Friday, May 30, 2014

CHARTS OF THE DAY



It's clear the Fed is protecting this market while it continues tapering. I'm wondering if they aren't going to manufacture a runaway move that could last through most of the year and then crash near the end of the tapering (all runaway moves end in a crash). 

Sunday, May 18, 2014

Saturday, May 17, 2014

Friday, May 16, 2014

HAS THE BEAR RETURNED? MAYBE...

Following up on my last article it does look like stocks have begun to move down into the yearly cycle low that I was expecting.

The failed breakout was a big warning sign. After a month and a half consolidation there was no reason for the breakout to fail. By the second test of the 1900 level stocks should have built up enough energy to break through and hold at that point. 



Even more concerning is the ease with which the S&P sliced through that 1880 support yesterday. If the market just needed to build a little more energy then support would have held and another thrust higher would develop from that point. 



On a cyclical basis the S&P has now broken its daily cycle trend line, which is the first confirmation that the daily cycle has topped and begun moving down into its daily cycle low. Considering that trough isn't due until around the June employment report there is a lot of time for the market to drop yet (about 15-20 trading days).



Even more of a concern is that with so much time still left in the daily cycle, the odds are high that the intermediate trend line will also be broken in the near future. When that happens it will confirm that the next larger intermediate degree cycle is also in decline.



On an even larger cyclical basis the yearly cycle trend line is only about 50 points away. A break of that would confirm that the largest degree yearly cycle decline is also in progress. And a yearly cycle decline is the most extreme selling event of the year.



Now here is where things start to get interesting. The NASDAQ and Russell have both printed failed intermediate cycles. When intermediate cycles start making lower lows this late in a bull market it almost always indicates a bear market has begun.



If the S&P follows and moves below the Feb. low over the next 3-4 weeks that would be a big warning sign that this QE driven bull market is finally coming to an end. 



I was originally looking for stocks to generate one last bubble phase before the bear began but when the hostilities broke out in the Ukraine that scenario probably got taken off the table. Since it's unlikely that situation is going to be resolved anytime soon I expect a final bubble phase is now unlikely, and the bull has probably begun the topping process. I will have a better idea when we see how far down the market drops into this yearly cycle low over the next 3-4 weeks, but based on what is happening in the tech and small cap sector it's not looking too promising.

The last two times the Fed tried to end their QE programs the market tanked. Did they really think this time would be any different? The process has been slower as they didn't go cold turkey this time like the last two, but the end result will almost certainly be the same. The unpleasant realization that this bloated market simply can't stand on its own without constant infusions of liquidity. 

Turning off the liquidity this late in the cycle will probably kill the bull, and if Yellen panics and tries to restart QE it's likely to flow into the commodity markets instead of stocks, and that will kill the economy. 

Sunday, May 11, 2014

STOCKS ON THE BRINK OF A SHARP CORRECTION?

In today's post I'm going to make the case for stocks moving down into a sharp correction over the next 4 weeks. 

To begin we need to examine the last two intermediate cycles. Normally an intermediate cycle will run roughly 22 weeks. Well in our case the last two cycles were both stretched to 32 weeks by the Fed's QE3 programs. As you can see in the next chart both intermediate cycles had 4 smaller daily cycles embedded within them. This is pretty unusual as most intermediate cycles only have 2 or 3 daily cycles nested within. The market is now in desperate need of a short cycle to balance out these two long cycles. 


Next let's examine the larger yearly cycle. As you can see out of the last 4 years, the larger yearly cycle bottom has occurred in the summer 3 times. The odds are favorable that the 2014 yearly cycle low should also occur in the middle of summer.


If the current intermediate cycle bottoms with the ongoing 2nd daily cycle, then we would get our yearly cycle low in early June. Right when it is expected. 

On the other hand if somehow the Fed manages to stretch this intermediate cycle also, then the yearly cycle wouldn't arrive until the end of summer/early fall. 


Obviously I don't give this scenario very good odds as I don't believe we will see three stretched intermediate cycles in a row, especially now that the Fed is withdrawing the fuel to generate another stretched cycle. 

What appears to be happening is that stocks have entered a 4 month consolidation phase ever since the Fed started tapering. 


A consolidation of that size is likely to produce a rather large move once the consolidation resolves one way or the other. I'm in the camp, based on my cyclical analysis that believes it will resolve downwards over the next 4-5 weeks. Go to that first chart again to see my expectations for what I think is about to play out. 

Saturday, May 10, 2014

THE INFLATION HAS BEGUN.

Just like the topping process in 2007/08 the rotation of inflation out of the stock market and into the commodity markets has begun.

Notice that since the first taper in December that the stock market has stagnated and gone basically nowhere for the last 4 months. During that period inflation has begun to leak into the commodity markets. This is the same process that occurred as stocks topped in 2007/08.



We should see a mild deflationary period over the next 4-8 weeks and all assets should take a hit. But once that correction has run it's course stocks should continue the stagnation phase as the cyclical bull continues what I expect will be a multi-month topping process. As this progresses the inflation that has been stored in the stock market will leak faster and faster into the commodity markets during the second half of the year.




More in the weekend report.

Friday, May 9, 2014

WEEKEND REPORT

Lots of interesting developments this week. The weekend report on Saturday will be extensive. 

Sunday, May 4, 2014

COMMODITIES MOVING DOWN INTO THE MIDYEAR CORRECTION

So far my 2014 expectations are playing out pretty much as planned, with a few adjustments. With the threat of war in the Ukraine I think the final bubble phase in stocks is now off the table. I doubt we can get the euphoric buying pressure necessary to generate a parabola as long as tensions in Eastern Europe continue to escalate. No bubble phase in stocks = no capitulation phase in gold. The Ukraine event was a game changer.



Just to refresh, I predicted we would see an initial rally in the commodity markets during the first quarter, followed by a corrective move into early to mid-summer. Once that corrective move was finished I'm expecting a much more powerful rally in the commodity markets during the second half of 2014.


The initial rally arrived right on cue as the CRB broke through its three-year downtrend line during the first quarter.


I'm pretty confident commodities have now begun that corrective move that I was expecting in early summer. As oil is the main driver of the commodity complex, and it led the CRB out of the 2012 three year cycle low, it is now leading the CRB down into that summer correction.



While the intermediate tops have been erratic over the last three years with no clear pattern, the intermediate bottoms are clearly making higher lows signaling that the three year cycle is still advancing.



While we may get a countertrend bounce early next week I'm not looking for a final intermediate bottom until oil tests its three-year trend line sometime in the next 3-5 weeks.



Barring the manipulation in the metals market last year gold would have printed a similar consolidation pattern as oil. And now that the three-year bear market in the commodity sector is coming to an end the precious metals should also participate during the powerful rally that I foresee for the second half of the year.



Just a little more patience is called for as I don't think the summer correction in commodities or the precious metals is finished just yet, although I do expect the metals to bottom slightly ahead of the rest of the commodity markets. 

Considering the damage that has been done to the physical market by the manipulation last year I believe the biggest gains during the second half of the year will come in the metals and I think traders will get an opportunity in the late May or early June to enter long positions in preparation for the resumption of the secular bull market.

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Thursday, May 1, 2014