Stock Market Tug of War

by: John Hampson
Let's start with eight indicators that all suggest a stock market bottom is close at hand and therefore a stock market buying opportunity:
1. CPC
(Click to enlarge) Source: Cobra's Market View
(Click to enlarge) Source: Cobra's Market View
3. RSI and 4. % Stocks Above 50 Day MA
(Click to enlarge) Source: Short Side Of Long
5. Stocks above 20 Day MA
(Click to enlarge) Source: Short Side Of Long
6. AAII Sentiment Survey
(Click to enlarge) Source: Hays Advisory
7. Investors Intelligence Sentiment Survey: latest reading down to 40% bulls, which is the historic level beneath which the stock market has been a buy.
8. Quantifiable Edge's Capitulative Breadth Indicator: latest reading 8. Above 10 has historically been a reliable stock market buying opportunity, but often above 7 enough. Furthermore, 6 week losing streaks historical performance 1 week and 6 weeks later also suggest the likelihood of an advance:
(Click to enlarge) Source: Bespoke Investment
The last time we saw such a collection of bottoming indicators was mid-March and I would dearly love to title this analysis "Stock Indices Buying Opportunity" as per my March 17th post and end the analysis here.
However ...
We have been suffering quite a lot of geomagnetism recently and the updated NOAA forecast shows expectation of more over the next few days, lasting through to Monday (the table below has been updated). In addition, we are trending down into and around the full moon of June 15th, we are in a Puetza crash window and we are currently in a little window of negative seasonality too. In short, I could be writing "Stock Indices Shorting Opportunity" for the next few sessions were it not for the mass of bottoming indicators above and hence my title "Stock Market Tug Of War."
Trading Days / Forecast Geomagnetism Forecast Lunar Phase Puetz Crash Window Seasonality Amalgamated Forecast
2011 June 8 Short stocks
2011 June 9 Short stocks
2011 June 10 Short stocks
2011 June 13 Short stocks
So, if geomagnetism, moon, Puetz and seasonality - together with the stock indices current technical weakness - push the market lower over the next few sessions, then the indicators above will become even more stretched and I would consider that a high probability buying opportunity which I would want to significantly load up on. Regardless of whether the subsequent rally was a snap-back rally or the start of a new uptrend, the odds would be very good on the long side.
Looking wider, we are into the mid-year period of historically lower returns, seasonally. We are also approaching the removal of the support of QE at the end of June and we are going through an economic soft patch globally for which we as yet have little evidence of improvement.
The soft patch has been largely the result of the combination of Japan's disaster and surging oil prices February to April and expectations are that we will see a pick up in growth again in the second half of this year as Japan recovers and as oil prices have fallen 15% from their peak. A caveat would be that oil does not accelerate back to peak levels or beyond - a conclusion in Libya may provide that requisite dampening.
Should a natural swing back to economic strength not occur, then the US Fed would be likely to interfere with some kind of stimulating activity, supporting asset prices again. It is difficult to see a new bear market emerging until the Fed is at the other end of the spectrum, overtightening to reign in inflation.
A reminder of all the reasons why the cyclical bull is not likely to be over here:
  • Yield curve doesn't predict a recession
  • 10 Year Treasury yields haven't got up to levels common with tops
  • No negative divergence in breadth going into the May top
  • Interest rates negligible in the major economies bar China - cyclical bulls historically end with overtighening in response to excessive inflation
  • Money supply, money velocity and Bloomberg Financial Conditions all positive
  • Leading Indicators have flattened but are still positive (bar India, Brazil)
  • Equities remain relatively cheap compared to both other assets and to history
  • Solar cycles and bull market internals compared historically both suggest a peak around 2013 - and that window would fit with the likely required rises in yields, inflation and interest rates to fit with historical cyclical bull tops
The major investment banks are largely still predicting the S&P to reach 1400 by year end:
(Click to enlarge) Source: Bespoke Investment
And the IMF has today maintained its global growth forecast this year of 4.4%, confident that Japan's problems are clearing quickly.
I therefore maintain my bias of looking for opportunities on the long side and republish my forecast models below for the S&P500. All point to the current period of consolidation being historically normal and the likely prelude to another significant upleg, whether that be imminently or after mid-year. Combining them, the price range I consider to be the golden opportunity on the buy side is 1200-1275.
(Click to enlarge)
(Click to enlarge)
(Click to enlarge)

Disclosure: I am long stock indices