Is it a lemming market?

Markets have added to gains, and it is now clear that we enjoyed a very strong eclipse green period.
We will be entering a new lunar red period this week, so this could be an important juncture.

Here is the current chart of the Nasdaq composite index (click for larger image):

The breakout to the upside is now clearly visible and the Nasdaq is even overshooting its recent trend channel to the upside. As if that trend was not going up fast enough.
There are bull markets and bear markets, and then there are lemming markets. Bulls and bears take a good rest once in a while, or waver a bit.. But lemmings are different, they go on as if there is only one way to go, and they just continue until there is some nasty fall. That’s how this market is starting to look.

My Earl2 indicator has turned up and crossed the red line to the upside, indicating that the recent period of sideways pause is over. But, my shorter term Earl is turning down already, pointing to an imminent correction that can start any day. Given the lunar red period that is about to start, I think we will give back some of the recent gains before the end of this month.
Most likely target is 3300-3350. Then a new leg upwards could start from those levels, but we will need to monitor very carefully if this is a lemming market. The fall can come unannounced.

Busy those days, so only getting out my weekly updates. But stay tuned for more charts and materials later this month.

Danny

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Further upside

Markets continued to march higher last week, and we now have clear breakouts to the upside in place.
Such a strong performance is not unusual in eclipse green periods, as we explained a few weeks ago.
We have another week of green period to go, so further gains are in the cards, but I think we will give back a good portion of the recent gains in the 2nd half of May, when we will enter a new red period.

Let’s have a look at the S&P 500 index (click for larger image):

We got a nice breakout above the 1600 resistance level and now there is further room to rise to 1650 and possibly 1700 later this summer.
Some consolidation is likely later this month, but as long as the S&P doesn’t fall back below 1540 things look pretty good going forward. I would now set sights on a probable summer high (July or early August) around 1700, then a more serious market correction.

My Earl2 indicator turned upwards last week, and the orange line is about to cross above the red line, which would reconfirm a buy signal.

Good luck,
Danny

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D Time

Markets recovered surprisingly well last week, but despite this recovery the lunar red period ended with a slight loss on the Nasdaq.
We now enter a new green period, what’s in store?

Here is the Nasdaq chart (click for larger image):

This looks like a potential double top.
We cannot rule out a further rise to 3400, especially in an eclipse green period as discussed last week. But my Earl indicator is in peak territory already, which is a warning sign that another leg down can start any moment. The Earl2 is still not showing a buy signal either.
The LT wave has continued to do well, and it is also showing weak for May, especially for the second half of the month.
This means we have mixed signals, and even though a potential rise to 3400 is in the cards, the odds for a serious move into the other directions are not small either.
It is decision time for this market: either the resistance at 3300 gets broken convincingly, or we get a sizable drop to the 3000-3100 range.
Because the picture is so mixed I will just watch from the sidelines this week.

I just don’t see a good risk/reward ratio in either direction at this point.
This market starts reminding me of the 1993-1994 period. Most investors were not overly optimistic even though the market was setting all time highs. And everybody was waiting for a much needed correction. But the stocks just kept grinding higher with only some small pullbacks of 3-5%, and then in 1995 they started going up even faster. Those who were betting on a correction just lost money month after month.

Hopefully we will get more clarity by next week.

Stay tuned,
Danny

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Long term commodity price cycle

In a recent article posted by NASA, the possibility that we may be entering a Maunder minimum type period of global cooling was openly discussed. The current very weak solar cycle 24 is supporting that hypothesis.

This prompted me to take a closer look how long term solar activity has influenced commodity prices in the past.
The sun is known to be in an approximately 11 year sunspot cycle, which is half of the 22 year solar magnetic cycle.
This means we can filter out these 11 year and 22 year fluctuations by calculating a running 11 and 22 year average of the yearly sunspot number.
The yearly sunspot number since 1700 can be found at the SIDC site : http://sidc.oma.be/sunspot-data/
Calculating the running 11 year and 22 year averages we get this chart (click for larger image):

Both curves are quite similar. When trying to connect it to long term commodity prices I noticed that peaks and bottoms in commodities (CRB) have lagged the sunspot graph by 15 to 16 years. Or in other words: long term sunspot average has been a 15 year leading indicator for commodity prices.
This image lines up the most important peaks and bottoms with the historic CRB index (source: Bianco Research), using a 15 year lag (click for larger image):

The blue line (22 year running average) sets the long term pattern, with the green line (11 year running average) marking some secondary peaks and bottoms. The correlation is quite remarkable.
And while we don’t have yearly sunspot numbers prior to 1700, it is quite likely that the broader pattern matched sunspot averages in these earlier centuries as well.
We see rather flat commodity prices coinciding with the Sporer minimum until the early 16th century, then a period of rising solar activity and rising commodity prices during the Renaissance. The Maunder minimum brought a long term downtrend in prices, which lasted until solar activity started picking up again in the 18th century.

Listing the main peaks and bottoms in the 22Y sunspot average – “ssn” (blue line):
* Very low ssn: 1826 -> followed by a 100 year low in CRB 16 years later in 1842
* Next major high ssn: 1850 -> followed by an all time high in CRB 15 years later in 1865
* Next major low ssn: 1916 -> followed by a major low in CRB 15 years later with the 1931 great depression
* Next major high ssn was a double peak in 1960 and 1968 -> followed 15 years later by inflation peak of the mid 70s and early 80s
* Next low in ssn: 1981 -> marked the period of desinflation that ended around 1996, 15 years later
* Next major high ssn was again a double peak in 1991 and 2000 -> there was a CRB peak in 2008 and we could thus expect another one in 2015 or 2016 (15-16 year after 2000 peak).

Since 2000 the 22 year ssn is falling rapidly and will probably fall to levels last seen 200 years ago. The same happened in the early 19th century (Dalton minimum), and probably also during the Maunder minimum (17th century). This is a ~200 year cycle.
On these earlier occasions the CRB index dropped 70-80% within 10 to 20 years.
If history repeats then a similar period of deflation would start by 2015-2016 and probably not end before 2030. If the next solar cycle is also weak then deflation could extend to 2045. A 70% decline would take the CRB down to ~140 on the basis of its 2008 peak.

Is it possible?
These earlier periods of deflation during weak solar cycles came as the result of a combination of two main factors: stagnant or declining population (because of famines and war) + technological advances that led to more efficient and thus cheaper production.
That’s a scenario that could repeat itself in the coming decades.

Will the central banks’ easy monetary policies prevent this from happening again?
That’s not so sure. In fact their QE may well make the ensuing deflation worse, when the accumulated debts start imploding under their own weight.

PS: in his newly released book, Global Crisis: War, Climate Change and Catastrophe in the Seventeenth Century, historian Geoffrey Parker describes the events of the “Little Ice Age” in over 900 pages. How would our modern society deal with such a cold period: are we better prepared, or worse?

Danny

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How to play the correction

The market correction has come right on the mark with the eclipse Red period we discussed last week.
It also confirms that our LT Wave remains on track.
We have another week of Red period to go. Can we expect more downside already?

Here is the current chart for the S&P 500 (click for larger image):

The S&P has now dropped out of the trend channel that started last November. That’s a significant development, and means that the market will now need to establish a new support level.
The S&P is currently clinging to the 1550 level, where we have some support.
And I think this could provide us with some sideways movement for a week or two.
But May shows us up weak in all of my models, so I think we will eventually go lower by the end of May.
As marked in the chart, the 1480 level will become the next important support level, and that’s my current target.

Does this mean we have a classic “Sell in May and go away” year?
I don’t think so. I expect a “buy in May” opportunity, with the market climbing back to retest the 1600 level by summer.

For people who follow Apple (AAPL) shares, check out this chart if you missed it: http://t.co/C4iwZXsfr4

***

As chart of the week I have chosen the gold stock XAU index. (click for larger image):

This index has fallen to the 100 level, which is not only a round number, but also a major support level, as you can see in this chart. These parallel trend lines have all offered major support and resistance on numerous occasions.
It also indicates the current low in gold stocks matches the 2008 bottom.
This means there is a good chance that gold stocks will produce some nice pullback from here, even if gold itself remains stuck in the $1300-1440 zone.

Good luck,
Danny

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Long term Nasdaq chart

This is an update to the long term outlook we presented in February.

We pointed out that the 3200-3300 level on the Nasdaq was going to be a tough resistance zone. And indeed, the market has now spent several months trying to overcome that level, and failing so far, with the Nasdaq currently sitting at 3264.
So, for all the talk about an unstoppable bull market, the Nasdaq is only 50 points higher than it was in mid February.

Our forecast was made on the basis of this chart, now updated (click for larger image):

We can see that the large arc formation remains in play.
Notice how we have had four equidistant declines/bottoms within this arc formation, which may call for another bottom by the end of 2013.
Also notice how we got three equidistant peaks, which point to a possible fourth peak right now.
If this pattern holds up, then look for an initial decline towards 3000 support level. Then a rebound, followed by another leg down in autumn or winter of this year. The scenario is drawn in thick orange on the chart.

Only a clear breakout to the upside, which becomes evident when the Nasdaq climbs to 3350 or 3400, would move this scenario off the table.

So, I have sold most of my stocks by now, only keeping some core holdings. If I am wrong then I can buy back when Nasdaq reaches 3400, and will have given up a potential 5% of my profits. If this analysis pans out, then I will be able to buy back my stocks 10-20% cheaper somewhere down the road.
That’s what I call a good “no-risk/reward ratio”.
At major crossroads like this, markets trying to overcome resistance levels, I prefer to let other investors do the heavy lifting and I try to pick up the somewhat “easier” profits that come in between.

Stay tuned,
Danny

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Prospects for Gold

This is an update to the long term gold chart we posted in February.

The large drop of the recent weeks is giving us more clarity going forward.
Here is my first chart (click for larger image):

This is a monthly chart. Even with the recent drop, this market is still in a clear long term uptrend. So, it is way too early to declare that this bull market is over. But this is of course at least a very big correction.
I have drawn in an ellipse which has nicely contained the moves since gold broke above its 2008 highs.
This pattern should be resolved by September.
Notice how neither the Earl nor the Earl2 are showing any bottom yet.

Looking more into detail and projecting possible ways forward, we have this chart (click for larger image):

When you have this kind of fast move, then there are three typical scenarios:
1) the biggest rate of change comes at the very end of the move (that’s what we had in the 2008 correction)
2) the biggest rate of change comes in the very middle of the move
3) in a more rare variant, you get the highest rate of change at the 1/3 or 2/3 point of the entire move.

We can see that the support level near $1440 did not hold the market and we have now fallen to just above $1300, where stronger support is likely.
Going forward I look for gold to hover between $1300 and $1440 (support has become resistance) for a couple of months. And then it will probably move depending on one of the above scenarios.
In scenario 1 we would look for a breakout above $1440, which would resolve the ellipse pattern and be a signal to buy.
In scenario 2 we would get another drop towards $1080, probably in August or September, and then the start of a new move upwards. So, if we get this drop to $1080, then I would also buy and use a stop-loss just below $1000.
Notice that on a drop from $1800 (last year’s high) to $1080, we would expect the greatest rate of change in the middle, which happens to be exactly $1440.
Even on the daily chart, gold has dropped from $1560 to $1330 within two days, which also puts the biggest rate of change point at $1445. This points to an ultimate low just below $1100.
In the more rare scenario 3 we would look for a bottom around $1260 or all the way down to $720 (which puts $1440 at the 2/3 and 1/3 points respectively).

Good luck,
Danny

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Eclipses and the Stock Market

We are entering the first eclipse season of the year, so today I will share some research before we present our current interpretation of the market.

English: Total Solar eclipse 1999 in France. * Additional noise reduction performed by Diliff. Original image by Luc Viatour. Français : L’éclipse totale de soleil en 1999 faite en France. * Réduction du bruit réalisée par Diliff. Image d’origine Luc Viatour. (Photo credit: Wikipedia)

Upcoming lunar and solar eclipses are known in advance and sometimes announced in the news. And on astrology related sites you will usually find forecasts about the impending disasters that are going to hit us as a result of the next eclipse. Indeed, eclipses have had a bad reputation for centuries.
But it is also clear that we get a couple of eclipses every six months, usually in the form of a solar eclipse preceded or followed by a lunar eclipse. Obviously the world is not ending every six months.
So, how do eclipses influence the stock market? If they evoke fear in a lot of people, then we would expect some effect.

Well, I have looked into all eclipses going back to 1950, and how they have affected our lunar Red and Green periods in the stock market.
Solar eclipses always come within a lunar Green period, because solar eclipses always come on a new moon day. Lunar eclipses always happen on a full moon in the lunar Red periods coming before or after a Green period with a solar eclipse.

The result (based on over 130 eclipses in 60 years): solar eclipses have historically been very good for the stock market.
Investing in the eclipse Green periods has yielded and annualized 17% gain, vs 11% annualized for all Green periods. That’s significantly better than average.
Of course, that doesn’t mean the stock market never goes down in eclipse Green periods.
About one eclipse green period out of six has generated a decline of more than 2%. But once out of four it has produced a gain of over 2%, and in 10% of the cases it produced a better than 4% gain.

But that’s not the end of the story. I also looked in the Red periods that come before and after a solar eclipse. This are typically the periods that contain the lunar eclipses.
These Red periods have a negative expectation, especially the red period that comes before a solar eclipse. It doesn’t really matter whether the period gets a lunar eclipse or not, these periods have averaged an annualized loss of 8.5%.
Again, this doesn’t mean that every red period before a solar eclipse has been negative. In a about 15% of the cases these periods have shown gains of over 2%.
But in 33% of these periods there has been a loss of over 2%, and in 20% of the cases the loss was over 5%.
So, fairly often these red periods have produced significant downturns in the market.

The red periods that come after a solar eclipse are less outstanding and have just a break-even expectation, they tend to go either way.

Bottom line: historically the most profitable strategy going into eclipses has been: go short in the Red period before a solar eclipse, and then go long in the ensuing Green period that contains the solar eclipse.

***

There will be a solar eclipse on May 10th. This means we are now starting the Red period that precedes this eclipse, the most dangerous type of Red period in the cycle. Given that the market has climbed to record highs, the setup for a sudden downturn is fully in place.

Let’s have a look at the current Nasdaq chart (click for larger image):

The Nasdaq is trying to follow the S&P with a break out to the upside. But there are warning signs. The Earl2 remains negative for the moment, but could turn into a buy if the market continues to go up from here. In the shorter term Earl we see a bearish divergence shaping up.
So, given the history of eclipse red periods, I have now sold almost all my stocks and bought some put options.

One doesn’t need to be fully invested in the market at all times. These eclipse red periods are the best time to stay away from the market, and if a downturn materializes then you can jump back in to benefit from the positive Green period that often comes with the solar eclipse.

Good luck,
Danny

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LT Wave reviewed

In mid February I posted an experimental chart, which I called the LT Wave.
It showed expected ups and downs in the market until the end of March.
How has it panned out?

Well, not so bad as can be seen in this comparison with the S&P 500 (click for larger image):

As I pointed out, the blue and yellow smoothed lines are most important. Actually, the orange line is too distracting and I will omit it in future versions of the chart.
As we can see, extended periods of yellow line above 1 has correlated nicely with the upward swings in the S&P, and has continued to do so in February and March. The main pullbacks have come when the yellow line was below average, especially when the blue line was also weak.
This is quite promising, but a few months of correlation can also be a product of luck. It needs to work well over longer periods of time, before we can get any confident about it.

So how does the LT Wave continue going forward? Here it is for April and May (click for larger image):

Notice how April started with some weakness in the LT Wave (even though we were in lunar Green period), and we did get weakness in the stock markets indeed. One of the peaks for April is on the 10th (yesterday), and we got new highs in many markets.
So far so good.
Weakness is seen for next week, and around April 25th we get another strong period for the LT Wave (even though we will be in lunar Red period by then). May looks significantly weaker with an extended bottom period in the last weeks of the month.

So, one of the interesting things is that from time to time this LT Wave deviates from what we expect based on our lunar Red and Green periods. That will again be the case in the last week of April, so we will see what happens.

Good luck,
Danny

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Hanging on

The Nasdaq briefly touched a new high for the year last week, but then sold off and fell through important support levels. The S&P 500 and the Dow Jones Industrials are showing a bit stronger, and are still within their up trends that started last November. What to make of this?

Here is the current chart for the S&P (click for larger image):

Notice how the S&P is still within the uptrend and has held its support around 1540.
This means we cannot rule out another push towards its all-time high @1576, especially since we remain in a lunar Green period this week. But it will have to happen fairly quick, otherwise the S&P is likely to follow the Nasdaq down by also breaking below its support levels in the next lunar Red period. My Earl indicators also remain negative.

So, for this week I think the market will try to hang on at least for a few more days, keeping hopes alive for putting in a new all-time high, but will then weaken towards the end of the week.
A few weeks ago we put a stop-loss for the S&P at 1540.
Now my stop is moved to 1544, so on a break below that level I would get out and wait for upcoming signs of a bottom.
The first downside target would become 1490 and then 1425.

Later this week I will have some new material on commodity cycles.
So, stay tuned.

Danny

 

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