I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Friday, November 30, 2012

Nov 30

60-min system is still on a buy signal, but that signal is weakening. Monday should be a telling day either way (is this consolidation before a new breakout above the 50 DMA, or has this sharp move up exhausted itself?).

Stepping back and thinking about the bigger picture: I have been of the opinion that we are now in an Intermediate degree correction, and I have been saying that this pullback will be like "the Apr-June 2010 pullback and not the May-Oct 2011 pullback" in terms of severity.

But I think there is a case to be made that it might be similar in form as well. Here are my current thoughts as to how this pullback might count like:

And here is a look at the Apr-June 2010 pullback. While the recent move down is not analogous to the 2010 'flash crash' in terms of severity, it is certainly similar in form (fast move that accelerated into a spike bottom without even a hint of divergence on a daily chart). The current move up is a sharp retracement to alleviate the deeply oversold condition from a local perspective, and I think it is similar to the move up in early May 2010:

Wednesday, November 28, 2012

Nov 28

The 60-min System buy signal that was issued Friday 11/16 is still intact. I am still of the opinion that the recent low is a pause before more selling off occurs. Current thoughts:

Sunday, November 18, 2012

VIX: Why I don't think this was 'the top' and also why I think the correction is not over

There are many reasons why I don't think we saw 'the top' with the recent peak. See these posts for why:

Thoughts on the Fiscal Cliff
Update on Long Term Projection (08/17/12)
Long Term Projection, Macro, and an Analysis Retrospective

Let me add another to the list, which I have talked about before (see: Yet another reason why I don't think we saw 'the' top (3)), the lack of a long term VIX divergence. The VIX keeps making new 'recovery lows' as the SPX keeps making new 'recovery highs'. This is completely counter to what we saw at the 2000 peak and the 2007 peak where there was a very pronounced VIX divergence that was several months long.

So count me firmly in the camp that we have not seen the end of this cyclical bull market.

That being said, the VIX has also not spiked up on the current pullback the way it has on all the other pullbacks so far in the current cyclical bull. It seems to me that option traders are getting 'clever' with the market. That they think this pullback is already 'overdone' and they won't panic and are ready, if not eager, to preemptively buy this dip.

As I have been saying this past 2 weeks, I think that is the incorrect position to take. I was of that opinion in October, but since November there is too much technical damage to buy the dip now. I think the evidence (including what is shown below) is clearly on the side of the bears for the near term. And I think option traders are on the whole trying too hard to be 'cute' with the market.

I think we will get a much better entry after some more panic early next year.

My take at any rate.

(Update 11/19 7:30) Wow, this projection is very similar to what I am thinking as well. Read all the way to the end: http://pragcap.com/goldmans-kostin-stocks-will-fall-8-further-before-year-end

Friday, November 16, 2012

Nov 16

I still think we are in the middle of this Intermediate Term correction and not near the end of it. Daily chart is still suggesting more downside if I am looking for the correct setup. The 60-minute system issued a buy this afternoon and we are very oversold for the short term. If the market is trying to stage a bounce here, it might try to retest the 200 DMA before continuing down:

Here is my current best estimate for how this wave is playing out, for anybody that cares:

Thursday, November 15, 2012

Thoughts on the Fiscal Cliff

Everybody should read this post by Warren Mosler: more on the cliff. I very much agree with all of the macro observations he is making regarding the cliff and what it means for the stock market going forward. I do not think this was 'the top', I think that after a correction we will have a very nice dip to buy.

So, why do I think we will correct more? Why don't I think we are bottoming now? A few reasons: Because of the *uncertainty* associated with the fiscal cliff. Many pundits are saying that there will be some sort of 'deal' / the 'Grand Bargain' struck either before the end of the year or perhaps at the beginning of the year. The latter is the more interesting and 'uncertain' option being waved out. Basically the Democrats want us to go over the cliff 'just a little' to scare Republicans into some sort of deal. This is completely idiotic on two accounts:

1) The political machine has broken down and is playing chicken with the economy to pass legislation. In this regard the markets are reacting commensurately to this action, no one has any idea what to expect for tax planning going into the end of year. What will tax rates be for 2013? How long does this game of chicken get played? What if there really is no deal struck and the full force of the cliff goes all the way through 2013? Combined with a very dismal earnings season that started bad and got progressively worse (and a massive deficit reduction / full force of the fiscal cliff in 2013 would be bad news for corporate profits) has investors nervous for any delay in some sort of deal

2) There is no 'crisis' to begin with regarding the deficit. The private sector is still retrenched and is still saving (spending less than their income) due to the excesses (spending more than their income) accumulated during the housing bubble. They are rightfully repairing balance sheets. Unemployment is still very high but has been slightly coming down, which means that the private domestic sector is starting to come out of it shell but just barely. It is still fragile. Couple this with the fact that we have a trade deficit. Now in the macroeconomy there are three sectors: Government, Private Domestic and Foreign. The Foreign Sector is running a surplus (which is our trade deficit) and the Private Domestic Sector is running a surplus (saving more than their income to pay down debts) then by definition the Government Sector is running a deficit. And since the US won't magically start running trade surpluses any time soon and combined with the fact that the private sector is nowhere near done with its deleveraging cycle, the government will need to continue to run deficits for the next several years. This goal of trying to cut the deficit in the name of 'fiscal responsibility' will deprive the private domestic sector of income while they still need it desperately. The US Government is not a 'super-household', it issues its own currency. It never faces a 'solvency' constraint. The concept of 'fiscal sustainability' is inapplicable to the US Government. And because we have high unemployment and spare capacity (see the summary at the beginning of this post) we can 'afford' to continue these deficits before we start hitting the real constraint, which is inflation. There is no nominal constraint. For a very good and succinct presentation regarding the budget deficit, see this video by Stephanie Kelton. It is well worth 19 minutes of your time. (Update 11/16: Also read this well-timed post by Warren regarding the deficit).

Back to the markets, I still think there will be some sort of deal put in place regarding the fiscal cliff. Even mainstream economists agree that the full force of the fiscal cliff will put GDP negative in 2013 and virtually guarantee a recession. And while the parties are willing to play chicken with this issue, no one will want to accept responsibility for causing a recession.

Therefore I agree with Warren that the deficits although potentially lower will still be high enough to support aggregate demand (and corporate profits) and with the private sector still slowly coming out of its shell will also support aggregate demand (or be less of a drag as was the case in 2008-2011). Combined with the 'certainty' of a deal we should see a resumption of the cyclical bull market sometime early next year.

My take at any rate.

Wednesday, November 14, 2012

Nov 14

This move is starting to waterfall down as the 200DMA has been lost. This is looking extremely likely now that we are in the middle of an Intermediate Degree correction. As I have said previously, I expect the next intermediate degree pullback to be similar to the Apr-July 2010 pullback and not the May-Oct 2011 pullback.

I have updated my PPO chart with an overlay of the Apr-July 2010 pullback depth applied to the recent peak. I have also layed out how I think this may manifest, but more importantly the signals that I will be looking for on both the fast and slow Daily PPO indicators:

Saturday, November 10, 2012

Nov 10

Here is another look at an indicator that is saying that the 'potential' for an Intermediate Degree pullback has been confirmed. I often look at PPO movements (see this post for why PPO is a superior indicator to MACD) movements on a couple of different timeframes. I like 14,30,10 as a 'fast' PPO indicator (I think the default 12,26,9 is too fast) for finding bottoms and I like 34,89,21 as a 'slow' PPO indicator for finding tops. Looking for confirmed divergences often givens you insight as to what is happening. And the wave up since the 2011 has now formed such a divergence on the slow PPO on the Daily chart.

Combined with the recent 60-min, Daily and now Weekly sell signals from my Trend System, I think the market is at risk for an Intermediate Degree correction. The more I study the charts this weekend, the more realistic I think that possibility is becoming.

Friday, November 9, 2012

Nov 9

Today the Weekly Trend System went from long to short. Now before anybody reads too much into this, let's say what this does and doesn't mean:

1) This means that the conditions have been meet for a top signal
2) Having a top signal in place does not guarantee there will be a top

From my backtests with the Weekly System, it:

a) issued a few sell signals without actual tops between mid-80s to late-90s
b) issued a sell signal in mid 99 and it issued a buy in late 99 for a loss (no actual top)
c) issued a sell in late 2000 and a buy in late 2001 for a gain (actual top)
d) issued a sell in mid 2002 and a buy in late 2002 for a gain (continued selloff)
e) issued a sell in mid 2006 and a buy in late 2006 for a loss (no actual top)
f) captured most of the 2007-2009 selloff (actual top)

Getting a sell signal is far from a 'lock' in forecasting a major top. If I tried to tune out all the noise the system would be so slow to respond that the bear market correction would be halfway done before a sell was issued because they move so fast. So the system is set up to filter some 'noise' but is not so insensitive that it can't be faked out during volatile uptrends.

I certainly am NOT inclined to call 'the top' of this cyclical bull market since 2009 based on this weekly sell signal.

In fact, if I had to make a call right now, I would say this is closer to the 1999 or 2006 corrections in terms of analogy. That is assuming of course that this pullback is forming into an actual correction (some wave of Intermediate degree), which is by no means guaranteed at this point.

But I am just reporting what the systems are saying, do with them what you will. And if you choose to do nothing and ignore it, or even do the opposite of what it is saying, that's fine by me too.

Thursday, November 8, 2012

Nov 8

Daily System went from long to short this morning. This is starting to look a decent correction is shaping up.

As I said in my last Long Term Update, I thought that the next major correction would be an Intermediate wave down. However I was expecting another wave up into the end of the year before that Intermediate correction would take place. ... Now, I am not so sure. This correction is really looking like it could have some legs to it.

So if my large count is right and the next large correction (that we are possibly in right now) is an Intermediate wave down, as I said in my last Long Term Update: ... will be an Intermediate pullback (think the Apr-June 2010 pullback and not the May-Oct 2011 pullback)

Wednesday, November 7, 2012

Nov 7

So much for sure footing. 60-min system back on a sell.

Thursday, November 1, 2012

Nov 1

60-min System moved from short to long yesterday morning.

For anybody who cares, here is my current thinking about what's happening: