

We have a 2 week period of low forecast geomagnetism and upward pressure into the new moon now, and given last week was the seasonally worst week of the year together with a full moon, damage to pro-risk was contained. Supportive of pro-risk pressing upwards here is a particularly bullish correction formation in gold and a bear flag on the US dollar:

Source: TSP Talk

However, there are some warning flags for equities. This chart shows that when the Fear and Skew indices spiked together with a low Vix, equities were approaching a top.

Source: Sentimentrader

And this composite of Put/Call, Market Vane and Sentiment Surveys also suggests equities should be approaching a top.

Source: Technical Take

Note that with both charts, there is the scope for equities to top out now, or to keep rallying for another couple of months and then top out. So with that in mind, we can return to the top two charts of the SP500 and Nasdaq and watch to see whether they break back down below the March/April highs – which would make the breakout a fakeout and give more weight to a market top – or whether they can push on now this week and next and make the breakout backtest successful, which should mean a period of longer gains ahead as they move into clear air. My leaning is towards the latter because we don’t yet see the usual cyclical bear market topping signals or process.

We can look wider for more to gauge the environment for pro-risk. The key question is whether we are reflating or tumbling into recession. I previously noted the improvement in Conference Board global leading indicators but we have to wait until mid-month for new updates both in these and in OECD leading indicators. We have other data to keep an eye on though, starting with ECRI US leading indicators which rose again last week. It should be clear from the chart below that the action in the indicator does not resemble that in previous recessions:

Source: Dshort

RecesssionAlert caculate the probability that the US is in recession currently as 6.4%:

Source: RecessionAlert

Nowandfutures measure, which requires yield curve and CPI adjusted monetary base both to go negative, only has one in the territory:

Source: NowandFutures

Here are the latest global PMIs combined:

Source: World Bank

There is clearly some recent improvement, particularly in Europe. The key question is whether they are in a recovery trend, or just an oscillation in a continuing downtrend.

This is how I see it. There is some clear improvement in leading indicators globally. We have had 6 months of rate cuts and renewed stimulus. I expect the reflation. Solar and secular cycles support the reflation. But I’m not jumping the gun. I want to see more evidence of improvement. Clear upward trends. So it’s one day and one piece of data at a time. But I don’t see reasons to take profits on pro-risk longs at this point.

Dr.Copper is behaving bullishly of late, as is Dr.Kospi, and the Shanghai index was potentially breaking out of its wedging downtrend on a Demark buy signal and RSI positive divergence, prior to the Chinese holiday week – something to watch next week. Treasuries regained some ground as beneficiaries of last week’s correction in pro-risk, but by QE history should begin a more enduring downtrend – unless of course you believe this time is different.

In summary, there is tentative evidence of a global reflation that should provide the backdrop to a secular commodities finale, but I want more evidence. I see stocks at a crucial point technically, either backtesting their breakout succesfully, or failing, and my leaning is the former. There are some technical indicators for stocks flashing a top in terms of complacency and overbullishness, but as yet a lack of other supportive topping indicators. Because those flashing indicators could remain at those levels for a while longer, and given Presidential seasonality, I think we can push higher yet into November. In terms of my solar and secular timings, a topping out of equities as we turn into 2013 would be reasonable, so I believe we are approaching that stocks peak, but are not there yet.

Kondratieff And Solar Cycles

Posted on Posted in Commodities, Inflation, Solar Cycles, Stocks41 Comments

Kondratieff was a Russian economist who argued that there was a long sine wave cycle in the economy lasting around 60 years broken down into 4 seasons each lasting around 15 years. There proposed reason for the cycle is…. other cycles. In other words, cycles of demographics, credit cycles, capital investment cycles and more, generate these long repetitions over time. Clearly that’s slightly unsatisfactory, unless we can explain the cycles of the source phenomena. Today, I am going to argue that Kondratieff cycling actually reflects solar cycling.

Here is the Kondratieff cycle and its subseasons:

Source: The Long Wave Analyst

We should be in a K-winter since around 2000, with gold and treasuries king. With both gold and treasuries having performed handsomely over the last decade and recently reached all time nominal highs, evidence is supportive.

The general theme of the K-winter should be deflation and cleansing. When Kondratieff wrote his theory, central banks did not have the freedom they have now to counter-attack with intervention and monetary inflation. Using Shadowstats data, we can see that the results of their actions in the US: high price inflation rather than deflation.

Source: Dshort

However, when US GDP is netted of this inflation, we can see that the K-winter appears to have fulfilled: a period of shrinkage, or cleansing.

Source: Dshort

We can measure this another way: stocks have tracked overall sideways since 2000 but when adjusted for inflation have significantly dropped. This is reflected in price/earnings ratios gradually falling since 2000 by more than half.

There has been a lot of debate about which of the two ‘flations is and has been occurring over this last decade, and it’s understandable. There has been major monetary inflation, and this has resulted in significant price inflation particularly in hard assets such as commodities. Yet, there have been characteristics of deflation: real economy shrinkage, a decline in money velocity (cash hoarding), debt deflation (in households and companies), and liquidity traps.

I suggest that some kind of K-winter has indeed been playing out since 2000 as per the theory, and that governments have been unable to prevent that, but they have been able to prevent a social-conflict-inducing depression by tinkering in the economy with what they can (rate cuts, bailouts, money supply increase, balance sheet expansion). The result is two-fold: (i) in nominal terms the economy and asset prices have held up because inflation has offset real declines (a popular illusion) and (ii) a lighter rather than deeper cleansing has been possible in the economy and assets because public balance sheets have been expanded to simply transfer some of the previous excesses rather than purging them. There is no magic to the public balance sheet expansion: this is simply prosperity taken from the future.

So, central bank large-scale intervention in a ‘natural’ period of cleansing (following the excesses of the 1980s and 1990s) has changed the parameters understood by Kondratieff. The result of pushing easy money onto an economy in cleansing is a series of speculative bubbles from real estate to oil to agriculture to bonds to precious metals to equities. Over the last decade we have seen them take turns in making parabolic rises. Be aware though that much of this action is in nominal terms, i.e. net of inflation the gains are much less impressive. Nevertheless, if Kondratieff theory is valid, then our current K-winter is as much dominated by assets that perform well under inflation, such as commodities, equities and real estate, as dominated by gold and bonds as safe havens.

What if there is a K-winter finale ahead, in which outright deflation reasserts itself and just gold and bonds rise (perhaps in a parabolic)? Those who advocate that we are tumbling into recession currently and that this will reveal central banks to be powerless (given rates at zero and stimulus back on) could perhaps buy into that scenario. Let’s compare the last K-winter and see if this happened.

The last K-winter was the late 1930s and the 1940s. As now, equities were in a secular bear market, economies were in trouble following the excesses of the preceding decades. The world war pushed debt to high levels and so governments had to keep rates low. Inflation was problematic accordingly, and we saw a similar inflation/deflation mix to the current K-winter, in that economies shrank but assets such as commodities performed well due to easy conditions. The K-winter did not draw to a close with a deflationary assertion and a huge money flow into just bonds/precious metals and out of pro-risk, but rather a general commodities peak and associated inflation peak in 1947, followed by a gentle coiling of equities and then true secular equities bull momentum as of 1949.

I have maintained that the 1940s is our closest mirror to our current period since 2000, due to the secular commodities bull and secular stocks bear, the combination of ultra low rates and problematic inflation, and by solar cycle timing. The Kondratieff cycle would calculate this too, as it was the last comparable K Winter season. So let me now draw together solar/secular cycling and Kondratieff cycling (click to enlarge):

This diagram is an idealised cycles model, all based around solar. In my previous work I have demonstrated that solar peaks occur roughly every 11 years and that secular peaks in equities and commodities occur close to solar peaks. There is a sine wave in long term real stocks and an opposite-polarity sine wave in long term real commodities, both which have around a 33 year (equivalent to 3 solar cycles or 1 lunisolar cycle) duration, as shown in the charts below. Treasuries (or inverse rates/yields) move in around a 66 year cycle (2 lunisolar cycles) with peaks and troughs converging with secular commodities peaks. The result is we see two different kinds of secular commodities bulls: one set against rates moving to a peak, and one set against rates moving to nothing.

I believe that idealised combined cycles model fits very well with Kondratieff theory. The only adjustments I have made were to slightly shorten the summer and winter seasons by slightly extending the spring and autumn seasons, which doesn’t stray too far from his time ranges for the seasons. The combined model does suggest that there are differences between our current period and the 1970s or 1910s, which were both previous secular commodities bulls and secular stocks bears. They were K-summers where inflation was the only ‘flation in town, whereas today’s K-winter and the 1940s K-winter both had elements of inflation and deflation: a natural deflationary cycle offset by inflationary central bank actions. Regardless, the K-summers and K-winters ended in a similar way: with an inflationary peak and a general commodities peak, and a range-trading for equities.

Picture the current K-winter without central bank intervention. A deflationary depression would likely have occurred. Unemployment and defaults would have been much more severe, cleansing much deeper. Social conflict would likely have been much greater. But the natural process of cleansing would have given way to a new cycle of growth ahead in the same way with or without intervention. What the intervention has done is make the K-winter process less severe all round by some can-kicking (a lot of the ‘bad’ has been absorbed into new public debt, which will have to be paid for at some point, but not now). By keeping rates ultra low and bailing out companies and countries that could have had much wider impacts we are moving towards that new K-spring and cycle of growth with a significant helping hand (putting future generation implications aside).

I suggest that Kondratieff found evidence of cycles that were actually approximations of solar cycles. In other words, he uncovered repetitions in time in the economy and financial markets that ultimately are caused by the sun’s cycle of activity and its influence on humans. The long term sine wave to which he refers is apparent on my charts above for real equities and real commodities due to the speculative pulls into the solar peaks, and there is a similar relation with treasuries/rates. The idealised model that I have produced shows that the relations between these 3 asset classes and solar peaks produces one 66-year cycle within which there are 4 different periods, as the different assets are pulled to the solar peaks with different frequencies and alternations. These four periods fit very well with Kondratieff’s seasons by their characteristics, and the whole cycle likewise. I believe that a few tweaks are needed to K-theory to make it more accurate: the two shorter and two longer seasons per my model, and the K-winter now featuring central bank intervention and a mix of inflationary characteristics as well as deflationary (with associated implications for hard assets).

Friday Roundup

Posted on Posted in Commodities, Currencies, Indicators, Macro, Stocks7 Comments

1. Chinese stocks are making another attempt at bottoming, and this one has promise. A falling wedge, positive RSI divergence and a potential fakeout beneath support as stocks rallied strongly yesterday and again today (today’s rise not shown), taking us towards 2100.

Underlying Source: Cobra/Stockcharts

2. The German Dax bounced yesterday at rising support. The technical situation is shown below – for my bullish case, the most important is to hold above the March 2012 highs – a previous resistance that should now be support. If the Dax can hold that rising support line then the next target is the cyclical bull highs to date of mid-2011.

3. The US SP500 index is already at new cyclical bull highs and so holding above that s/r line is again the priority for my bullish case. Again, it will be interesting to see if the index can hold the rising support and after a little small range consolidation around this weekend’s full moon, resume bullishly with that angle of trajectory. Recall that Presidential seasonality supports further gains all the way to the November elections, and whilst I wouldn’t specifically trade that phenomenon, it has been fairly reliable historically.

4. The Dow Transports continue to languish, but a little indecision at the bottom of the range could spell another reversal back into the range. It’s an important one to continue to watch.

Source: TSP Talk

Here is Ryan Puplava’s assessment of whether stocks are likely in a topping process here or not, and the Transports divergence is the only flag currently, he suggests:

  • A shift out of risk assets and into defensive sectors. (false)
  • Leading economic numbers and Fed surveys roll over (false)
  • Transport or Industrial indexes not confirming each other in new highs (true)
  • A lower high, or at least a break, in the market trend (false)
  • Momentum failure (false)
    • Flat/sideways market from support to break (false)
    • Momentum divergence at a higher high (false)
  • Distribution with 2400 or more declining issues on the NYSE in a given day (false)

Source: Ryan Puplava

5. Gold is also climbing a rising support and if about to face resistance close to 1800. It arrives here on fairly frothy sentiment, however, given its preceding 9 month range coiling and its peak seasonality period currently, I don’t place too much weight on the frothy sentiment. I rather suspect it will have a run where sentiment remains elevated. But let’s see how it deals with that horizontal resistance.

6. Euro-USD pulled back having reached overbought/overbullish, and could pull back a little further to rising resistance. The key question is whether it has made a medium term trend change given the renewed confidence in Euroland and the dollar-debasing US QE-without-end. We know that QE1 and QE2 announcements made for enduring rallies into pro-risk (after the initial spike and correction couple of weeks), which would suggest Euro-dollar, commodities and equities all rallying. There are no guarantees third time round, but market participants may lean more pro-risk, aware of that history.

7. The correction in pro-risk this week has done a reasonable job of deflating other overbullish/overbought indicators, in equities and crude oil amongst others. As previously noted, equities typically flirt with extremes for a period before rolling over, as opposed to hitting once and then collapsing, and we are generally looking at first touches.  Indicators such as stocks above 50MA and bullish percent over call/put have reset sufficiently to enable stocks to rally again, if that’s the will of the market. The two US equity sentiment surveys of II and AAII both continue to show fairly neutral readings, and as I am looking for the next market top to be a cyclical bull market top, we really should see these reach extremes.

Source: Schaeffers Research / Investors Intelligence

Source: Bespoke / AAII

8. Natural Gas has been the stealth hit of 2012. Below is a weekly chart as of the end of last week and this week it has risen to 3.3. If you bought at the bottom in April, you would be up 75%. Well, my story is this: I was one to buy in long in 2010 and 2011 as it dipped several times below 4 (at what appeared excellent historic value and historic extreme cheapness versus oil), only to see dire performance continue and even worsen. Hence my aggregate position is still underwater but as the excess gas inventories have been declining it looks like it may eventually turn a profit. I consider this asset to really have been a good example of ‘the market can stay irrational longer than you can stay solvent’. My exposure was never that significant in my account, but it has taken a lot of patience to see a turnaround.

Source: TradingCharts

9.  On the macro front, we saw a couple of bad US data reports this week, the worst being durable goods orders. As a result, US Economic Surprises has taken a sharp fall and although still positive, needs watching closely in case of a trend change. Due to aggregate leading indicators trending up, I don’t expect that to be the case, but let’s see ECRI’s latest reading later today.

Source: Sober Look / Citigroup

As can be seen from the Dhort chart (hat tip Antonio), there is a relationship between the durable good orders and the SP500 performance that makes the data dip alarming:

Source: Dshort

There is a history of volatility in the durable goods number but that dip is one of the most dramatic. It’s a flag, but not on its own enough to make me want to take profits on stock indices longs at this point. With the improvement in aggregate leading indicators, the positive technical picture for equities, the renewed global stimulus, and the Presidential seasonality, the balance is still bullish. But for that to remain, other forthcoming data (of a leading style) needs to return better. Something to watch next week.

10. US earnings season starts the week after next and there is a fairly compelling relationship between the ISM PMI and SP500 earnings year over year (hat tip Gary). As can be seen below, the latest data for August was just below 50, i.e. around zero growth. The expectations for this earnings season are for earnings growth over the same quarter last year of -3.4%, i.e. a drop. That does potentially set us up for earnings to come in between zero and -3.4, i.e. to be bad but to beat expectations, which would normally be enough to rally equities. Clearly, both the ISM PMI and the analyst expectations are only guides, but there is a potential scenario there to fulfil the technically bullish picture for stocks, in October.

Source: Calculated Risk

Have a great weekend everyone.

Back To The Near Term

Posted on Posted in Macro, Stocks23 Comments

This week has been on average the most bearish of the year historically. We also have downward pressure into this coming weekend’s full moon. To add to that we had reached levels of overbought and overbullishness in a range of pro-risk markets (plus support/resistance levels in Euro and Dollar). And following previous QE announcements, the markets corrected for a couple of weeks after the initial euphoria of the announcement, example here:

Source: Chris Ciovacco

So, I expect the markets to continue to consolidate into next week, and then resume bullishly. It is important that those markets that broke out over their previous March/April 2012 highs, stay above those breakouts, or succesfully backtest. I have shown that level on the chart below which overlays the Sp500 on the Dax – I would like to see the Dax hold above 7200 and the SP500 above 1420.

Source: Stockcharts

On the macro front, the environment has improved for pro-risk. Economic Surprises remain positive and in an up trend:

Source: Ed Yardeni

European debt accuteness has retreated:

Source: Acting Man

ECRI US leading indicators continue their uptrend:

Source: ECRI/Dshort

The missing piece of late had been global leading indicators which persisted in the negative, however we now see positive development here, and evidence that reflation is coming:

Conference Board Leading Indicators 26 Sept 2012:

Conference Board Leading Indicators 24 Aug 2012:

The snapshot of the CB leading indicators above today and one month ago show a much healthier picture. With China particularly strong looking forward, that aids the commodities bull case. However, we now need to cross reference this with surveys and data coming out of China and the rest of world to ensure the improvement is valid.

One other key macro consideration is earnings, particularly US earnings, and US earnings season begins again 9th October with Alcoa. If pro-risk does consolidate into next week, then the following week I would be looking for pro-risk to be back in bull resumption, but it would be against the backdrop of earnings announcements beginning. In other words, it is important that earnings do not disappoint. As well as the earnings factor, Euroland is back in the news, so developments need to be monitored, but broadly speaking the macro evironment is currently supportive for pro-risk.

Dow Transports continue to be a concern. That index completely reversed its positive reversal, as shown:

Source: TSP Talk

The divergence with the Dow Industrials has been in place now for 6 months (DJIA made a new high but Transports did not). At some previous important tops in equities, the Transports topped out 1-8 months before the Industrials. That makes it a warning flag – unless of course it recovers and makes a new high.

If I am wrong about stocks pushing higher into the end of 2012, and this is indeed a top, correctly flagged by the Transports, then recall that topping is a process, and should take some time and messy price action, as highlighted for the last two cyclical bull peaks:

We should see more flags appear, and negative divergences appear in breadth and market internals. Also, we only just reached overbullish levels in indicators such as stocks over 50MA and bullish percent / call put, and these too have historically needed some time flirting with the extreme zone before the market keeled over.

If we consider for a moment that the topping process actually began in March/April and this is a little overthrow of the previous highs but essentially a double top in a multi-month topping process, then know that we don’t share the usual features of a cyclical bull top: leading indicators are trending up, economic surprises are trending up, there has been no inflation accleration or rate tightening, US yield curve is normal, rotation only recently began out of defensives, and so on. So I believe that scenario, that topping has been occurring since March, is unlikely, but a breakdown back beneath the March/April highs s/r level in the stock indices would give that more merit.

In short, I see us at a reflationary point, which should enable further upside for pro-risk. But too much frothiness first needs working off to some degree.

Addendum to Forecast 2013 series

Posted on Posted in Commodities, Solar Cycles, Stocks26 Comments

Two great charts from readers, worthy of a few more comments.

Firstly, from Robert Bowden, a long term chart of the Dow and the lunisolar 33-year cycle. Great work from Robert, I would just repeat my 1930s tweak, that the secular bear sideways range contraction would take place after 1937 rather than after 1929. Regardless, in each instance the market coiled into the solar peak in red and there was a great buying point for equities following.

Source: Robert Bowden

The second chart was provided by Mike, and is from NowandFutures. This long term chart for commodities fits very well with the long term equities chart above, showing the inverse secular relationship between the two. Nowandfutures have identified a ~30 years cycle in commodity peaks and by including their Elliott Wave count we already peaked.

Source: NowandFutures

Bring together this chart with the above equities chart, and multiple charts from my Forecast 2013 series, the evidence is pretty compelling that we are at a secular inflection point, in the long term view. If I was a very long term investor, I could sell out of commodities and bonds and buy equities and not look again for 10 years, and only a new paradigm would prevent that from returning handsomely. As I have argued, I don’t believe we have a new paradigm at this point in human history. We have thus far seen typical secular development and indicators suggest we are in the area of what should be a typical secular inversion.

However, as a secular inversion is a messy affair over a window of a few years, and I am a medium term trader whose main focus is to make a strong return each calendar year, getting the timing of when to enter and exit which asset class is crucial. So, my arguments for a commodities peak ahead next year, rather than already achieved in 2011, can be summarised like this:

1. Solar cycles are the underlying. The ~30 year cycle NowandFutures have identified is in fact 3 solar cycles or one lunisolar cycle. Maximum human excitability occurs around solar maximums which is revealed in my own charts by secular stocks peaks and secular commodities peaks all occurring close to solar maximums, as well as inflation peaks i.e. peak speculation and buying. The solar maximum ahead next year therefore suggests 2013 for a commodities peak rather than 2011.

2. Previous secular commodities peaks have all occurred with a subsequent shadow peak, or bounce, around 3 years later (as the demand-supply balance is not transformed overnight). 1980s secular peak, 1983 bounce (all lower highs). 1947 secular peak, 1950 bounce (just oil made a higher high). 1917 secular peak, 1920 bounce (just oil made a higher high). In each case, when the economy gained some momentum after the secular peak, commodities joined in the pro-risk party for a last push, but by that point, the best investment was equities, which were already in new secular bull momentum. Exrapolating, we should see a secular commodities peak in 2013, and a shadow bounce around 2016.

3. Secular asset peaks normally end with a parabolic mania, a blow-off top. In this K-winter since 2000, the leading asset has been gold, and gold has yet to make such a parabolic. Furthermore, the technical shaping of gold suggests that it has just broken upwards out of a 9-month coiling from 2011 to 2012, which should power it to new highs. Could it do so alone, without other commodities? It’s not impossible, but as I showed in my forecast series, there is feedback looping between commodities and normally close correlations in performance. Commodities:stocks and commodities:bonds ratios are supportive for a final mania in oil and gold, and Goldmans have just upped their forecast for commodities for the next 12 months for an 18% collective rise.

4. Grains have made new secular highs in mid-2012. That is supportive of a secular commodities bull still in tact. However, until we see other commodities at new secular highs, then the possibility of a 2011 peak remains open, with grains an anomaly.

5. I’m not a big fan of Elliott Waves because a variety of interpretations can be applied to any chart under consideration. Of all the market disciplines (and I have been open to all) I find them one of the least predictive. However, I generally subscribe to the idea that markets move in waves and that there is some logic to a 5-wave or 3-wave count. I can see a 5-wave count on the CCI commodities index since 2000. I think the 1970s 5-wave count above is less compelling and more of a retrofit. In short, I accept the 5 waves since 2000 to 2011 is a warning, but it would not be alien for commodities to make a new high next year and an alternative count applied. It comes down to weightings. I give more weighting to solar cycles, gold technicals, asset ratios, real interest rate trends, food price inflation, central bank reflationary actions and so on, than to Elliott Wave counts.

In summary, more evidence in the above charts that we are at a secular inversion point in history. I believe the Nowandfutures chart needs a little tweaking to make accurate, and as it is a long term chart, that tweaking makes all the difference, namely from 2011 to 2013 for a commodities peak. A prudent investor might choose to sit out what is a messy, tricky period to time in terms of which assets when. However, if there is a commodities parabolic ahead, that is a great opportunity for a trader, and I believe there is. Drawing together multiple disciplines, I believe the probability lies with the peak ahead. If I am wrong, then nearer term clues will start to appear in favour of the alternative, and my approach as always is to keep analysing day by day to see if this is so. In recent months however, the nearer term clues have grown more in favour of a peak ahead, than in the past, thanks to renewed QE and Chinese infrastructure programmes, grains making new highs feeding into food price inflation ahead, bullish technicals in precious metals, renewed US dollar weakness, and improving leading indicators.

Update: extra charts from Tiho, Shortsideoflong:

I’ve just added the solar peaks.

Forecast 2013 Part 3: Equities Wind Out Of Secular Bear

Posted on Posted in Solar Cycles, Stocks26 Comments

Secular stocks bear markets track overall sideways in nominal terms due to inflation, whilst price/earnings valuations gradually fall from expensive to cheap. The shape and development of the current secular bear market, which began in 2000, bears resemblence to the secular bear of the 1970s and the secular bear of the 1940s.

Here is the MSCI world index and the secular bear that began in 2000, compared to the SP500 in the 1970s and the DJIA in the 1940s.

Here are the individual SP500, Dax and FTSE charts overlaid on each other for the current period, showing that they all made the similar pattern.

In the last couple of years of the pentagon patterns in the previous secular bears, the markets contracted into a range and coiled, before breaking out to the upside, then backtested the breakout level before advancing in a secular bull of real momentum. In that pre-breakout phase, the markets were characterised by a loss of appetite for equities – the final washout after a decade long sideways grind.

We see that in the current market environment, through shrinking stock market volume, declining reading/viewing figures for financial media and equity fund flows persistently negative despite the stock market performing fairly well and bonds at extremes of expensiveness paying negative real returns. The chart below shows the difference in fund flows into those two asset classes despite equities yields at record attractiveness compared to bond yields.

This next chart shows that flows into bonds or equities largely followed the fortunes of the two classes, but since 2009 there has been a disconnect, whereby funds have flowed into bonds despite equities’ performance improving in relation to bonds. This also demonstrates a washout in appetite for equities.

Source: JP Morgan

A common way of measuring the end of a secular stocks bear market is by price/earnings valuation, with the rule of thumb that valuations have to reach single digits to become extreme cheap enough to bring about a secular inversion. However, the valuation reached depends upon the measure of inflation used, because, for example, for p/e10 a higher inflation estimate increases average real earnings over the 10-year period, and thus lowers the P/E10 ratio. Official CPI inflation stats calculations have changed since  the 1980s but these form the basis for most p/e calculations.

Nowandfutures generate their own inflation data to compensate for the CPI changes, and the real inflation adjusted long term Dow moves from the blue line to the green line in the chart below. That makes a big difference, as it makes the 2009 low an extreme secular low and our current position still below the long term trend, i.e. a longer term buy rather than a sell.

Source: Nowandfutures

Similarly, Shadowstats provide their own inflation measure that attempts to keep inflation calculations consistent over time. Dshort’s real S&P Composite Index adjusted for Shadowstas inflation paints a similar picture to the one above, which is that 2009 marked a secular low extreme and that equities are still an attractive buy at the current level, 45% below long term trend.

Using the same Shadowstats data, a discontinued Dshort chart reveals that the S&P p/e10 would be currently around 15, having come down from around 35 at the secular 2000 peak. With history as our guide, we should expect this p/e10 to drop again below 10. This can be achieved by stocks falling, by inflation rising, or some combination of both.

A look at price-to-book valuation also shows that both US and European equities are approaching previous secular lows, but could drop a little further yet.

Shiller p/es reveal Europe to be closing in on secular cheapness.

Looking at Japan, the cyclically adjusted p/e shows a similar picture: getting there, almost extreme.

MSCI’s global equity index forward p/e valuation is currently around 11, which is also approaching secular cheapness, but could fall a little further yet.

An alternative view of secular bear progress comes through US consumer confidence, which reveals similar developments in the 1970s and today. A further dip in confidence would complete the pattern and this would probably occur with an economic slowdown or stocks bear.

Underlying source: Sentimentrader

Returning to the secular bear pentagon patterns at the top of the article, after stocks broke upwards out of the pentagon in the 1940s and 1970s, stocks retreated again the following year in a successul backtest of the breakout level, before advancing in earnest in a secular bull of momentum. I suggest we are currently breaking out of the pentagon in the final third of 2012 to complete an overthrow for equities as we move into 2013, before we make that retreat in stocks to retest the breakout. That retreat, accompanied by rising inflation, should provide the drop to single digit valuations for those indices that still haven’t hit extreme cheapness. Bear in mind that not all indices will hit single digits as, for example, Japan ended the last secular bear at CAPE 20.

Following the secular bottom, in this instance 2008/9, there is a gradual process of repair. From financial system meltdown in 2008 to European debt crisis in 2011/12, that’s improvement in terms of global accuteness and that improvement is reflected in stocks moving higher.

Recall how derivatives had mushroomed into a major system threat by 2008. Since then the size of these markets has gradually come under control.

Source: Nowandfutures

Recall the accute sovereign default risks in certain countries in 2011 and earlier this year. The past 6 months has seen reductions in default risks across the globe.

Source: Bespoke

Recall the major real estate bubble into 2005/7. Since then real home prices have been fully deflated (in the US).

Recall household indebtedness, related to the real estate bubble, had reached excessive levels. This too has been repaired with time (US chart again).

Clearly not everything has been repaired. Global economic growth is currently fragile, and leading indicators generally weak. Central banks are still intervening with support and stimulus. However, secular stocks bulls don’t begin with everything repaired, they begin from very dire circumstances. I can argue that the secular stocks bull really begins at the secular nominal bottom, in this case December 2008 / March 2009, which was when things were at their worst. Federated Investors echo this view:

Source: Federated Investors

What secular history shows us is that stocks are unlikely to return to those 2009 lows or get anywhere near them. Our closest historical mirror is the 1940s secular bear because interest rates were kept negligible due to excessive debt. With central banks committed to keeping interest rates low in our current environment until recovery is entrenched (which will by association mean a secular bull is entrenched) we have even more reason to expect stocks to perform well, because their attractiveness strengthens relative to bonds and cash. Stocks dividend yields are at record highs versus treasury bond yields. This could mean that this time round, US equities do not need to drop to single digit p/es, because they are already at secular cheap valuations in terms of comparative yields.

Let’s draw in solar cycles and understand that a recession has always followed a solar maximum, and the solar maximum is forecast for 2013. Based on previous timings, we might expect that recession to come to pass 2014-15. Using the 1940s as our closest historical mirror, the recession could well be mild, as ultra low rates and central bank support are likely to persist through it.

Usually, stocks turn down roughly 6 months before a recession begins, as a leading indicator. This is how I see the price action in equities unfolding:

The topping out in the stocks cyclical bull (since 2009) should be a process – a trading range at the top, as seen in 2007 and 2000 on the chart. A high and then a retest of the high, but with negative divergences telling at the second attempt. I suggest stocks will top out as commodities really take off, with a big move in commodities bringing about an economic slowdown / recession. Stocks should therefore act as a leading indicator of that slowdown. I suggest stocks can reach 1600 on the Sp500 before topping (1600 is not my call for a top but a reachable level), and then retreat in a mild cyclical bear to go with the mild recession. As per the pentagon charts at the top of the article, stocks may pullback to 1300 or so in that cyclical bear, before advancing in earnest in a secular bull as of sometime in 2014.

Let me finish by contrasting my forecast with the very bearish projection that some others are promoting, because it clearly has huge implications for positioning. This is a chart with text from the Financial Tap, but I’m not singling them out – there are several well known sites publishing something similar.

Source: FinancialTap

It looks technically compelling, and the supporting arguments run something like this: despite all the easing and stimulus the world economy can’t get any sustainable growth, and when the penny drops that central banks are impotent, the bottom will fall out of the market. Not only that but excessive debt has not been resolved, and a sovereign is going to default sooner rather than later. Excuse me paraphrasing, but you get the idea.

My argument is this. There is no historical precedent for that major third collapse from previous secular bears. Any ‘third’ low is much higher. The shaping out of the 1940s and 1970s bears from this point is bullish, not bearish. Furthermore the current environment is one of ultra easy monetary policy, together with central bank commitment to stimulate and support like never previously, which really provides great support for yielding asset prices from underneath (cash and bonds are paying guaranteed negative returns, which improves the picture for equities yet further). What is more, equities are historically at cheapness extremes versus bonds, and also cheap in relation to commodities. Some European countries are at absolute secular valuation lows. The Eurozone is committed to staying together and to not allowing a default in any of its members. Their step by step measures, and other repairs in the global economy and the markets since 2008/9, are genuine reasons for equities to be much higher. Sustainable growth will be the last piece: once we are growing sustainably (technological evolution continues its parabolic ascent), the secular bull will be mature and some way higher.

What if this time is different? It is absolutely concerning that exponential trends in population, consumption and debt (brought forward consumption) are unsustainable in a world of finite resources, and our debt-based money system and policies of permanent inflation threaten to eventually accelerate to either system collapse or hyperinflation if no changes are made. However, none of those issues are at crunch point YET – we are just further up the curve. On current trends, humanity faces a true crunching of these issues from around 2030 to 2060. Between now and then things may change and exponential technological evolution has the potential to deliver solutions to some of these issues. Should no solutions be found, then we still have ‘room’ for a secular bull market in stocks before the crunch. An acceleration of the debt parabolic has defined these last few years, but once sustainable growth re-emerges, we will see an end to these large debt accelerations (not a resolution, just a slowing). I predict debt to be maintained at ratcheted-higher levels, and inflation to be permanently ramped higher, with the latter assisting in containing the former.

Coming Next: Forecast 2013 Part 4: New Secular Bonds Bear Market

Saturday Update

Posted on Posted in Bonds, Commodities, Indicators, Stocks14 Comments

1. 10 year treasury yields continue to make an inverse head and shoulders pattern targetting yields of 2.2:

Source: Stockcharts

2. Both the Euro and the Dollar are at S/R that could make for a near term reversal:

Source: Chris Kimble

3. New highs / new lows for the US stock market hit a record high. This could signal a near term reversal, but the implied rally breadth has historically meant continued bullishness subsequent to that, more often than not.

Source: Stockcharts / Greg Schnell

4. SP500 stocks above the 50MA have reached +1 standard deviation, but historically this indicator has usually oscillated in that range for a period before stocks topped.

Source: Index Indicators

5. SP500 bullish percent over put/call ratio has reached the 110+ extreme zone. Again, this indicator has usually gone on to oscillate in this zone for a period before stocks topped.

Source: Stockcharts

Sentimentrader’s indicators now show 40% in the extreme (bearish for stocks) – the highest percentage since January 2011. However, in their own words, with price at new highs this would be a concern if price action became toppy. It is a sign of a strong uptrend, but with near term reversal potential if price signals.

I don’t see price at this point looking toppy. Friday’s session was mixed for stocks, making a gain that finished in the middle of the day’s range. That’s fairly normal after a big up day on Thursday. The Nasdaq and SP500 have spent a week above their breakout, having successfully backtested it, which is bullish. The Hang Seng and Russell 2000 just broke out on Thursday/Friday. Unless price is reversed Monday/Tuesday then this is also bullish. Dow Transports have held above their triangle breakout, having a reversed a fakeout out of the bottom. Stocks breadth has led price, which is bullish. Chinese stocks are attempting a bottoming formation after reaching a Demark selling exhaustion count.

Demark’s last quoted price target for the SP500 is 1478. We didn’t get there yet. I believe stocks can push up a little higher early this coming week, giving a bit more room for the latest breaking out indices to subsequently consolidate above their breakout S/Rs. I respect the overbought/overbullish indicators that we are seeing and am alert to a correction soon, particularly when drawing in the Euro and dollar S/R positions and precious metals overbought/overbullish readings, but currently the evidence is for a consolidation in a continued bullish uptrend. So my approach is to maintain long positions through any correction, until evidence changes.

6. Coffee has a speculator net short position at a 7 year high. Here is the monthly price chart, and the weekly chart which shows a dynamic W bottom is being made. I am going to consider adding to my coffee position on Monday:

Source: Tradingcharts

Post FOMC

Posted on Posted in Bonds, Commodities, Currencies, Indicators, Stocks10 Comments

The Fed delivered more than expected, with the big gains in pro-risk evidence that it wasn’t all priced in. Some key differences to prior: (i) QE delivered at market highs rather than lows (ii) Fed commitment to be accomodative even after recovery is entrenched (iii) specific targetting of improving jobs situation (iv) open ended (v) negligible rates out to 2015. With ECB bond buying and Fed QE, pro-risk has some key support going forward.

The RUT, Hang Seng and silver all broke out, and the dollar broke down. The Nas, SP500, Dow and junk bonds all broke further free. Treasury bonds had a mixed session, but that’s to be expected. Initial support for bonds, as the Fed will be a direct buyer again, should give way to a sustained move against bonds, per previous QE:

Source: Scott Grannis

Stock market breadth improved. Corporate insider buying/selling is at a level more consistent with market bottoms than tops.

Source: Istockanalyst

But today we do find various assets into both overbought and overbullish indicator extremes, such as precious metals and the Euro. The SP500 new highs/lows indicator also suggests overbought:

Source: Cobra / Stockcharts

Sentimentrader’s research post yesterday’s session suggests a consolidation may come to pass over the next couple of weeks before further gains. This fits with my own take. Technical breakouts in assets together with double QE (Europe and USA) are bullish, but overbought and overbullish indicators are to be respected. A consolidation over the next 2 weeks, the period into the next full moon, to relieve those indicators whilst maintaining the technical breakouts, would make sense.

My account is currently 30% up for the year, now on track for my 40% target. Clearly I am delighted with that and don’t want to jeopardise the gains, particularly as the bulk of the positions are open. But I don’t find reasons to pare back positions currently. The biggest risk remains global leading indicators. Yesterday CB produced the latest data for Korea which came in at zero, a 3 month high (which Japan and UK also managed). Today Spain came in at -0.6 (following -0.3 last month and -0.6 the month before). So Spain still weak, but some potential positive trends elsewhere. We need more data, over more time, to assess. But with regard to my forecasts of an overthrow in stocks to end their cyclical bear (accompanied by increasing inflation and treasury yields), and then a parabolic finale in commodities and inflation, I see an increasingly supportive picture. Euro debt settling down, economic surprises repaired, 6 months of rate cuts across the world by central banks, US and ECB QE, technical breakouts in stocks and precious metals, inverse H&S on treasury yields and probability of fulfillment, US dollar breakdown, and recent new highs in grains to deliver food price inflation as of Q4 2012. Weakness in leading indicators does not offset all this.

Technicals Into The FOMC

Posted on Posted in Bonds, Commodities, Currencies, Indicators, Macro, Stocks7 Comments

This has been the story of my 2012. Took profits on stock indices longs from 2011 in the first couple of months of 2012, whilst retaining my secular commodities longs. Endured some pain as commodities fell into May. Bought stocks and commodities aggressively around 9-18 May as oversold and overbearish indicators aligned. Both then bottomed out and have since rallied. I took maybe 10% off in profits and have retained the rest.

I use the CCI commodities index above as it is equally weighted.

So, as things stand, all is well and I’ve got some very profitable positions (thanks to a little leverage), but with continued significant exposure. Do I want to cut some exposure, to mitigate a reversal in either class, or do I want to hold firm and play for continued upside in pro-risk for the remainder of the year? Here’s how things stand technically.

The Dow has broken above quadruple resistance and joined the SP500 and Nasdaq at new highs.

The Dow Transports appear to have completed a text book fake-out move, now breaking out the other way.

Source: TSP Talk

The Russell 2000 is at resistance.

The Hang Seng is also at resistance.

The Dax is challenging cyclical bull market highs.

10 year treasury bond yields continue to make an inverse H&S formation, which is bullish for pro-risk.

Source: Stockcharts

Junk Bonds have just broken above resistance.

Source: Bespoke

Silver is at resistance.

Source: Chris Kimble

The US dollar has reached levels of overbearishness.

Source: Sentimentrader

Equities sentiment is overly bullish by NAAIM (shown below), but not so by AAII (36% bulls, versus historic extreme zone 45+) or by Investors Intelligence (shown below).

Source: Sentimentrader

Source: Schaeffersresearch

In summary, it’s finely poised into today’s FOMC action (or non-action). The bullish breakouts in the Nas, SP500, Dow and Junk bonds are reversible at this point, as they are  only just at new highs. The bullish reversal in the Trans is positive. I suggest the edge is for a breakout in the Hang Seng triangle, rather than a breakdown, due to the Shanghai index having made a Demark seller exhaustion count, but continued ranging in the triangle’s nose is possible. Silver sentiment, silver resistance and dollar sentiment are suggestive of a forthcoming counter-trend move, i.e. a pullback in silver whilst the dollar pulls up.

Turning to leading indicators, CB produced the latest data for Japan and the UK this week. Japan came in at -0.8, still negative but a 3 month high. UK came in at +0.1, also a 3 month high. So a little encouraging, but I need to see more global LIs trending positively. The OECD’s latest global indicators come out today.

PIIGS CDSs and bond yields continue to ease. The German legal approval of ECB bond buying an important step.

So, to today’s FOMC. High expectation of QE, though unlikely fully priced in if delivered. If we get QE, I expect the US indices to pull away, and the indices at resistance to breakout. Furthermore, I believe it would seal the deal for my secular/solar projections into 2013 of inflation, dollar decline and commodity acceleration to a peak.

On the other hand, the Fed may choose to stop short of a new QE programme, acting to extend low rates, making an open-ended commitment to regular purchases of securities (Robin Harding), or choosing something unorthodox to tackle its main problem, jobs. Something stimulative but short of full QE could lead to a short term sell off which is then reversed on digestion.

Lastly, the Fed may choose to bide its time, carefully choosing words rather than concrete action. US leading indicators are on the rise and recent commodity price rises are likely to increase inflation down the line. If no action if forthcoming, I would expect a significant sell-off, and that sell-off would likely reverse US indices and junk bonds back  beneath their breakouts, making for bearish fakeouts.

Of the three scenarios, I rate the last (no action) as the slimmest likelihood. The Fed’s last two communications have been more heavily-hinted towards action. Plus I view things a little unorthodox: I expect the secular/solar projections to come good – I expect market participants, economists and central banks to unwittingly fulfill them (in this instance that rising sunspots make humans more speculative and pro-risk – QE is both).

There is room in equities sentiment for a push higher, and to reach Demark’s 1478 level on the Sp500. We are also in a bullish window heading into this weekend’s new moon, with negligible current geomagnetism.

I believe probability is on my side, and so am going to retain all my pro-risk positions into the FOMC (subject to OECD leading indicators not having deteriorated significantly – due noon UK time). This is the bears’ last stand. Not the bulls. A retreat in stocks and commodities would put us back into the  trading range. Whereas, a jump today in equities and precious metals and junk bonds would seal the breakouts and put pro-risk into clear air.