Crowded Markets

February 28, 2016/in Premium /by Bob Loukas

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Cycles Midweek Update – Feb 25th

February 25, 2016/in Premium /by Bob Loukas

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On a String

February 23, 2016/in Public /by Bob Loukas

On a String

An excerpt from this past weekend report within the Equities section. Consider membership here: Financial Tap

In equities this week, it makes sense to focus purely on technical analysis. During the past few months, I’ve outlined the likelihood that equities are well into a bear market decline that should last for 3-5 Investor Cycles (12-18 months). At this point, I don’t believe it makes sense to rehash it again.

Last week’s report was titled “All On the Same Side” to illustrate just how one-sided the markets had become. Not surprising then, equities bounced after forming a failed Daily Cycle and becoming very oversold. Since the January 20th Daily Cycle Low (DCL) had already confirmed a failed Investor Cycle, the failure of a following Cycle (on Feb 11th) was not a surprise. The Cycle failure was simply an extension of an already-apparent larger degree correction. However, as with every asset class, equities are subject to ebbs and flows on shorter time-frames, so a Daily Half Cycle Low rally was expected (past 8 sessions).

I noted previously that a 2^nd half rally might be sharp, but would fall just short of the high from day 8. It is too early to know if the half cycle rally is finished, but a final Daily Cycle should always form a lower high before it begins a final decent into a deep Cycle Low. Since the current DC has failed and is only on day 22, without a new high, we can only assume that the coming weeks will bring a sizable sell-off into DC and IC Lows.

We expected a sizable rally, but need to avoid allowing it to flip our thinking to the bullish side – the bear is still very much alive. More than anything, the current rally has allowed oversold technicals and bearish sentiment to reset themselves from extreme levels. In a downtrend, counter-trend moves like we’re seeing at present act as profit taking events before the decline continues.

In this case, the rally has allowed the market to reset to a position where a sell-off into a deeper, final ICL can begin. There is always the chance that a market will go against a well-defined Cycle picture by rallying prematurely without a clean final Daily Cycle low, but that’s the exception and not the rule. At present, it does not look good for the bulls, and the Cycle count does not support any type of bullish outcome. I expect that equities will decline into a mid-March ICL before being treated to a large, counter-trend rally.

One More Run

February 21, 2016/in Premium /by Bob Loukas

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All On The Same Side

February 15, 2016/in Premium /by Bob Loukas

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Midweek Cycles Updates – Feb 10th

February 11, 2016/in Premium /by Bob Loukas

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Bear Market Confidence

February 8, 2016/in Public /by Bob Loukas

It’s been 7 years since the start of the bull market, and signs of a market breakdown are now everywhere. A look at past bull market tops (1998-2000, 2005-2007) shows warning signs and divergences as much as two to three years before the top, all while the general equity indices are making new highs.

These signs are evident in today’s market. The commodity sector represents raw materials, and it has been in a deflationary spiral for a couple of years. Emerging markets, even those not heavily dependent on commodities, have been in a bear market for at least two years as well. In particular, China, the bellwether of the world economy and poster child for the current expansion, has been sounding a bearish alarm for well over a year.

Additional warning signs have appeared. High yield (junk bond) debt has been under enormous pressure recently. As investors begin to rein in speculative risk exposure, the high yield market is one of the first to turn down before of a market top. In addition, cyclical sectors like banking and transportation have already broken down. Moreover, the US treasury yield curve is flattening again, as demand for longer dated treasuries, the ultimate safe-haven asset, is once more rising.

The bottom line is that equities have stopped advancing, and have moved sideways for well over a year. Repeated attempts to breakout on the high side have failed, and the current top has turned into solid resistance. With valuations still at historical extremes and corporate sales growth flat, the ability for the market to sustain its current level is being seriously challenged. In short, I believe that the equity markets have topped and that a bear market is well underway.

That said, it’s crucial to remember that nobody knows in the short-term where the market is headed. That is both the beauty and the difficulty of trading – the markets are far too complex to predict with certainty over short time periods. And that’s especially true in the current environment, where whipsaws and volatility are so extreme that trading either side – Long or Short – is a challenge. Overall, a near term a rally would not surprise me, but I expect it to be short-lived. With Daily and Weekly Cycle failures in place, the market is showing unmistakable bear market characteristics. That being the case, my primary expectation is for a break below the January 20 low. I see this scenario as more likely than a large, counter-trend rally.

From an Investor Cycle standpoint, the bearish action should be clear. I’m now fully in the bear market camp, so I expect most of the significant moves to be to the downside. The last three attempts at a reversal higher have all failed, so the “buy the dip” ethic is clearly over.

Nevertheless, it would be foolhardy to rush in on the Short side and expect immediate downward pressure. That could happen, since we expect generally lower prices, but we need to be mindful that tops take time to form, and bear market declines are riddled with sharp rallies. My primary concern with trading Short is that equities have not had a particularly sharp rally yet. Sentiment is particularly low, so the door is open for a surprise rally. The trend is down, and I expect massive declines in the near future. But in the short-term, I’m open to all possibilities.

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No Lack of Optimism – Free Report

February 7, 2016/in Free /by Bob Loukas

Sample Premium Member Report published on Feb 6th, 2016.

Gold Cycle

Cycle Counts

Cycle	Count	Observation	Probable Outlook	Cycle Clarity	Trend
Daily	Day 25	Range 24-28 Days – 2nd Daily Cycle	Topping Area	Green	Flat
Investor	Week 10	Range 22-26 Weeks	Bullish	Green	Flat
4Yr	Month 41	Range 48-52 Months	Bearish	Green	Failed

Finally! After months of tepid action in Gold, a strong Daily Cycle rally is underway. So far, it’s been as strong as any rally of the past four years, and it’s not over. I had wondered why Gold has not benefited from the aggressive equity selloff…but no longer. Bonds are up sharply, and Gold has also begun to rise, fueled by equity outflows in search of a safe haven. Without question, Gold is locked in a powerful Right Translated Daily Cycle, one that has so far added over $100 in 24 trading days.

It’s easy to get carried away whenever we see a move like the current one. Based on comments in the Bull Bear Forum as well as a surge in bullish tweets, traders have become extremely bullish on the precious metals complex. Nothing lifts traders’ spirits like a good rally, and the Gold sector has certainly seen that. From my vantage point, however, the bullish shift in sentiment doesn’t – yet – represent more than the natural flow of emotions during a normal 4 to 6-month Investor Cycle.

Let’s focus first on the Daily Cycle. Although the move higher has been explosive, the DC is at day 24, so expecting further gains goes against the odds. Gold is well past due for a DC Top, and is extremely overbought technically. Based on history and market behavior, it’s difficult to see how the current rally can continue until overly-optimistic sentiment is cleansed through a DCL. In addition, we need to keep the current move in perspective. Since its peak in August 2011, Gold has shown a powerful Daily Cycle in every Investor Cycle. So Gold is not out of the bearish woods quite yet.

Turning to sentiment, history has shown that as sentiment increases, so does the willingness of traders to chase assets higher. A self-fulfilling loop of higher-prices-leading-to-stronger-sentiment-leading-to-higher-prices takes over. Price gets far ahead of itself, and the buying becomes ever more speculative, leveraged, and “weak handed”. Near the top of long term Cycles, inexperienced traders are generally holding significant leverage, hoping for further gains. The first hint of a reversal/top sends them scrambling for the exits, and a selling frenzy begins the process of unwinding overly bullish sentiment. The process isn’t over until bullish sentiment has cleared and a long term Cycle low arrives.

We’re far from that decline at present, but sentiment is rapidly rising. The below sentiment chart doesn’t include most of this week’s rally, but still shows sentiment near the level where every Investor Cycle of the past 4 years has topped. This is hard evidence that we can’t ignore. In past bear market ICs, Gold has topped near current sentiment levels. We can always hope for some sort of a change in character, but trading as if “this time is different” would be placing bias above historical data.

On the weekly chart, our analysis remains fairly straightforward. For the past two months, the current rally has been fairly predictable in terms of magnitude. A 10% rally during the first 10 weeks of an IC is average, and the current $100 move is slightly beneath that level. The Miners, too, show only average Investor Cycle performance so far. And this despite a giddy, sharply rising chart.

The point is that we need to be cautious in looking at the current DC, and in projecting a longer term bullish advance based on its performance. While it’s great to finally have a real rally in Gold, there’s no guarantee that the bear is dead. I’m not saying that it cannot be different this time…in fact, I hope that it is. But until the market and price action tell us Gold has turned the corner, we need to be cautious. The first real test will come at $1,191, the previous Investor Cycle high. If Gold can pierce that level, we can begin to consider whether a change in cyclical trend might be underway.

At this point, I’d like to throw evidence-based analysis aside, and discuss what I feel about precious metals.

I believe that a change in character could be underway across the precious metals complex. There is plenty of evidence to support the view that equities have entered a bear market and, if so, it stands to reason that Gold, which has been inversely correlated to equities for years, will benefit from a flow of funds from equities.

The bear market in Gold brought a 50% decline in 4 ½ years. The Miners have fared even worse, with averages falling by 80% and individual names by as much as 99%. By any account, the bear market has been long enough and the declines deep enough to satisfy even the most virulent bears. Since the Miners’ January low, some of the more viable and well-positioned companies are already up over 100%,. Others have tripled off their lows. These signs of a bottom are so pronounced that it’s easy to see how they could be precursors to a new bullish advance.

I’m an optimist by nature, but in trading I’ve learned to be more cynical due to my aversion to unnecessary risk. I trade from Cycle evidence and Gold has yet to show us a higher IC high, and that’s what we need to have real hope of a new bull. It’s easy to forget, but the most recent ICL made a new multi-year low, while the Miners matched their low from 13 years ago. So caution is still warranted. It’s caution that enabled me to weather the bear market without losing capital.

However, since hope springs eternal, I’ll show a last chart with the ratio of the HUI Index (Gold Miners) to Gold. The mining stocks were sold off to levels against Gold never before seen. The sell-off was so severe that the Miners were trading at 50% discounts to prices seen at trough of the 2000 bear market. We know that extremes can continue for long periods, but the reversal in Miners relative to Gold is now very clear. Remember, each past Gold market bottom has begun with the Miners outperforming Gold.

Investor Cycle Trading Strategy

I sold my Long position when it hit the topping point of a typical Investor Cycle. There are no trades here at present.

Daily Cycle Trader Strategy

No positions for now. I did try a quick topping trade in GDX, but was forced out on the power of Friday’s rally. I bought during an extremely overbought time in the Cycle, so I thought it was a good setup, but the action proved that markets can at times extend well beyond extreme levels. If we see a continuation higher on Monday, I will likely have the confidence to attempt another Short trade.

Portfolio Positions Summary

Open Positions – Investor Portfolio –

None.

Open Positions – Daily Cycle Trader Portfolio –

None.

Equities (S&P500)

Cycle Counts

Cycle	Count	Observation	Probable Outlook	Cycle Clarity	Trend
Daily	Day 13	Range 36-42 Days – 1st or 4th Daily Cycle.	Avoid	Green	Failed
Investor	Week 3 or 23	Range 20-24 Weeks	AMBER	AMBER	Failed
4Yr	Month 78	Range 50-56 Months- 8th Investor Cycle.	Bearish	Green	Up

It’s been 7 years since the start of the bull market, and signs of a market breakdown are now everywhere. A look at past bull market tops (1998-2000, 2005-2007) shows warning signs and divergences as much as two to three years before the top, all while the general equity indices are making new highs.

These signs are evident in today’s market. The commodity sector represents raw materials, and it has been in a deflationary spiral for a couple of years. Emerging markets, even those not heavily dependent on commodities, have been in a bear market for at least two years as well. In particular, China, the bellwether of the world economy and poster child for the current expansion, has been sounding a bearish alarm for well over a year.

Additional warning signs have appeared. High yield (junk bond) debt has been under enormous pressure recently. As investors begin to rein in speculative risk exposure, the high yield market is one of the first to turn down before of a market top. In addition, cyclical sectors like banking and transportation have already broken down. Moreover, the US treasury yield curve is flattening again, as demand for longer dated treasuries, the ultimate safe-haven asset, is once more rising.

The bottom line is that equities have stopped advancing, and have moved sideways for well over a year. Repeated attempts to breakout on the high side have failed, and the current top has turned into solid resistance. With valuations still at historical extremes and corporate sales growth flat, the ability for the market to sustain its current level is being seriously challenged. In short, I believe that the equity markets have topped and that a bear market is well underway.

That said, it’s crucial to remember that nobody knows in the short-term where the market is headed. That is both the beauty and the difficulty of trading – the markets are far too complex to predict with certainty over short time periods. And that’s especially true in the current environment, where whipsaws and volatility are so extreme that trading either side – Long or Short – is a challenge. Overall, a near term a rally would not surprise me, but I expect it to be short-lived. With Daily and Weekly Cycle failures in place, the market is showing unmistakable bear market characteristics. That being the case, my primary expectation is for a break below the January 20 low. I see this scenario as more likely than a large, counter-trend rally.

From an Investor Cycle standpoint, the bearish action should be clear. I’m now fully in the bear market camp, so I expect most of the significant moves to be to the downside. The last three attempts at a reversal higher have all failed, so the “buy the dip” ethic is clearly over.

Nevertheless, it would be foolhardy to rush in on the Short side and expect immediate downward pressure. That could happen, since we expect generally lower prices, but we need to be mindful that tops take time to form, and bear market declines are riddled with sharp rallies. My primary concern with trading Short is that equities have not had a particularly sharp rally yet. Sentiment is particularly low, so the door is open for a surprise rally. The trend is down, and I expect massive declines in the near future. But in the short-term, I’m open to all possibilities.