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, March 30, 2012

Mar 30

Two weeks of nowhere.

Monday, March 26, 2012

Mar 26

So much for that theory.

Friday, March 23, 2012

Mar 23

We have a potential correction in progress. This was the first real red week since the breakout. If this is the start of a decent correction, here are two views of how they could play out.

1) The sideways correction.

Relieve the overbought conditions and just correct sideways in time with no severe price retracement, similar to the 2010 mid-rally correction.

2) A deeper price retrace.

I still think this cup-and-handle setup is a good potential also. Nice support at ~1300.

But like I have been saying the last several months and in the last several posts in particular, I still think the October low marked an important low and at that there are a number of reasons why I think looking for a major top here is incorrect. I believe this correction will be a dip that you want to buy in the longer term sense, that this cyclical bull market is still not over.

Tuesday, March 20, 2012

Corporate Profit Margins, the Stock Market and Recessions

There are two must read posts up at PRAGMATIC CAPITALISM, BERNSTEIN: BEWARE THE PROFIT RECESSION and JAMES MONTIER: THE RISK TO CORPORATE PROFITS…. The points discussed in these posts are points that I have discussed over the past year as well (edit 3/22: See this post also, Warren Mosler: Corporate Profit Margins Highest Ever). See:

-- Yet another reason why I don't think this cyclical bull is over - Aug 28, 2011
-- Long Term Technicals and Macro - Jan 28, 2012

Please read the above posts as there are lots of good details and background discussion. But here are the summary points:
  • Corporate Profits increase during an economic expansion (as expected)

  • The stock market does not increase on current earnings, but rather expected earnings

  • However the analyst community is generally very bad at forecasting earnings at tops and bottoms, they tend to lag the earnings cycle. By this I mean that they are, as a community, too pessimistic at bottoms and too optimistic at tops

  • Corporate profit margins and corporate earnings tend to peak out *before* the stock market peak, as the analyst community is still forecasting earnings growth when the fundamentals have already begun deteriorating

  • This is a key divergence that has happened at many market tops and is a catalyst for a market correction (usually a major one)

  • Since the 1960s, the sequence has been for corporate profit margins to peak, which sets up deteriorating fundamentals, which sets up an stock market peak. This typically occurs with deteriorating fundamentals in the broader economy and happens in conjunction with a recession.

I have discussed the drivers for corporate profits in my first link above and I discuss the current macro environment and the fact that current levels of deficit spending are sufficient to support aggregate demand and in turn support corporate profits in my second link above.

And while I think we are near a cycle high in corporate profits and do believe we are currently peaking or near a peak, it is precisely because of the above observations that I don't think a 'major' stock market peak is forming here. These fundamental divergences typically take a long time (months/years) to play out. The stock market move will peter out and roll over as it becomes clear that the fundamentals have already deteriorated (which has not happened yet).

See this graph that I put together from FRED data to illustrate my point. The graph shows the trend illustrated above playing out since the 1960s. The exception being in the 1974 crash where the corporate profit margin peak was slightly after the stock market peak (a similar event can be seen in this chart):

Combined with many more observations (as detailed here) I think this cyclical bull market still has legs, and I continue to think that calls for a 'major top' formation here are misguided.

Friday, March 16, 2012

Mar 16

Very tough week last week. We had a very solid statistical setup with quite favorable odds: Mar 6 - Daily and 60-min Cycles, Looking for an Edge. Instead of a divergence bottom after a 60-min cycle top signal (which happens 91% of the time ... well now only 90% of the time with last weeks failure) we got a spike bottom on the first pullback and a *major* bull move that was so fast my system really had no time to respond to it.

Not complaining, it's just what happens. That's why every stat is not 100%, because there are exceptions to every setup. So currently I am waiting for something tradeable to emerge again.

The market made a 60-min bottom cycle signal last week, which means that the cycle from Dec is complete. It made an extremely right translated cycle. And I looked back through my system to see other times where it has made cycles like this, and the company it keeps is quite interesting: 2003, 2004, late 2006/early 2007, and 2010. Basically these are happening in the the middle of larger bull moves. Not at the end of them.

Another interesting thing that came out of this is that my main indicator on my Daily chart is still making new highs right along side price. Which means that I would like to reiterate the point I made in this post: Why I am not looking for 'the top' with the next pullback, whenever it happens. I don't think the next pullback which will cause my main Daily Indicator to peak will be 'the top'.

Whereas this last pullback was too shallow and way too fast to be the dip that I was looking to buy. I still do think both my 60-min and Daily Cycle systems are telling me that we will get a legitimate dip-buying opportunity and that this cyclical bull market is not yet done.

In the meantime, I am continuing to watch setups.

Friday, March 9, 2012

Mar 9

Man, what a bear trap. The worst I have seen in awhile.

I have been extremely busy the last couple days and will be for the next several days as well. The setup on my 60-min system has not been invalidated, but only just barely. Any higher high above today's high is a cover signal. I am letting you know now because I may not be able to send out a signal in real time during the next few days (assuming that happens).

Tuesday, March 6, 2012

Mar 6 - Daily and 60-min Cycles, Looking for an Edge

Yesterday my 60-min Trend System issued a short signal (that is obviously still in effect). If you recall, I have explained that the trading signals that I post are sub-cycle top and bottom signals. However, I also occasionally relay what is happening with my cycle signals. I don't trade them, but there is a wealth of statistical information that I get out of running studies, several of which have paid off tremendously over the last 6 months.

Today will be another similar study.

Because just now I got a cycle top signal on my 60-min system. Now, does that mean that I think we will have a 'major top' here? Nope. I think for a number of reasons that is not the case, not the least of which the statistics from my trend system say to not expect such an outcome.

Recall two weeks ago this post, Why I am not looking for 'the top' with the next pullback, whenever it happens. Here is the summary position from the post (but you should really read it):

The Daily Trend System long signal is still on a buy. Two weeks ago the 60-min System was also still on the upcycle half of its cycle. However, it was statistically running long and the odds favored a 60-min cycle top on the horizon (which we got today). However, because the main indicator on my Daily System was still increasing right alongside price since October, what were the odds that this peak will be a 'major top'? And my study results showed that there was a 90% chance (18 out of 20 Daily Cycles) that this price peak would not be the top of this Daily Cycle (i.e. 90% of the time the price goes higher after my main Daily Indicator peaks, which it has not yet done).

So the point of this post is two-fold:
1) Reiterate that point. Statistically speaking, there is little evidence that the price peak that we just saw is a 'major top', and instead the next pullback will be a dip you want to buy
2) Show some relevant stats regarding the 60-minute cycles to help navigate this pullback.

The 60-min cycle signal has occurred and we are in the middle of a pullback. The indicator that I have developed to track pullbacks on the 60-min system has not bottomed yet. And in fact, 61 out of 67 60-min cycles (91%) did not bottom at the peak of my 60-min indicator. This means that statistically speaking there is a 91% chance of lower lows before the real dip-buying opportunity presents itself.

So, in summary:
-- 60-min System says there is a 91% chance of lower lows before the bottom is seen in the downcycle half of the current 60-min cycle (and the *average* downcycle half duration is ~20 days)
-- The Daily System says there is a 90% chance that the price peak that we saw was not a 'major' top and that we should expect higher highs before the current Daily cycle is over (i.e. that the bottom of current 60-min cycle is a dip that you want to buy from a Daily Trading Standpoint).

The reason I think this post is useful is that the Daily Cycles (which average 445 days in duration) represents a nice intermediate balance between the timeframes that position traders and investors look at.

Again these are statistics, not prognostications .... past performance is no indication of future results ... yadda, yadda, yadda. Read the binve standard disclaimer... yadda, yadda, yadda...

So in short, I think the next pullback (which we are now in the middle of) is not a 'short it and forget it' type event. I think it will be a dip that will be worth buying.

Monday, March 5, 2012

Mar 5

Several strikeouts in Jan and Feb for the 60-min system. I loosened the tolerance on the system as we were in a strong uptrend with lots of intraday overlap, to try to avoid the whipsaws.

So here it is at the plate again.

My 60-min Trend System issued a short signal today at 10:20. See here and here. (These updates are sent out as part of my Trend System Notifications).

Saturday, March 3, 2012

On Mea Culpas, Admitting to Being Wrong, Objectivity, and Changing Stances in the Face of New Evidence

Being a blogger is not a particularly easy job. You put out your analysis and your thoughts and it is subject to endless critiques and criticism. And often you get attacked on both ends of the spectrum, and sometimes in the very same post! I have been accused of being too bullish and too bearish in the same post. I have been accused of not being objective in interpreting macro conditions from very different viewpoints.

And you know what, it's par for the course.

As I have said many times before: I have nothing to sell. I am not trying to convince anybody of anything. I have an analytical mind and I lay out my analysis for anybody to consider. My only goal is to point out things that may not be obvious and to further reasonable discussion and observations regarding macroeconomics and the markets. Maybe you agree with me. Maybe you think I am full of crap. Maybe you don't care either way. I am fine with any of these reactions. As long as one of my posts caused you to think, or to perhaps look at something in a slightly different way, then it did its job.

So my only 'job' in this 'business' (if you can consider putting in a tremendous amount of time and effort into an endeavor without getting paid, nor any intention of getting paid, and rarely even acknowledgement a business) is to stay objective. To be honest in my assessments. To acknowledge when my old assessments were incorrect, to reassess and provide new thoughts. Even when (and maybe especially when) these new thoughts and conclusions are unpopular.

And even this point has been a point of contention on my blog. I have been accused of being biased and providing non-objective analysis many times, including recently. And usually I let it roll off.

But you know what, it is time to set the record straight.

I have acknowledged being wrong and acknowledged that a stance needed to be changed many times. But those that criticize me are too lazy to search through my work, so I will do the work for them.

Hopefully this will end this criticism and will definitively set the record straight (but I doubt it, and won't be holding my breath. But at least I can link back to this post).

On being objective and admitting to being wrong - Feb 2011


...The problem is that the market never gets there all at once. Even within secular cycles, there are oscillations (cyclical bull and bear markets). And anyone who gets too ideological on the secular trend will get blindsided when a cyclical countertrend emerges.

And I am 100% speaking of myself. I fully admit I have allowed my bearish bias from playing this cyclical bull market correctly. There was a significant amount of honest-to-goodness bullish macro and fundamental developments (the stuff that any bull market is built on top of) that I was discounting because I believed it was in the 'noise' compared to the bearish macro.

I was wrong. I am not afraid to admit that. As an analyst I have to understand my mistakes and why they happened. ...

On providing bad analysis, recognizing that it was bad, and giving kudos to where it is due - Jan 2011


...There were quite a few headwinds and crises that the market absorbed and digested, and ultimately shrugged off. Nearly all the markets have bettered their April 2010 highs. To the bulls that foresaw this, I have one word:


Seriously. There is absolutely no sarcasm intended.

There were many positive developments occurring (corporate balance sheets were getting cleaned up, corporate higher interest debt was being swapped for lower interest debt, earnings were increasing) and for those that thought that the positives in the market would outweigh the negatives, you made the right call. ...

On changing stances in the face of new evidence - May 2011


...I will never take any argument that someone makes completely on faith or at face value. By the same token I will not dismiss any analysis out of hand without considering its merits. This also means that as I incorporate new ideas into my own thinking process, I will let go of previous misconceptions if I believe that they are in error. And I do think some of my previous macroeconomic analysis has been in error. As always, I fully reserve the right to be wrong, and to change my stance upon the discovery of better (more accurate) information and ideas. ...

On acknowledging that my old analysis was ideological and biased and striving to stay objective now and in the future - Jan 2012

This one is a very big deal. I have been hugely biased and ideological in the past. In fact all the analysis on this site and in my Caps blog from 2009 to the end of 2010 could easily be thrown away because of its heavy ideological bias. The reason I don't throw it away is to serve as a reminder that I make mistakes (and sometimes *huge* ones) and fall victim to thinking in terms of a bias. It is to remind me to stay vigilant and objective.


...Here is where I am coming from with this, why I use the term ideological in a very specific sense and yes, in a slightly derogatory sense.

I used to have a hugely ideological bent to both my macro analysis and my TA. If you read this post, you will see it all over the place: http://caps.fool.com/Blogs/sti... . In retrospect it was pure garbage. Not because it was wrong (which it was) but because I *knew* the US economy was in the toilet, because I *knew* that earnings were 'fake', because I *knew* that another crash was coming, because I *knew* that the Fed was engaging in 'debt monetization', etc.

The reason why it was ideological garbage is because I had a set of preconceived notions about the macro situation, all of which were completely unfounded, and came up with a count to justify that stance.

I didn't admit to myself at the time that was what I was doing, but in retrospect it was so obvious. I am now better able to determine when I make unfounded arguments. And I can easily see when others fall into the same trap.

Macro is not a subject to be taken lightly. And understanding the mechanics of how the banking and financial system works is key to understanding the real causes and effects in a monetary economy. It allows to you understand the bond market. It allows you to understand different monetary systems (e.g. Dollar vs. Euro).

EW is also not a subject to be taken lightly. If you want to know what you are doing, one really needs to do a *lot* of EW analysis and looking at historical waveforms (not just idealized textbook waveforms).

And I see many who continue to do what I did in 2009, come up with some opinion of what is going on in the macro environment (without any real understanding as to the mechanics involved = ideological as opposed to rational: e.g. using convertible currency economic analysis on a fiat currency system) and come up with a count to justify it (i.e. the P3 count to justify a 'debt deflation' / 'US Government bond market implosion' position). It makes no sense and frankly it makes me angry.

I fully acknowledge that I might be wrong, that my projections are even remotely right. But I use historical, macro and statistical analysis to determine what is 'likely', and talk in terms of odds on preferred counts. I know I have biases, but I am being as honestly objective as I can be. If I don't understand an aspect of macro, I will admit it to myself and research it. I will also to the due diligence and look at historical precedents for waves, etc. I feel like my work now comes from a place of analysis, not from a place of ideology. ...

Thursday, March 1, 2012

Mar 1

Here is my current EW count for anybody that cares.

Before looking at it, let me be very clear: I am *NOT* calling the top of this wave. There is absolutely *zero* evidence that the trend is over. You can talk about divergences until you are blue in the face, but in bull markets, specifically at the beginning of strong bullish continuations (which is exactly what this is) divergences do not matter. This market will wind higher to the frustration of everybody who tries to call a pullback.

I am just looking at this particular spot, and doing some wondering aloud. That's all. ... Why this spot?

1) From here: We started a new 60-minute cycle on Dec 23, making the current cycle 64 days long. Out of 67 60-min cycles since 2001 the average duration for a cycle (which is both the upcycle half and the downcycle half) has been 56 days. And the upcycle half of the current cycle is already longer than then average duration, which makes this rally 'mature' from a cyclical perspective.

2) First Wave relationship: Move from Dec 20 to now is ~1.62 times the move from Nov 28 to Dec 7. This relationship is tucked inside a larger relationship.

3) Second Wave relationship: Move from Nov 28 to now is ~1.00 times the move from Oct 4 (the bottom) to Oct 27.

So what I am saying is that there are a lot of favorable relationships from a wave perspective for a turn in a rally that is statistically overdue for a correction. That is not a prognostication, just an observation.

With that, here are my counts (again, just what-if's):

But keep in mind what I said here:

I formulated my study in the following way: Assume that my main indicator (which has not yet topped) tops right now due to a pullback (which would be met with a downcycle on my 60-min system). What would be the odds that this price peak would also be 'the top' of the current Daily upcycle?

The stats are pretty compelling: Since 1982, 18 of 20 cycles (90%) made higher price highs after the initial peak and rollover of my main indicator.

Which means that the odds of the next price peak being 'the top' are pretty small, at least from my viewpoint.

Again these are statistics, not prognostications .... past performance is no indication of future results ... yadda, yadda, yadda.

So in short, I think the next pullback (whenever it happens) is not a 'short it and forget it' type event. I think it will be a dip that will be worth buying.

If that is the case, and if this pullback does happen to materialize here, then my first reaction would be that it could look something like this (nice support zone right around 1300-1280):