The equity markets are finally seeing action that has even the most hardened bulls running scared. In the past, I’ve been quick to dismiss selling periods – Cycle Lows – as natural regression-to-the-mean events. In a bull market, an oscillating Cycle pattern of two steps forward and one step back is what drives an asset higher. But this time is different…two steps back is completely out of character. So much so, that I now believe that the 3.5 years bull market is now in serious trouble.
If we were to look for reasons to explain the recent selling, there are plenty to be had. The most likely is not a specific piece of news or single data point, but that the collective herd of market participants is fickle and can be easily spooked. The current bull market has broken plenty of records, including the length of time – more than 3 years – since a 10% correction. This has resulted in double-digit market gains for consecutive years, and a near vertical rise over a sustained period of time. Against the backdrop of a soft world economy, this performance is nothing short of remarkable.
What are potentially playing out are the very beginnings of a market turn. We could soon experience an environment of reversing psychology, where all tidbits of news will be construed as negative for the markets. It takes a lot of confidence (and ignorance) to elevate and sustain a market at present levels, especially one built on blind faith and the idea that the FED can keep the market elevated into perpetuity. This has bred a level of speculation, and arrogance, often seen at the top of longer dated Cycles.
If we need a catalyst for a potential market sell-off, we need only look toward Europe. Although the EU is just one market in the inter-connected global economy, it still makes up almost 25% of world GDP. And it’s large enough that any issues will send shock waves through world markets.
The EU’s problems are structural in nature, with too much government red tape, inefficient and constrictive regulations, and a labor policy that is not consistent with a rapidly-changing world economy. In addition, EU leaders have made poor choices of late. In particular was the instance on excessive austerity at precisely the wrong time in the Business Cycle. Austerity is choking what little life remains in the European economy, and is consuming capital needed to support investment and growth initiatives. The time to pay down debts and reign in spending is during good times; doing so gives the flexibility to loosen the reins and deficit spend during bad times.
What’s developing in Europe is a negative economic feedback loop comprised of declining sales, lower production, declining income and lower employment. This is compounded by a general lack of leadership across the continent, and a flawed, unworkable economic union. The northern countries have been somewhat sheltered up to this point, primarily because the single currency has been very advantageous to them versus the consumption-focused economies in the South. In addition, France has faltered recently and has now made it clear that it cannot adhere to a capped budget while the economy shrinks.
Technically, the stock market is often months ahead of the general economy when it comes to predicting economic recession. Although the German market is near all-time highs, a failed cycle has developed. This is very likely associated with a market that has topped. On the below weekly chart, the first sign of a top was the Cycle failure in August. The market’s inability to rally to new highs in September was a failed opportunity to negate the August Cycle failure. But the nail in the coffin for German equities was Friday’s plunge, which took the index below the August lows and created another failed Cycle. Multiple failed cycles are exactly how markets top and turn over.
Here in the US, Equity Cycles are also showing similar technical damage. Technically, the great bull market is still intact, and a short-term rally is more than overdue. But to see this 1st Daily Cycle (normally the most bullish Cycle) retrace more than 100% into a failed state, is very odd behavior. A Cycle failure with increased volatility can only be seen as a significant change in character for the bull market, which is why I’m very concerned that the 3 year bull run is coming to an end. With other markets such as the DAX and Russell also showing Cycle failures, we need to strongly consider the possibility that a Left Translated Investor Cycle is in development.
I’m trying to balance bearish evidence (that is suddenly very evident) with what remains a bull market of historic proportions. In 2013 and 2014, the bull market needed to be respected, but was clearly on borrowed time. Because the bull market was not based on fundamentals, and with the market extremely extended, once the market tops, a correction is likely to occur within a very short period of time.
Because the S&P has retraced more than 100% of the Daily Cycle, within the first Daily Cycle, we now have a confirmed Cycle failure on the Weekly chart too. This is likely to be confirmation that the Investor Cycle has topped and 3 long months of declines are ahead for world markets. Of course, it’s never a straight move down, the market is significantly oversold here, so the expectation will be for a rally back toward the 50dma (the 1,975 area). Such a rally would occur as part of the 2nd Daily Cycle, but that rally should fail to make new highs since the market failed to hold the August lows at 1,904 next.
The primary reason for my bearishness is that Cycle failures in all of the major indices (NASDAQ, Russell, S&P and DAX) are leading indicators of a broader market top. And with that evidence in mind, the below monthly chart of the S&P is confirming that divergences are likely a prelude to a move lower into a Yearly Cycle Low. But to be clear, this isn’t a call on the health of the bull market that began in 2009. Even a market correction (-10%) in the coming months will not be enough (at this point) to alter my view of the bull.
On the below monthly chart, the S&P has fallen below a very well-defined 36 month rising wedge. Losing a channel of this size, along with the Cycle failures, are signs of real market trouble. The breakdown in the technical indicators is also indicating that this is the beginning of a multi-month decline. An Investor Cycle failure is always a prerequisite for a Yearly Cycle top, and a week 6 Investor Cycle top (see chart above) fits well with how Yearly Cycles normally come to an end. A week 6 top also allows for at least 12 more weeks before this Investor Cycle concludes, meaning we’re likely to experience a fast, step-down process lower into the next Weekly and Yearly Cycle Lows in early 2015.
The Financial Tap publishes two member reports per week, a weekly premium report and a midweek market update report. The reports cover the movements and trading opportunities of the Gold, S&P, Oil, $USD, and US Bond Cycles. Along with these reports, members enjoy access to two different portfolios and trade alerts. Both portfolios trade on varying timeframes (from days, weeks, to months), there is a portfolio to suit all member preferences.
You’re just 1 minute away from profitable trades! please visit https://thefinancialtap.com/landing/try#
Midweek Market Update – Oct 22nd
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Crude Oil is Hitting Bottom
/in Public /by Bob LoukasIn the past, we’ve discussed at length the structural problems facing Crude. So the pressure the energy markets are under, both from the demand and supply sides, should come as no surprise. This double whammy to the Crude market is not likely to be resolved overnight; demand-supply issues require time to work through a market.
Through hydraulic fracking and a massive influx of investment capital, the US has again become a major oil producer. But it’s the speed with which new supply from the US has come on line that has taken the market by surprise and rocked prices.
The 4 million plus barrels of extra oil that the US is suddenly producing is causing a problem for exporters like Saudi Arabia, who now need to find new markets for their oil. Most of the world’s oil is not sold in futures contracts for delivery one to three months out. Rather oil contracts are long term in nature, made over 1 to 3 year periods. And the competition for existing oil markets has been fierce, forcing suppliers to drastically cut their prices relative to spot.
As the price of oil begins to fall, oil producing nations, most of whom are ill-equipped to handle sub-$80 pricing, will likely try to offset the revenue lost through lower prices by raising their production. Saudi Arabia, the only nation capable of meaningfully cutting production, has stated that it will likely increase production to maintain its revenue levels. The other nations capable of possibly cutting production are Iraq, Iran and Venezuela, but all have economic issues that make any cut (without general consensus) very unlikely.
This should only perpetuate the glut of supply into 2015, setting the scene for much further declines in price as the markets are faced with continuing demand problems. If the European recession turns into a continent-wide event, its impacts on the world economy and, by extension, the demand for oil will put Crude prices under even more severe pressure.
Judging by the Daily chart reversal in the energy stocks in the past 4 days, there is a good chance that Crude has finally hit (an intermediate time-frame) bottom. As outlined earlier, I’m not bullish on Crude’s longer term prospects, but the current sell-off has been severe, and is likely over for now. Given the uncertainty in the Crude markets, we need to see a close above the 10dma and Crude to form a Swing Low ($84.93). Once that occurs, it’s likely that a counter-trend bounce will move price back to at least the $90 level.
This sell-off has been extreme and much deeper than a standard ICL. The depth of the energy sector sell-off is on par with the last, big general market correction in 2011. The entire sector is now extremely oversold and should experience a decent rally during the next few weeks. But as in 2011, we don’t know is whether the current move down is just the beginning of a deeper decline.
Crude’s weakness isn’t surprising – sentiment has collapsed to near record low levels, below even those from late 2008. Based on the overdue nature of Crude’s Investor Cycle Low, extremely low sentiment readings are suggesting that, at the very least, a new Investor Cycle (this Cycle averages 20-24 weeks) rally is about to begin. In the past, at similar sentiment levels, a sell-off comparable to what we’ve seen would have marked the low for the Yearly Cycle. So as with the equity markets, Crude is seeing lows deep enough to spawn a multi-month rally. But we also have evidence that suggests that a structural decline is now in progress.
It’s clear that an extended 46 week Cycle is (or has already) coming to an end. The final 3 weeks yielded $12 in declines, clearly Yearly Cycle capitulation selling. If it hasn’t happened already, a new Investor Cycle will soon launch, so we’re faced with two questions: just how far the current Investor Cycle will rally, and whether a longer term bear market has arrived.
The presence of a new series of lower tops and lower lows on the Investor Cycle chart is suggesting that 2015 is likely to be a very challenging period for the energy markets. Like all assets, energy moves through Cycles of varying time-frames. I believe that the record investment of the past 5 years has resulted in too much production, which will lead to a period of business consolidation and bankruptcy.
The Financial Tap publishes two member reports per week, a weekly premium report and a midweek market update report. The reports cover the movements and trading opportunities of the Gold, S&P, Oil, $USD, and US Bond Cycles. Along with these reports, members enjoy access to two different portfolios and trade alerts. Both portfolios trade on varying timeframes (from days, weeks, to months), there is a portfolio to suit all member preferences.
You’re just 1 minute away from profitable trades! please visit https://thefinancialtap.com/landing/try#
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Is it Safe to Come Out and Play?
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Midweek Market Update – Oct 15th
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Cycle Failures Point to a Market Correction
/in Public /by Bob LoukasThe equity markets are finally seeing action that has even the most hardened bulls running scared. In the past, I’ve been quick to dismiss selling periods – Cycle Lows – as natural regression-to-the-mean events. In a bull market, an oscillating Cycle pattern of two steps forward and one step back is what drives an asset higher. But this time is different…two steps back is completely out of character. So much so, that I now believe that the 3.5 years bull market is now in serious trouble.
If we were to look for reasons to explain the recent selling, there are plenty to be had. The most likely is not a specific piece of news or single data point, but that the collective herd of market participants is fickle and can be easily spooked. The current bull market has broken plenty of records, including the length of time – more than 3 years – since a 10% correction. This has resulted in double-digit market gains for consecutive years, and a near vertical rise over a sustained period of time. Against the backdrop of a soft world economy, this performance is nothing short of remarkable.
What are potentially playing out are the very beginnings of a market turn. We could soon experience an environment of reversing psychology, where all tidbits of news will be construed as negative for the markets. It takes a lot of confidence (and ignorance) to elevate and sustain a market at present levels, especially one built on blind faith and the idea that the FED can keep the market elevated into perpetuity. This has bred a level of speculation, and arrogance, often seen at the top of longer dated Cycles.
If we need a catalyst for a potential market sell-off, we need only look toward Europe. Although the EU is just one market in the inter-connected global economy, it still makes up almost 25% of world GDP. And it’s large enough that any issues will send shock waves through world markets.
The EU’s problems are structural in nature, with too much government red tape, inefficient and constrictive regulations, and a labor policy that is not consistent with a rapidly-changing world economy. In addition, EU leaders have made poor choices of late. In particular was the instance on excessive austerity at precisely the wrong time in the Business Cycle. Austerity is choking what little life remains in the European economy, and is consuming capital needed to support investment and growth initiatives. The time to pay down debts and reign in spending is during good times; doing so gives the flexibility to loosen the reins and deficit spend during bad times.
What’s developing in Europe is a negative economic feedback loop comprised of declining sales, lower production, declining income and lower employment. This is compounded by a general lack of leadership across the continent, and a flawed, unworkable economic union. The northern countries have been somewhat sheltered up to this point, primarily because the single currency has been very advantageous to them versus the consumption-focused economies in the South. In addition, France has faltered recently and has now made it clear that it cannot adhere to a capped budget while the economy shrinks.
Technically, the stock market is often months ahead of the general economy when it comes to predicting economic recession. Although the German market is near all-time highs, a failed cycle has developed. This is very likely associated with a market that has topped. On the below weekly chart, the first sign of a top was the Cycle failure in August. The market’s inability to rally to new highs in September was a failed opportunity to negate the August Cycle failure. But the nail in the coffin for German equities was Friday’s plunge, which took the index below the August lows and created another failed Cycle. Multiple failed cycles are exactly how markets top and turn over.
Here in the US, Equity Cycles are also showing similar technical damage. Technically, the great bull market is still intact, and a short-term rally is more than overdue. But to see this 1st Daily Cycle (normally the most bullish Cycle) retrace more than 100% into a failed state, is very odd behavior. A Cycle failure with increased volatility can only be seen as a significant change in character for the bull market, which is why I’m very concerned that the 3 year bull run is coming to an end. With other markets such as the DAX and Russell also showing Cycle failures, we need to strongly consider the possibility that a Left Translated Investor Cycle is in development.
I’m trying to balance bearish evidence (that is suddenly very evident) with what remains a bull market of historic proportions. In 2013 and 2014, the bull market needed to be respected, but was clearly on borrowed time. Because the bull market was not based on fundamentals, and with the market extremely extended, once the market tops, a correction is likely to occur within a very short period of time.
Because the S&P has retraced more than 100% of the Daily Cycle, within the first Daily Cycle, we now have a confirmed Cycle failure on the Weekly chart too. This is likely to be confirmation that the Investor Cycle has topped and 3 long months of declines are ahead for world markets. Of course, it’s never a straight move down, the market is significantly oversold here, so the expectation will be for a rally back toward the 50dma (the 1,975 area). Such a rally would occur as part of the 2nd Daily Cycle, but that rally should fail to make new highs since the market failed to hold the August lows at 1,904 next.
The primary reason for my bearishness is that Cycle failures in all of the major indices (NASDAQ, Russell, S&P and DAX) are leading indicators of a broader market top. And with that evidence in mind, the below monthly chart of the S&P is confirming that divergences are likely a prelude to a move lower into a Yearly Cycle Low. But to be clear, this isn’t a call on the health of the bull market that began in 2009. Even a market correction (-10%) in the coming months will not be enough (at this point) to alter my view of the bull.
On the below monthly chart, the S&P has fallen below a very well-defined 36 month rising wedge. Losing a channel of this size, along with the Cycle failures, are signs of real market trouble. The breakdown in the technical indicators is also indicating that this is the beginning of a multi-month decline. An Investor Cycle failure is always a prerequisite for a Yearly Cycle top, and a week 6 Investor Cycle top (see chart above) fits well with how Yearly Cycles normally come to an end. A week 6 top also allows for at least 12 more weeks before this Investor Cycle concludes, meaning we’re likely to experience a fast, step-down process lower into the next Weekly and Yearly Cycle Lows in early 2015.
The Financial Tap publishes two member reports per week, a weekly premium report and a midweek market update report. The reports cover the movements and trading opportunities of the Gold, S&P, Oil, $USD, and US Bond Cycles. Along with these reports, members enjoy access to two different portfolios and trade alerts. Both portfolios trade on varying timeframes (from days, weeks, to months), there is a portfolio to suit all member preferences.
You’re just 1 minute away from profitable trades! please visit https://thefinancialtap.com/landing/try#
At the Gates
/in Premium /by Bob LoukasYou don’t have access to view this content
Midweek Market Update – Oct 8th
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Dollar Holla
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Midweek Market Update – Oct 1st
/in Premium /by Bob LoukasYou don’t have access to view this content
Gold Will Surprise In More Ways Than One
/in Public /by Bob LoukasEverywhere you turn today, gold is again being dismissed as a relic of the past, totally worthless, non-producing, with no place in any modern day portfolio. During the past 3 years, the gold complex has experienced the progressive stages of fear, capitulation, and despair, all classic bottoming phases of a long term Cycle. The question now is whether this high level of apathy is a symptom of a new secular bear market or a period of “stealth smart money” accumulation.
As an analysts of market Cycles, I’m encouraged by extremes in sentiment, as it correlates well with major Cycle turns. An asset’s price is just a reflection of the collective markets willingness to own it, so it naturally oscillates in response to changing sentiment, over a predictable period of time. Each ebb & flow of a Cycle may not repeat the last, but they sure do rhyme and they are as natural as breathing.
This brings us to the current Weekly Cycle, now standing at week 17 and in the early portion of the timing band for a Cycle Low. We know from experience that the final days of a Weekly Cycle can be thrilling; at times gold could lose $100 in the final 3 sessions. And that cannot be ruled out here, nobody can predict gold’s price movements over short periods of time. What we have is an asset that is in the timing band for a Daily and Weekly Cycle Low, sentiment at extremes, a COT report that is bullish, and miners that are showing relative strength. This is the very environment that spawns new Cycle rallies, not the setup for sustained declines.
I have been bearish for a while, for good reason, and I’ve been joined by most analysts of late as gold has fallen further. We’re seeing this reflected within extremely low (the 2nd Lowest of the past 15 years) sentiment numbers. Almost all financial analysts now expect to see a massive breakdown within the gold complex. And the recent Cycle failure and 4+ year lows within Silver has many expecting gold is just a step or two behind.
On the surface, this theory makes a lot of sense, the trend is lower. Gold is behaving in such a way that one can realistically expect a waterfall decline to quickly develop. But before we can entertain that idea, we must consider that this viewpoint has become a far too “scripted” notion. Setups that are so widely circulated and discussed, especially with sentiment at such levels, rarely ever develop that way.
To seriously consider a bear market continuation (from the 2011 top) or waterfall decline, we need to be aware that such developments require room (technically) and time (Cycle count) to transpire. In both cases, this is not an ideal position from which a significant gold sector breakdown could occur. The current deep Cycle count of the Yearly Cycle, the sentiment and technical readings, and even the U.S dollar’s massively stretched and overbought position do not support a sustained gold collapse.
Instead, what we should consider and focus our energy on is the coming Yearly Cycle Low, rather than what is likely to occur in the coming week or two leading up to that low. This current 15 month basing pattern is obviously very important because it is the foundation from which the significant move will be based from. At this time, we don’t know if the that move will be a continuation pattern lower or the next leg higher. However in both cases, gold’s first surprise is that a significant Yearly Cycle rally is about to begin.
Notice how on the monthly chart above, the last 2 Yearly Cycles topped (red arrows) on month’s 4 and 2 respectively, that’s bear market behavior. Both were comfortably Left Translated, meaning that they topped early (Left of Center) and spent the most part of the Yearly Cycle in decline. But in each case, we still witnessed at least an 8 week rally to start each Cycle, in both cases adding at least $300 before topping. Yearly Cycle Lows occur only every 13 to 16 months and by definition coincide with the end of a (shorter) Weekly Cycle. What the evidence clearly shows is that we’ve come to another Weekly Cycle Low juncture, just as the Yearly Cycle is ready to turn here on Month 16.
The point here is that a (quick) loss of the $1,179, June 2013 lows within the next few weeks is a real possibility. But that reversal will mark the end and the beginning of a new Yearly Cycle. As shown earlier, even within a Bear Market, we see violent counter trend rallies; this coming Yearly Cycle rally should be no different. This rally will dominate the remainder of 2014 and take many people by surprise.
It won’t be until the 2nd or 3rd month of that rally that our next gold surprise will come. We will need to reconsider at that point whether this current 15 month Yearly Cycle basing pattern was just a continuation pattern (Bear Market) or a basing pattern (Bull Market) to support the next up-leg. It’s at the 2 to 4 month period where a bull or bear market will reveal itself again.
I could offer you an opinion as to where I believe gold is headed in 2015, but I see no point in making such brash predictions. My only concern is with where gold is headed in the intermediate future, that’s where the trade lies today. I will leave it to others who can do a much better job of entertaining you with lofty (biased) calls.
The Financial Tap publishes two member reports per week, a weekly premium report and a midweek market update report. The reports cover the movements and trading opportunities of the Gold, S&P, Oil, $USD, and US Bond Cycles. Along with these reports, members enjoy access to two different portfolios and trade alerts. Both portfolios trade on varying timeframes (from days, weeks, to months), there is a portfolio to suit all member preferences.
You’re just 1 minute away from profitable trades! please visit https://thefinancialtap.com/landing/try#