Rotation Of Major Markets

Signs of The Times

"Emerging-market debt has grown $28 trillion since 2009."

- Bloomberg, November 9.

"Goldman says U.S. Economic recovery has about 4 years before it ends."

- Market Research, November 11.

"London homes valued at 5 million pounds or more fell 11.5% on a square foot basis from the third quarter of 2014."

- Bloomberg, November 12.

"Barclay's: Liquidity in credit markets remain challenging."

- Bloomberg, November 12.

"Wall Street banks are struggling to sell billions of dollars of loans they made to finance the corporate buyout boom."

- Bloomberg, November 13.

"China Doubles Margin Requirement"

- Bloomberg, November 13.

Great Headlines

Over the centuries the markets have provided some outstanding observations.

One of the great bubbles blew out in 1873 and in classic fashion crashed in the fall. At the worst of the crash, The Economist wrote:

"While the panic may be over, the results of the panic are not over."

That post-bubble contraction prevailed from 1873 to 1895.

In 1986 Brian Marber, a London market commentator, observed:

"Life is a bear market, interrupted by progressively weaker rallies."

On November 13th, Luke Bartholomew at Aberdeen Asset Management in Scotland observed:

"The real worry about liquidity is that it behaves like a bad friend - it is there when you don't especially need it, but as soon as you do need it, it disappears."

Great Contractions

The features of the lengthy post-bubble contractions include a firm senior currency and the US dollar has been in an uptrend since 2008. Another is generally weakening commodities and the big high was set in 2008. New lows have been set this week.

Commodities

Despite radical central bank policies commodities have weakened. It seems that such recklessness no longer drives commodities, including precious metals, up. Our case has been that the problem is that most consider that "inflation" means only rising commodities and wages. The classic definition was that it meant an "inordinate expansion of credit".

This works whether the action is in soaring financial assets or in tangible assets.

The point to be made is that the public, not policymakers choose the game. In the 1970s the "discovery" was that expanding money supply "caused" commodities to soar. This pushed up the rate of CPI inflation. Prior to that "inflation" was driven by the utter nonsense of "cost-push" or "wage-pull".

Then as in 1921, the action shifted to the inflation of financial assets. It continues with the regular business cycle providing brief commodity rallies. The "super-cycle" for commodities remains a theory in search of the event.

However, there are the possibilities of seasonal trades. One was for copper declining into November () and crude oil into December ().

Copper has plunged from 2.96 in May (our last exit) to 2.07. The Daily RSI has plunged from overbought at 70 to very over-sold at 19. There has been no headlines about the theft of copper wire for a couple of years.

Base metals (GYX) have plunged from 346 in May to 244. That was from very overbought to now very oversold.

Another "Rotation" is being set up. Once turned, the rally could run well into the first quarter.

Crude oil declined from 62.58 in May to 37.75 in the August hit. The rebound made it to 50.92 in October and the low has been 40.50 this week. A little more "down" could set up the rebound.

Grains (GKX) rallied out of the August-September pressures, but need to complete a significant test of the low.

Overall, commodities (DBC) set the last cyclical peak at 32 in 2011. The low with the August slam was 14.33 and the rebound made it to 15.86 in early October. The low has been yesterday's 14.05.

The Daily RSI is down to 28 and it could get a little more oversold before we can look for the turn around.

The technical "model" we used in 2011 is attached.

Stock Markets

Poised seems to be the condition of the stock market. For what?

The rebound by the DJIA made it to 17797, which was beyond our high-side target of 17870. This was accomplished with momentum as well as a Sequential (9) Sell, which is pattern. On top of this the "VIX" model gave a warning.

Linking the S&P500 to a "real" series, we came across a chart and published it on November 5th. This was the Sales Tax Receipts, which turndown has occurred close to important stock market highs. It is one of those "thick line" bars that puts the top to an accuracy of a month or so. Looks like June was the peak and May recorded the high on the S&P500.

The next key could be the slump in the retail sector, highlighted by the pre-opening 20 percent slump for retailer Nordstrom (JWN). That was on November 16. The overall retail index (XRT) fell from 47 to 42 in only 7 days, finding support at the August 24th low.

The high was 51 in April and taking out the 50-Week ma and then failing to get back above it sets the downtrend. Similar to the cyclical peak in 2007.

The retail sector topped in April and Sales Tax Receipts in June. These have now joined the extended slump in global commodities.

An update on the Broker-Dealers (XBD) notes that the high was 203 in the middle of July and the drop was to 161 on Black Monday and to 159 on October 2nd. The rebound was turned back by the 200-Day ma at 187. The next low was 178 on Monday and the bounce is testing the 200-Day from the underside.

Various technical conditions are precarious, Sales Taxes and the retail sector are weak, but markets are buoyant this week. Resources and materials can outperform into February.

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Courtesy of Institutional Advisors