This Week Promises to be Wild

This Week Promises to be Wild – Feb 12

DJIA matches the duration of the 1929 bull market this week

The DJIA (SPX) remains in an historic blowout to the uptrend from 2009. Although we have maintained our aggressively bullish stance during this time based on very similar price action to both 1929 and its copy, 1987, the countdown clock is wrong. It is wrong in time but not distance nor price. This week is the 415th week since the 2009 low exactly matching the rally before the 1929 crash and well beyond the 387 weeks into the 1987 crash. Thursday is 2002 days since the 2009 bottom, the same number of days from the 1921 bottom to the 1929 crash.

So is the market about to crash this week? It could potentially produce extreme volatility and what many will believe is the start of a crash. But it should only be a very small dress rehearsal. The candles of the 1929 birthday cake may quiver but they should stay alight.

The Current Uptrend Matches the 1920s Bull Market

But not quite as closely as the 1980s Bull Market

We frequently make the point that volatility is the hardest market variable to gauge. Direction is often much easier. There are many reasons why volatility (distance/time) can itself be so volatile. But the reasons all stem from a change in positions in the market due to a shift in one of the key FITS Drivers

Fundamentals – events,
Intermarket – another market movement,
Technicals – a break true or false –
Sentiment – the willingness of traders to keep or change positions.

For much of the 2014-2015 consolidation we became increasingly aware that this historic uptrend was taking longer than its two sisters but that it still needed the truly aggressive blowout to complete. But until Donald Trump’s election provided both the volatility and cause we were unaware of what would produce such dramatic volatility. Given the need to ‘catch up’ with the historic templates we assumed that the typical rising US rates, Dollar and stocks (‘Trump On’) associated with this last phase represented the very last phase.

However, of the four key characteristics of fractals or accurate historical comparisons, time or distance divided by time, in other words volatility, are the most variable. Context and price action are far more important.

Having arrived at the 1929 anniversary, it is clear that only time matches the very top. Donald Trump’s election did not represent the start of the last leg of the uptrend but only the most aggressive part of that uptrend.

The evidence is clear from both the 1987 chart and the narrative (context).

Indeed the potential volatility this week due to the Trump-Abe talks or indeed Janet Yellen’s Humphrey Hawkins speech on Tuesday and Wednesday, the day before 1929’s birthday would not be unexpected given the strong similarity between last Friday and January 22nd 1987. Even USDJPY is displaying a likeness to current price action.

What does this mean in practice?

1. Two way volatility is likely this week in many markets before a resumption of the medium term blow out in stocks.
2. We will change our Countdown Clock to reflect the historic price and percentages more closely – once we have seen the price action of the next 24 hours or so.
3. This revision does not affect our trading strategy or view on any market we cover. In fact it is an affirmation of that strategy.
4. But the revision will allow price action to reflect the narrative more closely and therefore increase the probability of our approach. Expectations of a Trump inspired inflationary growth due to increased government expenditure and tax breaks should be borne out most in higher inflated stocks. But until when? Until perma bears (those who continue to pick a top) have given up the ghost of a 1929 or 1987 crash. But more importantly, when the effects of an inflationary expansion funded by government borrowing at least start to show. When it becomes apparent the Trump Effect is not sustainable.

The jury on the Trump Presidency will have 4 years to sit. But for now, many of them are singing Happy Birthday 1929 and are too busy to blow out the candles.

This is the basis of a more detailed an revealing account of the 1929 and 1987 blowouts available to subscribers in the next 24 hours.

Next week we will outline the key FITS milestones in this bull market and in particular the early warning signs (most likely from Japan).
LAST WEEK

Mon 6
0000 AUD Inflation beat
0030 AUD Retail sales miss
1400 EUR Draghi speaks
2000 USD FOMC Harker speaks

Monday opened in Asia with Australia’s inflation beat and Retail Sales miss. AUD faded whilst NZD remained flat. NIFTY gapped up 50 points, which it then took two days to slowly fade. In Europe and the US, Friday’s rally on financials abated and US equities, the NKY and FTSE were flat on the day. Worries in Europe caused the DAX and EUR to fade, as did AUD, CAD (with oil) and 10-year US bond yields. Safe havens of gold and JPY were up, a classic risk-off day.

Tue 7
0200 AUD rate hold a/e
0200 NZD Inflation expectation beat
1330 USD Trade balance beat

Tuesday’s RBA rate hold cause a rise, and then sharp drop in AUD in the Asian session, dropping a net 0.6% (46 pips) which took all week to recover. NZD spiked up on an inflation expectation beat, but gave it up by the time Europe opened, where indices were flat as was gold and bond yields, although DAX recovered a little of Monday’s fall. NIFTY briefly spiked down to fill the weekend gap, and recovered.

The dollar was generally strong, as EUR and CAD almost exactly repeated Monday’s price/action falling further along with oil (which made a three week low, near the bottom of its current $51-$54 consolidation range), and JPY gave up Monday’s gains.

The spread between French and German 10-year bonds hit a four-year high amid fears that Marine Le Pen might win on May 7th. Greek bond yields briefly soared about 10% pulling back to 9.48% by the close. FTSE spiked up as GBP spiked down as Europe opened, (on the vote to trigger Article 50) and both promptly reversed as Europe closed, showing perhaps that Brexit risks are felt more strongly in the UK than elsewhere.

Wed 8
0900 INR rate hold (0.25% cut expected)
2000 NZD rate hold a/e

As we said last week, the INR rate decision would affect NIFTY. The rate was held at 6.25% against an expected cut and the index promptly fell by 0.72%. After a recovery, this behavior was repeated on Thursday, but then the index rose to finish a V-shaped week.

In the absence of news, European and US equities were flat, as was the dollar against EUR, JPY, AUD and even GBP this time (hence FTSE was also flat). NZD also didn’t move until the rate hold at 2000. Despite this being expected, NZD faded 100 pips (1.34%) during the following Asian session, and had not recovered by the end of the week. Oil started its recovery and took CAD with it, despite the EIA miss. Gold rose again, putting on $13 (1.12%), all during the European session, with price action similar to Monday. The only asset to continue the earlier two days price action was 10-year yields, which hit a bottom for the week of just under 2.34%, the lowest level since Jan 18th.

Thu 9
0700 EUR German exports/trade miss
1330 USD Jobless beat

President Trump promised a ‘phenomenal’ corporate tax announcement in the next two to three weeks and equities soared in all sessions. FTSE put on 50 points (0.71%), SPX put on 20 points (0.89%), DAX added 115 points (1%), NKY added 330 (1.75%). Of course part of the latter two’s gain was the fade in EUR (0.36%) and JPY (150 pips, 1.34%).

This was risk-on, so 10-year yields fell, as did gold, giving up Thursday’s $10 gain. NZD also fell, but surprisingly GBP and AUD did not, and CAD along with oil gently rose (WTI rose 0.9%, which is a lot for most instruments, but quite modest for oil) It is possibly therefore that JPY move was buying the rumor of the forthcoming Trump-Abe meeting rather than any dollar strength, as indeed the EUR fade may have been due to Greek worries.

The euphoria in European stocks was not shared in the bond markets, and although the French-German spread eased, Greek 2-year yield was back over 10%.

Fri 10
0030 AUD MPC Report
0930 GBP Mfr & Ind Growth beat
1330 CAD Emp/Unemp beat
1530 GBP NIESR GDP est beat (0.7% vs 0.6%)

A surprise on Friday was the resignation of Fed governor Tarullo. He wrote most of the Dodd-Frank rules, and his absence weakens those safeguards, and we saw IYF (US Financials ETF) soar 1.5%. Favorite to succeed him is David Nason, Hank Paulson’s #2 during the meltdown, but for once, not a Goldman alumnus (GS shares actually fell on Friday!)

SPX continued with Thursday’s rally in the US cash session, making new all-time highs with the DJIA. This time the RUT and NDX joined in. This follow-through day was not, however, shared by the non-US indices which were flat, the NKY even fading slightly, as JPY recovered about a third of Thursday’s move. FTSE rose slightly. GBP had faded, but recovered a little with the NIESR GDP estimate beat at 1500. USD was flat on Friday, as EUR continued to worry about Greece and France. NZD and 10-year yields were flat, and like the day before CAD and oil continued to rise, the former no doubt helped by the employment/unemployment beat at 1330. Gold rallied into the close, which probably helped AUD which followed it.

NEXT WEEK

Last week’s much vaunted Trump-Abe summit didn’t produce anything economically substantive on Saturday, but keep listening. The conversation most accentuated Trump’s preference for Japan over China, although this would appear to be more military than economic, as he cancelled TPP three weeks ago, the whole point of which was to prefer other Asian nations over China.

Trump’s tax plan hints, which drove the markets last week are not due in substance for another two or three weeks.

In Europe, keep watching the French election polls, Fillon being ahead of Macron makes the nuclear option, Le Pen, stronger. Greek 2-year bond yields rose 1% last Thursday to an eight-month high, and ratings agency Moodys have warned of numerous credit risks. Greece has a €7bn payment due in July, and currently it looks like they will default without another bailout.

No important ERs on Monday, but Trump meets Canadian PM Trudeau, and Steve Mnuchin is expected to be confirmed as US Treasury Sec around 1900 (when GS is trading!). Wilbur Ross’ confirmation as Commerce Secretary (responsible for NAFTA) is also expected. INR inflation data is released, estimate 3.24%

Tuesday’s Asian sees Chinese inflation (CPI and PPI) at 0130, following by German inflation and GDP at 0700. The European session continues with CPI and PPI from UK at 0930, and €Z-wide GDP at 1000, along with the German ZEW Sentiment Survey. No US data today, but we see Janet Yellen’s first testimony to the new Congress for two days starting at 1500. This may be the main event of the week, if she amplifies the road map for interest rates in 2017. Commentators are expecting the headlines to occur at the beginning of her session.

US inflation comes in at 1330 Wednesday, expected to be slightly up at 2.4%, the best since 2012, and partly dependent on the continuing rise in oil prices. Also published are Retail Sales, where an improvement is expected as well.

Asia opens on Thursday with Australian Employment/Unemployment at 0030. The German Wholesale price index is at 0700, and US building permits and housing starts at 1330. The ECB MPC report is at 1230, followed by a G20 leaders summit starting at 1600, with the first outing for the new US SecState Tillerson.

Finally on Friday, we have UK Retail Sales at 0930. DefSec Mattis is speaking at the NATO conference in Munich. He is likely to tell the members, mostly Eurozone countries, to increase their defence spend. Remember public spending drives currencies up not down.

Calendar w/c 13 Feb. Important items in bold but any strong beat or miss will move markets.

Mon 13
No scheduled news

Tue 14
0130 China PPI/CPI
0700 Germany CPI/GDP
0930 UK CPI/PPI
1000 €Z GDP
1000 Germany ZEW Sentiment
1500 Yellen speaks

Wed 15
1330 US CPI/Retail Sales
1500 Yellen speaks

Thu 16
0030 Australia Emp/Unemp
0700 Germany WPI
1230 ECB MPC Report
1330 US Building/Housing starts
1330 Initial Jobless Claims
1600 EU Leaders Summit

Fri 17
0930 UK Retail Sales