Where Is The Bottom?

Yesterday, another selling wave hit Wall Street. The S&P 500 has now lost more than 10% in just 9 trading days. While in our semi-annually outlook published in December (www.cv-invest.ch) we were More »

US Dollar Countertrend Rally Ahead – Watch Yields And Copper

After losing 12% since beginning of this year, the Dollar Index has become heavily oversold and we expect a significant countertrend rally in the weeks ahead. On a daily timeframe we already More »

New Highs But Weak Breadth – Another Down-leg Before Rally Resumes?

Last week and early this week, some of the headline indices made new highs, which was very well received by financial media. Is the correction already over is it time to become More »

Relative Breakout In Goldminers – Don’t Chase Stocks Yet

As expected and explained in our outlook published in July, gold has finally broken above key resistance at USD 1’300. Not only has gold managed to move above the highs from April More »

This Is Not The Time To Chase The Market

Having entered a seasonally weak period for stocks, we do not recommend to chase stocks any further. Also the presidential and the decennial cycles do not suggest, that it is the time More »

 

Where Is The Bottom?

Yesterday, another selling wave hit Wall Street. The S&P 500 has now lost more than 10% in just 9 trading days. While in our semi-annually outlook published in December (www.cv-invest.ch) we were expecting a weak start into 2018, we were surprised by the magnitude and the speed of the decline. The sell-off certainly hurts but putting it into perspective, it sill looks rather shallow considering the massive gains in the months and years ahead.

Also, while we have always warned that this bull market will end in tears, we do not think that is has already ended. Forming a major top is almost always a process that takes several months. Like the transition from autumn into winter, when the leaves beginn to fall from the trees in a very gradual process. One after the other until the trees are eventually bare at the onset of winter. It is our guess that this process has started now and months of volatile trading with no clear direction might be ahead of us.

Short-term we have an increasing number of signs that we are close to a significant rebound:

  1. Sentiment indicators such as the ARMS index, volume, the VIX and McClellan have spiked massively on February 7th, a sign of panic. This is almost always a good indicator, that the worst is behind us. The fact that they haven’t reached new highs yesterday is encouraging and increases the odds of a tradeable bottom
  2. The daily RSI in most indices is in oversold territory and has formed a bullish divergence. The S&P 500 has closed between the 23.6 and 38.2% retracement of the 2016 rally (2624 and 2469). The 200day moving average as next support is at 2538, 43 points below yesterday’s close. Interestingly, the future has already tested this support in the night session on February 6th.
  3. While be believe that the main reason for the decline was the overbought, overbullish sentiment, rising rates in the U.S. certainly didn’t help. In the meantime, the consensus is that rates will continue to rise. But the charts are telling a different story. The 10yr yield, trading at 2.85, has formed a weekly divergence and also look very overbought on the daily chart. The same applies to the 5yrs. It remains our (contrarian) view that yields will not break out to the upside and and rather will fall in the months ahead (also expressed in our outlook)
  4. While being a long-term bear on the dollar, the greenback looks increasingly oversold. It has reached the 61.8% retracement and a weekly divergence calls for a technical rebound. This would certainly ease current inflation fears.
  5. U.S. high yields so far have managed to hold above key support. Being increasingly oversold, a rebound can be expected. Still, we continue to watch high yields closely as the could trigger a far bigger correction.

To summarize, we view the current correction as being close to a bottom and the odds of a significant rebound are rising. At the same time, it is likely that it is only the first leg (a wave) of a correction and that wave c will unfold following the rebound. For traders the coming sessions could offer a great opportunity while for investors, it is advisable to sell into strength.

The next few months will be key if this is only a correction within the 2009 bull market or if a major top is forming. We continue to believe in the latter…

 

On a different note: Attending many meetings in the past few weeks, it became clear that a lot of investors were worried about valuations and the near vertical rally. Their message: We wil get out once the tide turns. Recent sessions have shown that this will NOT be possible. You have to sell ahead of everyone else!

US Dollar Countertrend Rally Ahead – Watch Yields And Copper

After losing 12% since beginning of this year, the Dollar Index has become heavily oversold and we expect a significant countertrend rally in the weeks ahead. On a daily timeframe we already have a bullish divergence in place while on the weekly chart, the RSI is not far from a bullish signal.

Following Wednesday’s Fed meeting, the interest rate differential between Euro and Dollar should continue to increase. Also, despite Merkel winning the German elections is widely expected, we would not be surprised to see profit taking in the Euro following this weekend’s elections (buy the rumour, sell the fact…), especially as Euro long positioning has reached extreme levels.

We expect EURUSD to correct towards 1.14/1.12, the 38.2% and 50% retracement repectively. Remember, 1.14 was strong resistance between May 15 and May 16.

Keep an eye on U.S. yields. While the 2 year yield is already trading at the highest level since late 2008, 10 year yields are lagging. Following the sharp rally that took place between July 16 and March 17, they have retraced nearly 50% of that move. We expect them to break the March 2017 downtrend and to move towards 2.60 again.

A rising US dollar and rising yields will very likely weigh on commodities such as copper, which is already correcting. Considering the strong rally of the past few months, we view the current weakness as very healthy. While it is very important to understand that we only expect the dollar rally to be a countertrend rally and therefore to be temporary, commodity related stocks are likely to underperform while financials and export driven European stocks should outperform in the coming weeks.

New Highs But Weak Breadth – Another Down-leg Before Rally Resumes?

Last week and early this week, some of the headline indices made new highs, which was very well received by financial media. Is the correction already over is it time to become bullish again? We do not think so. Not yet.

Out of the 10 indices we are following regularly, 6 made new highs (Dow Jones Industrial, S&P 500, S&P 100, Nasdaq 100, Semiconductors and NYSE Composite). The Dow Jones Transport, Russell 2000, S&P Mid-Caps and S&P Small Caps are still trading below their all-time highs. Especially the fact that transport stocks have not yet confirmed the breakout in industrials raises the question if last week’s breakout is sustainable.

Signals that the breakout might be a bull-trap is coming from market breadth indicators. For example the number of stocks making a new 52-week high is lower than it was in August (with the exception of the S&P 500). Also the percentage of stocks trading above the 200-day moving average is lower than in August. Such non-confirmations often signal that the market is not as healthy as it should be during a breakout campaign. On the daily charts, we are also seeing non-confirmation in momentum indicators, such as the RSI.

Therefore, we continue to warn of chasing the market and instead expecting one more down-leg to complete an a-b-c correction. Remember, we are in the middle of a historically very week period (September/October). Nevertheless we expect the correction to be rather shallow. In the case of the S&P 500, the lows from August around 2420 should provide good support. Once this correction is over, we still expect the market to start its final fifth wave to the upside that could last into early 2018 and reach 2’550, our long-term target for the 2009 bull market.

Only a broader based breakout accompanied by a strong improvement in market breadth would make us change our view.

Relative Breakout In Goldminers – Don’t Chase Stocks Yet

As expected and explained in our outlook published in July, gold has finally broken above key resistance at USD 1’300. Not only has gold managed to move above the highs from April and June, it has also broken the very significant downtrend that started in late 2011. Remember, gold is following an 8yr cycle and we continue to believe that the low in late 2015 was a major low. My price target remains at around USD 1490/1520, to be reached by late 2017/early 2018.

Being bullish on gold automatically translates into being bullish for goldminers. Major goldminers have AISC (All-In Sustaining Costs) of well below USD 1’000 (Barrick Gold USD 730, Agnico Eagle USD 824, Goldcorp USD 856, Newmont Mining USD 911). A rise in the price of gold will have an extremely bullish effect on profits.

Looking at the the relative charts of goldminers (GDX) versus gold itself but also versus the Dow Jones Industrial reveals a very bullish picture. After months of relative underperformance, the miners have broken out of a triangle. I therefore expect them to outperform gold AND common stocks in the coming months.

A quick on word on equities. In early August I warned of a pending correction and not to chase stocks. I do not believe the correction to be over, despite the recent rally. The cycles remain bearish into October and we still haven’t seen a spike in several fear indicators during the recent correction. I rather view the bounce as a typcial countertrend move within an a-b-c correction. On Monday, markets will remain closed for Labor Day and then, the focus will turn to the debt ceiling and the budget. While it is still likely that they will finally come to a solution, volatility should be higher than normal, given the very unpredictable political situation in the U.S.. (I would never ever call it  “Muppet Show”….)

Now to somehting different. I’ve found an article that exactly expresses my feelings about the current crypto-currencies hype. Massive media coverage, insane price movements and a common topic among friends during an after-work drink all reminds me of the year 2000. Back then, the price of stocks of companies with no business model exploded. The current hype has all characteristics of a massive bubble. While a few companies such as Apple and Amazon survived the crash (we cannot imagine life without them anymore), most other just disappeared. I don’t think it will be different this time…. Just my opinion.

There’s Literally A “Token” Called “Fuck” That’s Up 370% In The Last 24 Hours

 

This Is Not The Time To Chase The Market

Having entered a seasonally weak period for stocks, we do not recommend to chase stocks any further. Also the presidential and the decennial cycles do not suggest, that it is the time to be brave. They both indicate weakness into October.

Furthermore we are seeing an increasing number of divergences. In both, the S&P 500 and the Nasdaq, recent highs were not confirmed anymore by higher momentum. In addition, the recent weakness in transport stocks is suspicious. While the Dow Jones industrial continues to make new highs. the Dow Jones Tranport is in correction mode since mid July. Such a divergence is often a warning signal.

While we do not expect the bull market to be over, the next couple of months could bring us a well deserved correction before we expect equities to start their final advance into early 2018.