Phoenix made the world news this weekend for hitting 119 degrees. If you are wondering what it was like, it was miserable. But really, it was only one day, as Sunday never lived up to the terrible hype. Thankfully, it’s only been this hot four times in the past 23 years. Now that we got the formalities out of the way, let’s talk about something that was almost as hot.
Last week I told you we were really close to Fibonacci calculations to spawn a bounce. By a week ago Friday, we had the minimum requirements in but we really didn’t have the wash out I was looking for. On Monday we got that wash out and it was a classic. What people need to understand about sentiment is that fear can build but that’s not really enough to bottom out markets. What is required is a whole bunch of fear and then the other shoe drops. We need the kind of day where it feels like it’s going down forever. That was Monday and we got the response I was looking for. The rest of the week was up and by Friday we started a benign pullback. It was not the kind of selling we saw last week.
Feast your eyes on this chart. It’s the best one I have. Never mind the calculations back in 2011, if you want to learn symmetry you ought to take my training. What I want you to look at is where the drop stopped going down. Its right on the trend line supporting a possible ending diagonal wedge. This could be a larger 4th wave low destined to give us one more high. We are off to a fine start. My view of these markets is we are in a similar situation to that of March 2011. The only difference is we didn’t end quite with the bang of a Japanese tsunami. Thank God we didn’t. But my point is the VIX got high enough to give us a trading leg but not high enough to give us a sustained rally. Don’t forget my time windows coming in at the end of August. We have enough time if it’s going to happen to top in the fall window. But let’s be concerned about now.
This rally looks good for today and it comes after the best sentiment I’ve seen at a low since August/October 2011. But there are a few problems. Have you seen commodities? I know you’ve seen Gold and it violated an incredible 1-1 relationship in terms of range and time last week at 653 give or take. That’s not supposed to happen if there’s going to be a reversal. Also, I’ve seen some reports that suggest Gold insiders/traders/analysts are hoping for lower prices so they can buy on discount in an ongoing bull market. I know you folks long enough; can I be blunt about this?
In bull markets pullback are short and intense. Fear builds quickly. I understand Gold is a commodity and the psychology is a little different than if it were a stock. But we also had a 20 year bear market where nobody was interested in yellow metal. In that way the psychology is similar to equities. Gold is nearly 2 years off a high with several lousy bounces. This isn’t Wal-Mart; you don’t get to pick the price level you want to buy on the dip. These people have been around the block long enough to know this. I’m not going to name names. But let’s just say that after all this time there is still complacency creeping into the precious metals. It might bounce here because we have an interesting reading in the XAU but in the bigger picture I think we are going lower.
Finally Corn and Wheat broke to the downside. Oil is treading water and so is Cotton. I cover the Cotton market once a week and come to know it pretty well and what I can tell you is it’s a fairly good economic indicator because enough products use it. Equities might be up but the commodities are telling a different tale. That may not have a payoff right now but ultimately it should. Unless commodities kicks into gear the economy is likely stagnate into the 4th quarter.
Then we had a downward revised GDP number last week for the first quarter. Traders actually liked this because they took it as the Fed being early on ending their bond buying program. So that part of sentiment hasn’t changed. Banking looked good, housing looked fair; biotech looked much improved, transports is okay while oil stocks are trying to get out of their own way. See what I mean about commodities?
I think we are in a position where we can get new highs in certain areas, not others or quite possibly marginal highs the way we did in May 2011. But I am looking for a rough 4th quarter for the stock market. That may or may not pan out but right now, coming out of the seasonal time window for June, if we did put a low in place with the information we have now we could peak this year.
Nothing has really changed with the longer view of interest rates and risk very high at some point for a waterfall event in the bond market. It could happen in October or a year from October. But my main concern is that interest rates do not accelerate but rise slowly over time. Unfortunately, I don’t think that’s going to happen. Finally, I think Europe also has a high probability low in place. That will allow them to be in a position for leadership again. There’s excellent price and time symmetry on the DAX which stopped going down at the 200 day moving average. For a chart that has held and is testing the big average it would be rare for it to break on the first test. We’d probably need to see some really flat action in the coming days and weeks for it to violate to the downside. At the end of the day we are likely in a case of here we go again with the bull market. But there are danger and warning signs. Play it appropriately but as always be flexible enough to not be the last man in.