Midweek Market Update – Sep 30th

September 30, 2015/in Premium /by Bob Loukas

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Churning Time

September 28, 2015/in Premium /by Bob Loukas

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Midweek Market Update – Sep 23rd

September 23, 2015/in Premium /by Bob Loukas

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Steps from a Deep October Market Selloff

September 22, 2015/in Public /by Bob Loukas

For some reason there was a late flurry of expectations that the FED was going to raise rates this past week. Many in the media would like us to believe that we’ve finally transitioned out of an economic intensive care and that the economy is ready to stand on its own two feet. Evidence to support the idea is the employment picture, which when taken on the surface provides the illusions that we’re in a healthy and thriving economy.

But the reality is very far from what those broad numbers represents. Sure certain pockets of the economy are doing well, namely the top 10%-20% of income earners. But for the majority of people, real incomes have been in a constant decline throughout this expansion period, while the quality of available employment has been subpar. The government and their talking heads want you to believe all is well, but what we have here is a highly stimulated economy (via low interest rates, easy money, high debt spending, and artificial asset appreciation) that is only muddling through a business Cycle expansion.

But if we stop and consider that the FED has not raised rates in over a decade now, has pumped trillions of dollars into the economy, and that this is month 78 since the last recession, we’re being fooled into forgetting that the U.S (and the world) is currently experiencing an economic depression that is being tapered over with easy money. All of this economic stimulus should have seen inflation and the economy growing at over 5%, but both metrics are barely above the break-even point. And to make matters worse, we’re forgetting that the standard economic business Cycle is typically just 80-90 months in duration. In short, we’re now entering the timing band for the next economic recession.

So when we hear about the FED possibly raising rates I find this almost ludicrous to even consider. The Dollar is at multi-year highs for a reason, because capital is fleeing from risk, especially from the emerging markets, for the safety of the reserve currency. The FED cannot move because global growth is slowing and market volatility is rising. Core retail sales are coming in at below expectations, as demand for goods remains weak. Take a look at inflation expectations, they’re once more heading towards that deflationary line.

The media can focus on employment numbers all they like, but they’re a lagging indicator, unlike manufacturing surveys which provide a better snapshot of economic activity. If we look at the recent NY and Philly FED surveys, both show a new developing downtrend that I know the FED is concerned about.

Source: Bedspokeinvest.com

So what’s the point I’m sure you’re asking, because we have established in the past that economic performance does not correlate well with stock market performance, at least not in the short-term. And I would agree with that statement, with the caveat being that eventually fundamentals always matter, and that this might now be that time when it matters!

We had a massive and powerful bull market rally, but it has aged considerably and has left valuations at levels only eclipsed by that once in a century bull market of 1982-2,000. My point is that I sense that both the economy and the markets in general are approaching their climax. This is now a time to be both concerned and defensive.

On the Daily Cycle, the S&P index reached 2,021 soon after the FOMC announcement, which was into the 2,020 to 2,040 topping zone that I’ve been reporting as my target ever since the last Daily Cycle Low (DCL). (See post back in Aug Post: Sound the Alarm – Aug 24th). This has been the type of move I expected ever since the deep August lows, with the action in this Daily Cycle constituting only a counter-trend reaction before a larger degree continuation of the Investor Cycle took control again.

When the market reversed sharply on Thursday, I thought it might be mainly an overbought drop, before one more rally towards a Cycle Top near 2,044. But when Friday opened sharply lower and significant selling was seen, it dramatically increased the odds that the market had already topped.

I don’t pretend to know where this market is heading, especially not in this type of conflicting environment. I only have my preferred outlook to present you each and every week and I’m also not afraid to change that viewpoint as the market Cycles dictates. My trades depend upon my perceived probabilities of the current outlook, which are of course greatly influenced by my degree of comfort in my outlook.

In this particular case, I have maintained for a number of weeks that the markets were in the earlier stages of the Investor Cycle, meaning that the Aug 24th lows would eventually be exceeded. That would involve a pattern where the markets recovered back towards the prior breakdown point near 2,044, and then continue lower. Two days of sharp declines are not confirmation, but that was an ugly end to the week and the odds of that expected pattern playing out, i.e. a continuation lower, have greatly increased.

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, US Bond’s, and Natural Gas Cycles. Along with these reports, members enjoy access to two different portfolios and trade alerts. Both portfolios trade on varying time-frames (from days, weeks, to months), there is a portfolio to suit all member preferences.

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Step Two

September 20, 2015/in Premium /by Bob Loukas

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Midweek Market Update – Sep 16th

September 16, 2015/in Premium /by Bob Loukas

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A Time For Sitting

September 13, 2015/in Premium /by Bob Loukas

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Midweek Market Update – Sept 9th

September 9, 2015/in Premium /by Bob Loukas

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Volatility to Remain – Free Report

September 8, 2015/in Free /by Bob Loukas

Sample Premium Member Report published on Sep 6th, 2015.

Gold Cycle

Cycle Counts

Cycle	Count	Observation	Probable Outlook	Cycle Clarity	Trend
Daily	Day 34	Range 24-28 Days – 1st Daily Cycle	Neutral	Green	Failed
Investor	Week 7	Range 22-26 Weeks	Bullish	Green	Failed
4Yr	Month 40	Range 48-52 Months	Bearish	Green	Failed

At this point in Gold’s Investor Cycle, there are two primary factors in play and I’m closely tracking both. In the immediate term, I’m watching Gold’s Daily Cycle for signs of a turn higher and the beginning of a 2^nd DC. In addition, Gold’s long term trend lower should guide our expectations for the next few months. After the coming DCL, the performance of the 2^nd Daily Cycle will drive how Gold’s current Investor Cycle unfolds.

When the 2^nd DC begins to move higher, I will remain cautious out of respect for a possible continuation of the bear market. If the bear is ongoing, it is likely we will see a top to the second DC before week 10 of the IC.

On the other hand, if Gold’s trend has changed and the yellow metal is embarking on a major bull run, it may be difficult to capture the early part of such a move. Most investors will be weighed down by 4 years of IC declines and the ongoing downtrend.

But before we can observe Gold’s 2nd DC, we need for the 1st DC to end, and that could mean at least one more decline into a DCL. I mentioned my concern about this in Wednesday’s mid-week report. So seeing another drop in Gold would not be unexpected and, if it happens, should not be considered a bearish development. Overall, the current chart setup remains constructive, and Gold is now sporting a slightly lower low from which it can form a 1st DCL. I expect Gold to turn up from here without more downside, although another day or two lower is still possible. In any event, by the end of the coming week, I expect Gold to begin a rally that should at least test the $1,170 top of the last Daily Cycle.

There is still a decent amount of fear in the Gold trading community. Watching Silver languish while the Miners retest the last ICL has not in any way inspired the Gold bulls. And seeing the sector’s more speculative assets wobble has made me wary as well. Remember, with the bear market still in force, traders and investors must remain aware of downside risks. Until the trend reverses, early Cycle rallies should only be considered counter-trend moves which can reverse sharply at any time.

Although the current move out of the ICL is still technically just such a counter-trend move, I believe that it has plenty of upside remaining. The IC count tells us it’s still too early for a top, while sentiment has failed to get above even pessimistic levels. So there is plenty of time and fuel for Gold to continue higher. Typically, an Investor Cycle Top occurs only after sentiment has reached a flat-to-elevated level, which is still well above current readings.

Perhaps of greatest importance for Gold is the COT report. All new Investor Cycles begin with some degree of Short-covering, as speculators who were over-Short during the IC decline are caught by the turn higher and forced into panic covering. For Gold, this Short-covering has begun, but the process is nowhere near the level that indicates a new equilibrium has been reached. From the below COT chart, it’s clear that the NET position (black line) is not close to the peaks associated with prior IC tops. This suggests that Gold speculators are still too Short, and that they will likely be forced to cover once the 2^nd Daily Cycle gets going.

To many investors, I know it seems that the Gold sector is trading poorly. But when Gold is viewed in isolation, it’s clear that this is really not the case. In fact, the current move fits our expectations from 6 weeks ago at the start of the current Investor Cycle. Every Cycle forms in a series of ebbs and flows, and we must recognize where the asset stands in the process.

Gold should be close to completing its first DC, and the 2nd DC should see it rally for 2-4 weeks toward the bear market trend line. How Gold performs during its 2^nd Daily Cycle, and especially how it moves near the last DC high and the bear market trendline, will shape its current Investor Cycle. Unfortunately for bulls, given the dominant bear market trend and Gold’s tepid movement in the new IC, I expect the declining trend-line to cap the upside move.

Investor Cycle Trading Strategy

I’m waiting to add a position here, and will consider more of the current Gold ETF. Trading a Gold ETF will not add much to our bottom line, but because we’re at the advent of a 2^nd DC that we expect to roll over early in a continuation of the bear market, it doesn’t make sense for this portfolio to be exposed too Long.

Daily Cycle Trader Strategy

I’m still Long two GDX positions, and these have come close to a 100% retracement of the move up from the recent low. Price managed to hold up well on Friday, so my expectation remains that Gold will begin its 2^nd DC, and that GDX will have a splendid outing when it does.

Portfolio Positions Summary

Open Positions – Investor Portfolio –

Long UGL 10% position.

Open Positions – Daily Cycle Trader Portfolio –

2 Positions Long GDX

Equities (S&P500)

Cycle Counts

Cycle	Count	Observation	Probable Outlook	Cycle Clarity	Trend
Daily	Day 10	Range 36-42 Days – 2nd DC	Bearish	Green	Failed
Investor	Week 9	Range 20-24 Weeks	Bearish	Green	Failed
4Yr	Month 75	Range 50-56 Months- 8th Investor Cycle.	Bearish	Green	Up

The recent collapse of the S&P toward 1,880 was severe, and pushed every technical indicator well beyond the levels of a typical Investor Cycle Low. Based on the massive bull market trend behind equities, we should expect a huge V pattern reversal that drives a quick move to a new all-time high.

Although it’s still somewhat early for a final verdict, such a huge reversal has failed to materialize. Instead, we continue to see spiking volatility, huge intra-day swings, and an Investor Cycle that suggests that there are more declines ahead. The significant volatility makes all of our outlooks somewhat murky, so any short-term expectations must be held lightly at this point. Keep this in mind as you read the scenario I outline below. It’s only one possibility. But with that caveat, I believe that equities are currently far too short-term oversold. At this juncture, a rally that tests the break-down point would not be at all unusual.

We’re faced with an Investor Cycle and bull market dilemma. If the primary (up) trend is intact, equities have seen more than enough of a decline and should be ready to rocket higher. But the severity of the decline and the way it has differed from declines in previous Investor Cycles has me thinking that a more complex market correction is unfolding.

For example, volatility has surged, and significant intra-day market swings have become much more prevalent. With one quarter of all August trading days involving a move of more than 2%, the current correction is nothing like the declines into the 6 previous ICLs.

In addition, sentiment has collapsed too far too fast, leaving the ratio of bulls to bears at a four year low. The drop in sentiment tells me that the market is running scared, and that a bear market mentality has taken hold. From a contrarian standpoint, the collapse in sentiment is bullish, but with the market in a correction, I’m fearful that it’s just too early for a longer term reversal higher.

The change in market character can be seen in the VIX index. Panicked, extreme moves in the VIX are almost always a precursor to a large degree, multi-month decline. A massive move in the fear index is typically the result of a large, underlying shift in the market, and these shifts take significant time to fully unfold. In short, what equities are currently showing is not standard Investor Cycle Low volatility, so we should not expect a swift market rebound and a plunge in the VIX.

The point is, while the technical picture points to an Investor Cycle Low, the severity and character of the current decline resembles a larger and more complex correction. And the Investor Cycle count is in agreement; even before the decline began, the most likely count showed the current IC at only week 6. A correction similar to those in 2010 and 2011 takes time to unfold, and the current Cycle count supports a decline until mid-to-late October. Seasonality supports this picture as well. Although the early portion of September is often bullish for equities, the middle of September until the middle of October has, historically, been the worst performing period of the year.

Looking at the weekly chart (below), we see an initial sell-off that was both sudden and deep. In fact, the weekly candles still indicate trades outside of the lower Bollinger Band. The “hammer candle” from 2 weeks ago was a sign that the markets might have been forming a massive “V” reversal, but the bulls just couldn’t make it happen. If equities were in a typical ICL, we would have expected the bulls to take the market higher.

In summary, so far the declines have been of the ICL variety. But the fact that the market has entered into a correction with such high volatility and so early in the Investor Cycle points to a deeper market correction. But it won’t be a straight line lower, and with markets extended to the downside, we should have a period of stability (maybe 2 weeks higher) that should lead to a short-term top. Only then, after the bulls have begun to feel comfortable that the “buy the dip” narrative will hold true again, will the market be in a position to continue its decline.