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Very interesting charts
look down
Sent: Sunday, November 11, 2007 1:33 PM
: AstroCycle research - Equities Nov. 9, 07
this man does some pretty interesting work:
Francis
Bussiere <fb@xxxxxxxxxxcom> wrote:
| Equities |
The BSI continues lower, but has reached
-20 a level that brought a bounce in May 06, but remains on Sell the
rallies since Oct. 19,07. |
| Dow
Theory |
The Utilities joined the rally in the
Industrials and the Transports and gave a long-term investing signal to
Buy since Nov. 2003. |
| Bonds and
Rates |
Bonds rallied after the Fed lowered
the expectation for further rate cuts and are on a Buy since Nov.
2,07 |
| Currencies |
The US Dollar broke recent lows and is on a
Sell since Oct. 19,07 and is vulnerable to a panic sell-off
before year end. |
| Precious
Metals |
Gold and Gold stocks rallied as Gold rose
above 700 bringing all time highs into play and putting us on a Buy
since Sept. 7,07. |
| Commodities |
Oil and the CRB are consolidating above
support and on a Buy since Nov. 9, 07 joining Gold and Metals on
a Buy since Sept. 14, 07. |
Technical Summary
The BSI continues lower, but has reached (-20), a
level that brought a bounce in May 06 but remains on Sell the rallies since
Oct. 19,07. November 9th was the 2nd New Moon after a the September 21st
Cardinal Date and could mark a low, although it may be short lived. Short term
Harmonics are suggesting that the 8 and 12 month cycle lows should start some
short covering rallies before a solid low is made as the 3 month cycle bottoms
near the end of November. With the shallow 4 year cycle low in 2006 and so far
in 2007 we should continue to be vigilant for a delayed 4 year cycle low
before early 2008 like we saw in the 1982-87 cycle. ![]()
Economic SummaryThe Economic
Dashboard suggests a high level of caution since Inflation expectations are
higher than in 1987, and the Yield Curve has also turned down from high levels
like in 1990 and 2001 which were both followed by recessions. With the US
Dollar precariously low compared to US Interest rates we could see further
market deterioration if US Bonds decline in value and rates rise or the US
Dollar declines further causing a financial shock. While the 2006 Yield Curve
inversion predicts a recession in 2008, the Volatility model suggests one will
occur near 2013, unless we get a 1974 style recession or a deep pullback like
in 1987, both of which also occurred after decade lows in Volatility like we
just had in 2006.
Cardinal Moon Dates
November 9th was the 2nd New Moon after the September
21st Cardinal Date and could mark a low, although it may be short lived.
Cycle Harmonics
The 3, 8 and 12 month cycles have all pulled down this
market sharply in November, but two of the cycles have already turned up and
we should start seeing some short covering rallies before a solid low is made
as the 3 month cycle bottoms near the end of November.
The 4 year cycle low is well known and not to be
ignored
A warning comes to us from the reliable 4 year cycle
lows as shown in this chart of the SPX since 1948. Only a few of the 4 year
cycle lows have been minor, and it could be argued that the 1987 crash was the
delayed effect of the suppressed 1986 cycle low. With Global Equities on the
rise since the last cycle low in 2002 and a correction overdue, we must be
very cautious even into early 2008 until Equities correct at least 10-20%.
Also take note that years ending in 3 and 7 are 75% more likely to have a
serious decline than any other years.
Economic Dashboard: Bonds, Inflation and Capital
flows
The rapid economic expansion since 2003 has caused the
Yield curve (white line) to rise rapidly to levels last seen in 1989 and 2000
just before economic contractions began. The contraction that started in 1989
was mild since the relative position of the US Dollar versus US Interest Rates
(red line) was favorable and Inflation expections (blue line) were recovering.
The next economic expansion that ended in 2000 was fueled by an exceptional
"Goldilocks" combination of slowly rising Yield curve (white line) and
declining Inflation expectations (blue line) mostly from a rising US Dollar
from foreign Capital Inflows (red line). The contraction that followed the
expansion of 2000 was severe, but not enough to significantly slow foreign
Capital Inflows (red line) which kept long-term Rates low and started a sharp
recovery into 2007 mostly from mortgages. According to the Yield Curve (white
line) we are near the end of this economic expansion, and with high Inflation
expectations like in 1987, and high Capital Inflows like in 2000, this coming
contraction could be severe as well.
Bond Market Cash Flows - A
strong economy causes the Yield curve to flatten (white line to rise) as
earnings grow and extra cash flows to the Bond market, causing rates to drop
and fueling the economic growth even more. As the Economy overheats and
Inflation rises, the Fed raises rates causing the Yield curve to invert and
the process to reverse with cash flowing out of the bond market to replace
declining revenues from the economic contraction, causing rates to rise and
aggravating the contraction even more.
Inflation Expectations -
When Gold is stronger than Commodities (blue line declining), we have high
Inflation expectations that should cause the Fed to raise rates to slow
economic growth and keep inflation under control.
Capital
Inflows - When the US Dollar is stronger than Rates (red line rising) it
is suggestive of foreign inflows and supportive of US Assets.
The Yield Curve Inversion and the Fed pause add up to
caution
Contrary to popular belief, Equities have already
achieved most of their gains when the Fed stops raising Rates, especially when
the Yield Curve goes inverted like we had in 2006. This can be seen in the
corrections in Equities after the Fed paused in 1981, 1989, 2001 and now
probably 2006. The reverse also applies, it is best to buy Equities after the
Fed ends an aggressive Rate easing campaign that takes the Yield Curve well
below the average 1-3% spread, like in 1982, 1987, 1992 and 2003.
Recession Watch
The Yield Curve inversion is widely known to have
successfully predicted recessions and this over many decades. We have had a
significant Yield Curve inversion in 2006 similar to the one in 2000, and both
were stronger than the one in 1989. Since the last three Yield Curve
inversions gave us recessions in 1981, 1990 and 2001, many are watching this
indicator and expecting a recession in the next 12 months. I have also
discovered another good predictor of recessions, based on the correlation
between Solar Sunspot and ouput
cycles and the Volatility index (VIX) .
Recessions almost always occur after extended periods of Volatility that
disrupts normal functioning of the economy like in 1960, 1970, 1981, 1990 and
2001. The single exception was the 1974 recession which was probably a
continuation of the one started in 1970. While this model predicts a recession
will occur near 2013, another 1974 like recession near the low of the cycle is
possible in 2008 according to the Yield Curve inversion in 2006.
Liquidity induced Bubble Watch
After the roaring Twenties took debt to 270% of GDP in
an unsustainable way, the collapse of this debt led to the great Depression,
WWII, and a distinct distrust of paper assets and debt. Debt levels then
returned to a more manageable 150% of GDP before rising again, mostly from the
growth of mortgages as the real estate and commodities bubble took hold in the
late 1970's. When these real asset bubbles collapsed, much of the funds moved
to the Nikkei forming another bubble and pushing the Yen sharply higher in the
late 1980's. Once the Japanese bubble collapsed, funds flowed back to US and
European markets fueling their rise in the late 1990's, and confirmed by the
rising US Dollar. The ensuing US market collapse of 2000 sent the funds back
into real assets like Commodities and Real Estate, but this time embracing
even more debt and leverage to 350% of GDP. We have phenomenal growth of
credit in absolute terms too, with US Treasuries and total credit both
expanded 9-10 times since the first bubble formed 27 years ago. Since we are
already seeing the first flight away from risky paper, history is likely to
repeat itself, and 60% of this debt will be eventually wiped out mostly
worthless in the next 5 to 15 years.
Dave MacKay ![]()
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