Sunday, April 17, 2011

4/17 Weekly Commentary

This is the last weekly before  the 4/18-4/19 I1 peak.  The Japan quake started a 7 trading day lag of I1 to the stock market indices.  The latest lag was only a  6 day lag, 4/6 to 4/14, so the market is adjusting back to it's profile. 

The quake and nuclear disaster was a bigger hit to the world economy than is being given credit and will be felt for years.  Japanese borrowing to rebuild is not healthy for theirs or ours.  This is called the broken window fallacy.  Up until this event Japan exported $175Billion in capital to the world because it's domestic fixed investment rate was low and thus corporate savings financed the government debt tab.  At 200% GDP their government is the leader of the developed world.  So what this tragedy does is stim housing re-building and welfare, reduce corporate saving, and block that $175Billion from flowing to Europe and the U.S.  It also transfers more money from savers to consumers. The Japanese household savings rate was only 2% before the quake. The U.S. has exhausted it's savers and the Japanese government is single-handedly (with the help of demographics) changing Japan from a nation of savers to debtors. 
Anyway, back to the lag.  Last year I1 was in a declining mode when the Fed started querying the Street on how much the "next round" of QE should be at the beginning of September, so I had to shift to neutral until the I1 rally started in mid-December.  At that time I switched to bullish. It's been a difficult time, but I have preserved my gains and am free of the spectre of government stimulus.  The Lone Ranger sold
Silver and will have to walk to the rescue, way late, tired, and thirsty.
The weekly technical composite hit -13 two weeks ago.  -12 is a solid sell level.  -16 would have been an extreme that we are not going to get.
I spent time this week re-generating my cycle composites.  I have developed software that identifies bottoms over the past 6 years, then steps back 50 years from each of those bottoms, for each cycle length from 5 to 1200.  It ranks the cycle accuracy and, exceeding a performance threshold, adds it to a composite list of cycles (up to 50).  Anyway, the updated DJ cycle chart is bearish going forward.
 The SPX cycle chart paints a similar picture, but both have a short-term cycle peak 4/26 which corresponds with the shortening lag between I1 and stock prices, as induced by the Japan quake.  I'm still going with 4/18-4/19 to begin shorting.  The cycle generation process is a "cheat" in that it uses current prices as a baseline.  Those trading systems that tout great performance are almost all cheats, looking backward from current to generate fantastic returns that turn to mush real-time.  I1 was baselined in 2003 and I will not re-generate it so it is not a cheat. 
Another reason to go short, besides the seasonal saw "Sell in May and go away" is another old saw, the Decennial Pattern.  In an age of governmental intervention the decennial has been discredited and ignored.  Even the bust of 2008 was not timed with the decennial, but was timed when the destruction of the prior monetary binge unwound itself.  With the age of stim now coming to an end (due to debt limits and future political backlash) the decennial should now have a closer correlation to future price behavior.  If you believe that Ben will be tamed by Ron Paul and the Tea Party (as I do) then we are about to enter an era devoid of stim, not just in the U.S. but in Europe and eventually Japan.  The decennial peaks in April and declines into mid-2012.
So, there we have the justification, besides I1, for a bearish stock market tilt at this time.  The formal I1 sell signal does not occur until 5/16 but, as I said before, I believe this will be after the peak in prices.

On Friday I went into a tiny short on gold and a tinier short on silver.  Currently .5% ZSL and 1% DZZ, holding these are core intermediate-term should be profitable.  One of the reasons for entering the trade, besides the sentiment gauge posted Friday, is the silver composite cycle which I baselined to Friday.
Friday's Daily posted the alternate precious metals sentiment gauge.  The one that I use more frequently, the PM1, does not peak until 4/28 but, like the stock market, I believe the price peak will already be behind us by that time.
The charts I have posted here are high-definition and will take a while for your browser to load them.  I'm going to stop here, but will post the gold and dollar this evening in an Addendum, with analysis.

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