Category: Stocks

Sunspots and Geomagnetism

Posted on Posted in Commodities, Solar Cycles, Stocks18 Comments

The solar peak is forecast for February/March 2013, which means sunspot counts should peak around then. The chart below shows that sunspots picked up from their December 2008 minimum gradually, becoming significant in 2011. In the last few months though, they appear to have died away.

This does not mean the solar cycle has peaked early, but reflects the oscillations of sunspot levels around a trend. Below is an overlay of this solar cycle (24) into the end of 2011 on top of solar cycle 14, which was a ‘spikey’ cycle. Less powerful solar cycles, such as both of these, are typically more spikey.

Source: SolarHam

It follows then, that we should expect an up-cycle of sunspots now, lasting perhaps several months, and if we zone in on a smaller timescale, we see evidence that this is perhaps now beginning, with a sudden increase in the last few days.

We can see from the above chart that sunspots rallied last year between February and November, or perhaps in two distinct upswings of February-April and September-November.

I have just produced a 26 page PDF on my new IN DEPTH GUIDE page which explains the relations between solar cycles and the financial markets in detail, so here I’ll just summarise that rising sunspots correlate with (i) earthquakes (ii) protest, revolution and war (iii) pro-risk and inflation.

The 7 most major earthquakes of 2011 all occurred in the two windows of Feb-Mar and Sept-Nov, corresponding to the upswings in sunspots. The Arab Spring revolutions main events began with the Tunisian overthrow in January and ending in the Libyan war finishing in October, again corresponding to the overall period of rising sunspots. And lastly, both significant inflation and outperformance in gold lasted between January and September, again tying in with the sunspot rally.

So, if sunspot counts begin to accelerate now and rise to new heights over the next few months (which we should expect as we are getting nearer to the solar peak), we should be alert for (i) earthquakes (ii) protest, revolution and war (e.g. Iran) and (iii) pro-risk and inflation, namely commodities rising and in turn inflation. Clearly (ii) could impact (iii) as oil could rise on supply jeopardy and gold as security.

As yet, we still do not see outperformance in commodities versus stocks, but at some point soon this should begin to occur, as by solar cycles a secular peak in commodities should occur in 2013. The chart below shows how stocks outfperformed commodies into their secular of March 2000, breaking away from their usual combined risk-on relations, and we should expect something similar from commodities into 2013.

Now turning to geomagnetism, we see a pick up in both actual and forecast geomagnetism that reflects the historic seasonality of geomagnetism, that typically is at a maximum in March and April. This negatively affects sentiment, and therefore we see in the models for stocks and commodities some short term downward pressure.

If we look at the medum term view we can see a clear flattening out and tipping over of the model:

This means headwinds for pro-risk until geomagnetism begins to ebb again, which by historic seasonality would be May-time.

This appears contradictory – rising sunspots ahead supportive of pro-risk, but significant geomagnetism ahead anti-risk. To further complicate things, rising sunspots typically lead to higher episodes of geomagnetism (though a lag can be common). A simplistic analogy would be that some alchohol (solar activity) makes for human excitability, but too much can also make for a lagged hangover (geomagnetism).

Returning to the chart above that shows stocks accelerating away from 1998-2000 in their secular mania finale, stocks actually took off from the geomagnetism model in this period, as might be expected in ‘irrational exuberance’. We should see the same therefore in commodities this time round into 2013. What I suggest could happen therefore, is that from amongst protests, revolution, war and earthquakes, we get a sunspot-inspired supply/security push on commodities, and a sunspot-inspired pro-risk/inflationary flow into commodity demand, which takes commodities above and away from the geomagnetism model, whilst stocks remain on the geomagnetism model track of sideways peformance. In other words, if a commodities secular finale is ahead, completing in 2013 (as solar cycles history predicts), then the period ahead is a window in which commodities should start to outperform.

This Week

Posted on Posted in Commodities, Currencies, Macro, Stocks5 Comments

Will we finally see a downside break for equities this week? The Vix is still trying to make a rounded bottom, CS fear remains excessively high, Market Breadth has weakened, certain indicators remain overbullish and overbought. There is still no ‘screaming sell’ but note that US small caps have already broken:

I have highlighted on that Russell 2000 chart the confluence of horizontal support and the 61 fib, and the large rising wedge, which should act as support if downside in the other indices materialises. Large caps, currently outperforming, may correct less.

The full moon takes place this Thursday and the bottom by my models is around Friday. Due to some persistent geogmagnetism, my short term model has now tipped over a little. Here is it versus the CRB commodity index and around the lunar oscillations lower highs and lower lows can now be seen:

We see silver, the US dollar and stocks all at important junctions:

Source both: Chris Kimble 

So might we see the US dollar resuming an uptrend here, silver dropping to the bottom of its downward channel in a continued correction, and the stocks rally ending?

Well, by history, it is unlikely that the strong rally in equities of the last few months suddenly reverses here. We should expect a drawn out topping process as a minumum. In other words, if equities pull back here, we should expect them then to revisit the highs, or make new highs, whilst seeing internals weaken and greater divergences come to light.

There is an extreme in bullishness in energy, particularly oil. That suggests a pullback in crude is imminent. But there is likely to be demand-supply and geopolitical support from the underside. Pro-risk typically moves together. So as it is unlikely that equities enter a significant downtrend here, it is also unlikely for commodities. Neither precious metals nor agriculture display overbought or overbullish readings like energy.

On the macro front, ECRI leading indicators rose again in Friday’s reading, but China data today surprised to the downside. Euro debt and CDSs remain well contained, with the exception of Greece. Credit markets continue to improve. Some key analysts still expect the Fed to announce QE3 or some kind of new balance sheet expansion in the next 6 months. Goldmans expect it already in the first half of the year. I can’t see it on the current improvement in data, but given their expectations I will keep it on the radar. Next FOMC is 13 March.

To sum up, my personal expectation is that pro-risk markets retreat this week, into my model bottom around 9 March. I don’t see it as an opportunity to short or to pull out of commodity longs, as I expect we have not marked a major top, and that this will be digestion. Rather, we should at least be revisiting the highs, or more likely exceeding the highs, after a consolidation, and in doing so we will be able to judge better whether a topping process is unfolding. Treasury yields continue to display a potential rounded bottoming, which could signify much more pro-risk appetite ahead, fitting with a secular commodities bull conclusion, and would support only digestion of gains here.

Stocks, Surprises And Bonds

Posted on Posted in Bonds, Macro, Stocks5 Comments

Here’s Apple again, the leading stock in the leading stock index.

The inverted hammer candle of 15 Feb didn’t turn out to be the top, despite reaching RSI over 90. Here we are now further up the parabolic curve, a curve that is unsustainable. The question is when it is going to break, because as the leading stock in the leading stock index, it’s likely to be important. On the chart above I’ve marked the long term rising upper resistance line that stretches back years but was broken early Feb 2012. At the end of yesterday RSI was at 85. I’m on the look out again for an intraday reversal and inverted daily hammer candle.

The Vix is still trying to make a rounded bottom. We still see some overbought/overbullish readings in equities, and some negative divergences. We also still see a solid uptrend, and no screaming sell.

Turning to Citigroup US economic surprises, this index appears to have topped out at the start of 2012, but it tends to lead the market. I’ve highlighted the major recent trends in this index, and applied the same to the S&P500 chart.

Source: Bloomberg

Compare the strong move up in surprises from an extreme low to an extreme high in 2009 and 2011. Both advanced off the bottom a couple of months before stocks bottomed. Back in 2009, the surprises index then topped out at the high extreme around June-July 2009, and gradually fell away to neutral into Autumn/Fall 2010. Stocks tracked overall sideways in this period, as designated by the arrow, but it is notable that stocks made their high within this range about 9 months after economic surprises topped.

In short, assuming economic surprises have topped out and now fall away to neutral (as this is a mean reverting indicator) mirror action to 2009/10 would see stocks push higher into late 2012, before being dragged back.

Now bonds. The 10 year treasury yield is showing evidence of building a rounded bottom.

Source: Stockcharts

The treasury bond aggregate has potentially broken down beyond rising support.

Source: Chris Kimble

Treasury bonds are at a historic extreme high, and yields a historic extreme low. If we see a significant change of trend here, then it will fuel pro-risk.

Idle Speculation – Sp500

Posted on Posted in StocksTagged 12 Comments

Drawing together the historic seasonality of geomagnetism, the window of growth into mid year before headwinds in H2 as per leading indicators, the cyclical bull’s behaviour to date in fib and channel tagging, the expectation by solar cycles of stocks topping out ahead of the solar peak and noting the S&P500’s current battle with 2011’s top (but expecting it will eventually break upwards, as the Nasdaq has led the way already):

As per the title, don’t take it too seriously. But it does appear the S&P500 has a destination of the merging of the 100 fib and top channel line, and this is in line with Zealllc’s expectation of roughly where this cyclical bull will top out.

This Week

Posted on Posted in Macro, Stocks13 Comments

Since my model top of 22 Feb, stock indices have either begun a pullback or are digesting gains ahead of an imminent further leg up. My models predict a pullback into 9 March, so the former is my primary expectation. Supportive of a pullback here are a perfected DeMark sell set-up on the Dax, a potential Vix bottom in relation to US stocks and a historic extreme in the CS Fear Index (which suggests participants are insuring against perceived forthcoming downside):

Source both: Andrew Nyquist

Source: Bloomberg

If we do see a pullback this week and next, then recall Tom De Mark suggested it may be a correction that frustrates bears – lots of back and forth and overall shallow, before pushing on again.

Chris Ciovacco points to a 2004 rhyme and suggests the stock market needs to flatten out at the top following such a powerful up trend, before any significant correction:

And this fits with not having seen divergence in market breadth yet, which would normally signify an important topping process.

So if we picture something between shallow consolidation and shallow gains in the weeks ahead for stocks, then that sets the scene for commodities to outperform, and that’s what we’ve been seeing the last few sessions. Crude oil looks set to challenge its 2011 high of around $114. Gold and silver are at key levels, whereby a break above would likely attract significant money flows.

But if we consider the fortunes of pro-risk as a whole, a fly in the ointment remains ECRI, who reiterated their recession call (for sometime in 2012) on Friday, despite improvement across the board in leading indicators from Conference Board’s own to Money Supply to Financial Conditions Index to the stock market itself. I note they quoted flatlining GDP and retail sales in their defence (yet both these show recent improvement trends) and marginally improved WLI (which has actually risen from -10 to -3.5), so that makes me a little skeptical. Well, I don’t want to disregard them because of their track record, and Chris Puplava suggests it’s all compatible: that we have a growth window into mid-2012 before ECRI’s call comes good. He points to prices paid as a lead indicator for manufacturing, which shows that summer 2012 rollover:

Source: PFS Group

I would summarise like this: if the economy is to roll over by mid-year we will see various leading indicators roll over ahead of that, and not be reliant on the word of ECRI. Right now, we see leading indicators improving, and where I identified potential early casualties in the form of earnings and economic surprises (both at historic highs) we still don’t yet see a decisive tipping over. I maintain the expectation of a growthflationary finale into the secular peak, with the emphasis on inflation. So let’s see how things progress.

Stocks, Dollar

Posted on Posted in Currencies, Stocks14 Comments

Tom De Mark pins us around a top here, still suggesting roughly a 5% retreat from here in total, in an up-down manner that frustrates bears, before the market then advances again. He makes the following analogy with 1987:

Source: De Mark / Bloomberg

My model top is around today, fitting with De Mark’s call, and my next model low is around 9 March, which fits with that 1987 analogy.

With a little more geomagnetism forecast, my model is flattening out. Ideally, I would like to see a final higher push today/tomorrow into which strength I would exit further stock indices longs, with a view to looking to buy some back if we can reach around 5% lower or so, but still being much more overweight in commodities expecting outperformance in that class going forward.

Turning to the US dollar, Chris Puplava identified this analogy with the 1970s in the middle of last year.

Source: PFS Group

Note how the US dollar failed a backtest of the ABC s/r line in the 1970s and then declined significantly, providing the backdrop to the last secular commodities bull finale.

The current US dollar technical position is very similar (shown below), possibly having just backtested the s/r line and potentially now going on to decline, as a backdrop to this secular commodities bull finale. Dollar sentiment is fairly neutral currently, giving no clues, but the Euro-USD relationship has closely mirrored pro-risk in recent years. As my other references support a bullish commodities conclusion over the next 12 months, I predict the US dollar will indeed fall away and the Euro advance again, as pro-risk led by commodities is the dominant theme. The Greek debt deal yesterday should assist in supporting Euro-USD.

Source: Stockcharts / James Craig 

This Week

Posted on Posted in Commodities, Macro, Stocks19 Comments

Last week we saw leading indicators ticking up for Korea, USA (both ECRI and CB) and Spain. Evidence is accumulating for a new business cycle upswing. Looking back at previous such cycles, 6-9 months is fairly typical for such a cycle to play out, and this next chart suggests a 9 month upswing may be ahead this time.

Source: Chris Puplava

Drawing in my previous analysis on how events have unfolded into solar/secular commodities peaks, we have a potential sequence of events here. Growth and pro-risk advance as a whole before excessive inflation and commodity mania.  Stocks do well into late 2012 before turning down as commodities diverge towards the end. Commodities rise into the secular peak of Feb-Mar 2013 before excessive oil prices help bring on a recession, with stocks turning down several months ahead of the recession as a leading indicator.

Underlying source: Dshort

What are the threats to this scenario? Well, the business cycle upswing is still tentative at this point. Leading indicators for some countries are still negative. China had to lower its reserve ratio this weekend to stimulate lending. Sovereign debt could flare again, and Greece remains unresolved at the time of writing, with the March payment deadline approaching. However, I expect resolution on Greece ahead of the deadline, and I expect leading indicators for the laggard countries to turn up in the weeks ahead. At this point, emerging from an extreme in global anti-risk appetite reached at the end of 2011, and with a natural business cycle upswing supercharged by the range of central bank counter-responses over the last 6 months, I believe the weight of evidence supports a growthflationary finale from here into the solar peak, in line with history.

Shorter term, I still expect a pullback in equities, for the following reasons.

1. We continue to flirt with overbought and overbullish readings.

Source: IndexIndicators

Source: TheTechnicalTake

2. We approach Fib resistance

Source: Afraid To Trade

3. CS Fear Barometer has potentially topped ahead of the market:

Source: Bloomberg

and 4. We have a DeMark sell set up (the conditions in place for a period of retreat, if not the momentum).

We don’t have a full set of top indicators, but we have ‘enough’ for a pullback.

Now to add to this, POMO sales could add to the likelihood of a pullback from here into the end of Feb.

Source: McOscillator

Plus, we have a new moon tomorrow, my models suggest a top the day after, and a geomagnetic disturbance is in progress again, shown by the arrow, adding weight to a seasonal pick up in geomagnetism, which is a headwind.

For now, economic surprises remain in an uptrend for the major economies, but perhaps topping out for the US. As a mean reverter, it is a matter of time before we start to see more disappointments versus estimates than beats. Some are predicting a US jobs figures major disappointment on the first Friday of March. As we enter March, geomagnetic seasonality should pick up yet more.

So, tomorrow and Wednesday I will be looking at potentially taking profits on my remaing stock indices longs, and will report if/when I do. However, I do not see this as a major top that I wish to short, but rather of an overbought/overbullish pullback. I maintain the expectation of commodities beginning to outperform, and will not be taking profits in commodities but rather holding into the solar peak (unless the picture radically changes).

Apple Top

Posted on Posted in Stocks29 Comments

The leading stock in the leading stock index made a large inverted hammer candle following a recent parabolic rise that hit RSI 90, and this looks very much like a top (with US indices also making inverted hammers):

Furthermore, the unforecast geomagnetic storm that I referred to made for the following spike:

The pick up in geomagnetism that seasonality warns us of may be occuring. However, before we call a market top, I refer you to previous Nasdaq topping processes:

Messy affairs – reversals of reversals of reversals before declining in earnest. Some back and forth to make a top into the middle of next week (around 22 Feb) would fit very well with my models. In support of this, not everything sold off yesterday. The Hang Seng actually broke out, and has held the break out today.

In short, I think Apple has topped and the US indices have begun a topping process, but the wider market is less likely to dive from here and more likely to flirt with the highs in a topping process. I will keep my eyes on the geomagnetic disturbance, as it isn’t quite done yet, but also on other assets and indices to see if they start to line up behind Apple.

Next Target 22 Feb

Posted on Posted in Macro, Stocks20 Comments

Looking at the S&P500 on short term view with updated actual and forecast geomagnetism, this is what we see:

We saw a cycle inversion or very shallow pullback around 7/8 Feb, and now the next target is around 22 Feb for a potential medium term top, subject to seeing a set of overbought and overbullish indicators. Indicators have been able to cool a little in the last few sessions with some digestion of gains, suggesting we can push higher before reaching adequate extremes.

We can also see from the above chart that, based on forecasted geomagnetism, the trend is still up into mid-March. The threat to this is actual geomagnetism being greater than forecast, and at the time of writing an unforecasted geomagnetic storm is in progress. Below is a reminder of the historic seasonality of geomagnetism and its correlation with stock market seasonality, and it’s important to note that this is an average. In February 2012 so far we have not seen much of a pick up yet in geomagnetism, compared to seasonal history, but the threat is there that it begins to increase, putting pressure on the market, and as we move towards March, the threat becomes greater.

Therefore, I will be looking to see if pro-risk can push on into around 22 February whilst making a divergence with the model and hitting overbought/overbullish indicator readings, or whether we postpone an intermediate top until mid-March, if actual geomagnetism stays relatively low and we don’t hit screaming top signals in late Feb. If we do keep pushing on into mid-March, I note the first major Bradley turn of the year is 16th March, plus Greece’s debt payment deadline is 20 March, if that saga drags on unresolved. So let’s turn to macro fundamentals.

Credit markets continue to improve. The rise in Portugese CDSs in early 2012 has now been reversed, and PIIGS CDSs as a whole and Japanese CDSs remain contained. The US earnings beat rate has crept up to over 60% as the season has progressed, so fairly middling compared to previous seasons and not a particular reason to be bearish. ECRI US  leading indicators continue to accelerate upwards (whilst still negative) and the latest OECD leading indicators show a tick up for the OECD area as a whole:

Source: OECD

Other than the US, the countries contributing to the general uptick include Japan, Russia and India.

Economic Surprises for the major economies and for the US continue to oscillate around a historic topping area. Until we begin to see a downtrend, pro-risk sentiment should be sustained, but a downtrend is likely to be close, due to this being a mean reversion indicator (data starts to disappoint versus ratcheted up estimates).

Source: Bloomberg   

Here is a reminder of the market’s overall sideways action once Economic Surprises topped out and began to fall away gradually in 2009-10, following a similar surge up from an extreme low (that was a leading indicator for a market rally).

Recall that history suggests overall sideways action in the next 18 months for equities, with a slight upward bias, whilst commodities outperform (based on the last 3 secular commodities conclusions into their associated solar peaks).

Lastly, some analysts are pointing to the Vix as a reason to expect a market reversal, as it back at the level which has marked a low multiple times in the last 3 years. However, as the chart shows below, the Vix could move sideways whilst stocks push higher, for a period.

Source: Bloomberg

Not only that, but if we look further back to 2005-2007, the final part of the last cyclical stocks bull, the Vix oscillated in a lower range (10-15 rather than 15-20) than in the last couple of years, which at least gives the possibility that the Vix could drop beneath the apparent horizontal base shown above.