The Rotation Worked
The following is part of Pivotal Events that was published for our subscribers February 13, 2014.
Signs Of The Times
"Strong US Earnings Fail to Impress Jittery Market"
- The Economic Times, February 4
That wasn't the only thing that was chilling out.
Weather stations in the contiguous US set some interesting numbers in January:
- 4406 stations clocked record lows.
- 1259 stations clocked record highs.
- 1973 stations set record snowfalls.
Records were set in the Southern Hemisphere as well.
"Antarctic sea ice extent is really on track to have the highest minimum in the modern satellite era. Extent is 27.4% above normal."
- WUWT, February 7
"European banks have loaned in excess of $3 trillion to emerging markets, more than four times U.S. lenders; putting them at greater risk."
- Reuters, February 4
"US job openings fall in December from a 5-year high."
- AP, February 11
It is interesting to watch numbers reach what could be a cyclical high. Of course for some economic series, it is difficult to determine as Chairman Greenspan observed about bubbles. We prefer the full description "financial bubble" when anything can and does happen. A classic example climaxed in 2007 and was followed by a severe contraction that prompted a frenzy of regulatory recrimination. This is the rush by legislators to close the barn door after the horse had bolted. The essential thrust of the formation of the SEC and the passing of Glass-Steagall was to prevent another financial bubble.
The SEC failed its mandate and Glass-Steagall was repealed in 1999 as Wall Street banks had already and illegally joined the party.
Once the financial collapse had completed - naturally - the establishment claimed that without the magnificence of the central bankers the panic would not have ended.
Ended, it did and it has been followed be a weak business recovery, which was highly probable, and an outstanding bull market for stocks and lower-grade bonds. Of these two, stocks get the most attention, but the latter is equally dangerous.
Not yet getting much attention, recent action in commodities has been remarkable. Is it a cyclical turn?
The action will be placed in perspective below.
One of the main elements of the stock market has been the "Springboard Buy" on the October low. The cyclical guide has been previous 249-week bull markets (1937 and 2007) out of a great crash. And then there was the seasonal tendency of powerful bulls to complete in January, namely the Dow in 1973, silver in 1980 and the Nikkei in 1989.
All it needed was time, which ran for some 254 weeks and was close enough. The other condition was exuberance, which reached sentiment and momentum measures seen only a cyclical peaks for the stock market.
As with any historical peak such as in 2007, 2000 and in 1929 the reversal in credit markets led the end of the bull.
Credit spreads peaked at the end of December and broke below the key moving average a week later. This was one of the alerts to change.
The 50-Day ma on the S&P was taken out on January 27th. The importance is that this held the corrections in October and in December.
The rebound, which is a big test of the high, amounts to a 78% retracement against a possible 68%.
On the next decline the 50-Week is the key moving average, which provided support at the first break at 1757.
As noted, this moving average is also critical for Europe's STOXX.
Market forces, which by reputation never accommodate the desires of the crowd, have accomplished another measurable cyclical peak. The crowd, which includes earnest central bankers, fully expects stocks to extend the bull market.
How is the crowd going to handle an extremely overbought condition?
Will it be eased by a modest decline and then sideways action, or will Mother Nature provide a cyclical bear?
The former sounds reasonable, but has never followed a speculative binge.
The CRB has accomplished a vigorous swing in the Daily RSI from 22 in November to 74.
Within this, base metals (GYX) rallied from 330 in early December to 362 in mid- January. Then it plunged to 331 and has rebounded to 341.
Base metal miners (SPTMN) rallied from 704 in December to 868 in mid-January and corrected to 787 a couple of weeks ago. The next rebound only made it to 849 yesterday and today's hit to 818 is an alert.
The rebound out of the gloom has been part of our November theme that the "High-Flyers" would rollover and the "Low Flyers" would lift off.
Crude oil bottomed at 91.77 at the end of November and popped to 100.75 in late December. The drop was to 91.24 was quick as has been the rally to yesterday's high of 101.3. In January we thought that crude could reach the 100 level in February, but this level would represent significant resistance.
Let's declare a "victory" on this one and look for a reversal.
Agriculturals (GKX) became very oversold, on the Weekly, early in January at 341. The bounce made it to 358 at the 50-Day ma. The test was to 342 and the rallied made it through the resistance line and is at 363.
This has been the worst sector and an intermediate rally has been likely. This could continue into March.
Oil Patch stocks (XOI) sold off with the general stock market. This was severe enough to take out the 200-Day ma at 1415 and the low was 1370.
The rebound has made it to 1435 today. Serious damage has been done and the December high was a cyclical peak for the stocks. On the longer-term, we have been expecting crude to soon resume its secular bear.
And then there is the huge short covering in some other commodities. In November we noted that coffee and gold were both being hammered together and on the "rotation" they could recover together. Coffee set its low, as we noted, at a "dollar per cup". The low was 1.01 and the first big high was set at 1.23 in early January. The correction found support at 1.13 on the 50-Day ma.
The buying panic drove the price to 1.44 on February 5th with the Daily RSI at 82. This is the highest such reading since the cyclical peak in 2011. The price slipped to 1.32 and the high is being tested.
A correction down to 1.25 seems possible.
Overall, the CRB could be ending a four-year bear market that started in 2011. We will let the chart tell the story and rising above the last high at 296 would extend the trend.
Through the high of 321 in 2012 would set a new bull market.
Considering that the first business cycle out of a classic crash is maturing, percent gains in the CRB may be limited.
The bottoming process on the "rotation" into rising commodities would likely help precious metals. It has and the rest of the story was that while base commodities would be there at the start, precious metals would go the distance.
The reason is that the gold sector has been setting a cyclical bottom as orthodox investments have been working on a cyclical peak.
The "opposing" nature of the two sectors has been readily apparent since September 2012.
In the meantime, precious metal stocks have become overbought enough for a few weeks of correction.
Link to February 14, 2014 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2014/02/stocks-and-precious-metals-rebound