Summary
Much like predicting the weather one year in advance, predicting the markets for one year is a game of probabilities and there are always a few likely possibilities that can act as road maps as the year progresses.
Stocks
The SPX should test the July 2010 lows near 1000 by the first half of 2011, but we will need a Spanish or other crisis to reach 900 or less and keep us below 1000-1100 by year end.
Bonds
The 30 year Bond should hold above 115 in the first quarter and probably rally to 130 by the fourth quarter.
Currencies
The US Dollar should hold above 0.75 in the first quarter and probably rally to 0.90 by the fourth quarter.
Commodities
Gold and Silver are pulling back but are likely to challenge the highs again near May before declining into the fourth quarter and turning parabolic into 2012-13.
The Very Bullish Consensus needs a lot of Jobs in 2011 and that is not very likely to happen
Since the 2000 top, the similarities with the 1970’s are becoming obvious to everyone with Oil having made parabolic highs, Gold following close behind, Unemployment a chronic problem, Mutual Fund outflows from the public and a general consensus that Bonds will decline as Rates rise from the Fed’s Quantitative Easing program, or the monetizing of US Consumer and Sovereign Debt.
This has led many to expect the SPX to challenge the 1500 highs by 2012 asArthur Hill shows here before a third decline into 2014 to match the 1973-74 drop and then the beginning of a large bull market, but there are problems with this view from the fundamental as well as the technical and wave pattern angle.
Fundamentals are the long term driver of where the Economy and eventually Equities will go, and the main driver of any economy is employment. While various agencies can adjust and change the way they report short term employemnt, the long term Employment trend per Capita on the right shows that the public was wrong in selling Equities in the 1970’s since employment was rising strongly per Capita since 1965 abd eventually Stocks reflected it but with a 10 year delay.
As you can see from the chart below, the latest Jobs numbers show no improvement after the Census jobs boom ended, and the reason Americans are no longer adding to their mutual fund holdings may be due to their lack of spare cash.
Expanding wedges are unstable driven oscillations that usually break big when they complete and since the wedge of the 1970’s was making both higher highs and lower lows every 4 years (66, 70, 74), it gave no clue to the direction of the break but the rising employment per capita and the negative sentiment from outflows made the break higher likely.
In contrast, the expanding wedge since 2000 has flat tops and lower lows and those usually break to the downside when they complete and the 2000 wedge made highs and lows every 7 years (02,09,16?) suggesting the break of the lower boundary near 600 could wait until 2013-14 for the 4 year cycle low of 2014.
Another kind of wedge that is even better known is the Ascending Wedge which is the opposite of a driven expanding wedge as the forces are now getting smaller and smaller until a big reversal comes hence their common name of Ending Wedge. They can be seen as descending wedges too, but the visible ascending wedge into 2007 of the Employment per Capita chart on the right correctly predicted the sharp decline into 2010, and the chart of the US Dollar just below shows that these Ascending Wedges usually lead to much deeper declines.
The Very Bearish View needs a Credit Crisis in 2011 which is likely to happen in Spain
The subprime crisis started on February 7, 07 with the first UBS losses on subprime but the market did not react until February 27, 07 and the first real credit crisis did not start until August 17, 07 with the Fed orchestrating the Countrywide bailout. Since then the chapters of this crisis have been repeating in an uncanny pattern of 212 and 184 days which together are 396 days or 13 months and about 1/8 of the PI cycle of 3,141 days as seen in the table below:
The Muddle Through Alternative takes us to 1450 by year end but is unlikely to happen with the Euro debt issues
| The Muddle Through View takes us to the next level of 1450 by year end but must somehow avoid all the pending Euro debt issues and ignore growing inflation in Energy, Food and Metals and the eventual Damocles sword of rising rates and deflating Bonds.
The Price action since the 2009 low is diverging enough with the short and long term pattern matches of 2003-05 to already question the validity of this road map for 2011, but the weakness of that pattern in the first quarter may show up on schedule anyway. The years ending in 3 and 7 are the most dangerous, but the years ending in 0, 1 and 9 all see more than their share of bear markets and the composite chart of the Dow by Decade illustrates that years ending in 1, 2 and 3 are where many major lows are made. |
The Cycle Progression for the US Dollar suggests strength and that is generally negative for Equities
The US Dollar index has been on a 17 year cycle with highs in 1985 and 2002 and lows in 1991 and 2008 but we saw two deep pull backs in 1992 and 1995 and since the deep 2009 pullback was 17 years from 1992, the next pull back should be near 1995 + 17 years which is 2012 and where the 8 year and 4.25 year PI cycle lows converge. the chart here.
Since the 2008 low, the US Dollar has been on an 18 month cycle that does point to weaakness in 2012, but a rebound in 2011 should come first and generally the SPX has seen the most weakness when the US Dollar was rising sharply. The ideal dates can be off by a month or more like we saw in late 2009, and the SPX can turn even further from these dates like we saw in the May decline but it does suggest a February low and an October high for the US Dollar which point to potential weakness for stocks in the February to October period.
One thing that is obvious from this chart is that all asset classes are rising at the same time: Stocks, Bonds and Commodities (not shown), which is exactly what the Fed needs to fight Debt Deflation but even the US Dollar is rising and the Fed may not really want that.
The Cycle Progression for Bonds suggests strength into September and that is generally negative for Equities
Bonds are near a 60 year cycle high with lows in 1860, 1920 and 1980 but the 1890, 1950 and 2010 highs are usually a slow topping process that can last 10 years like the 1950 low which did not break support for 10 years and we may not see Bonds break below 100 or Rates rise above 5% for years, especially if the Fed’s QE is buying Bonds to prevent Rates from rising too high.
Since the crisis of 2007, Bonds have been on an 11 month cycle that suggests weakness into March and strength into September which is in agreement with the US Dollar cycles which seems to rally ahead of Bonds by a month or two. The ideal dates can vary a bit but their effect on Equities can vary a lot more and point to general weakness for stocks between March and September.
The SPX Crash of 2008 makes Cycle Progression difficult but lows in July and maybe October are probable
The SPX Crash created such a large wave that Cycle Progressions is difficult for the smaller cycles but we do have the 7.5-15-30-60 month cycle series which gave us the January and April 2000 highs, the July and October 2002 lows, the July and October 2007 highs, the November and March 2009 lows (one month late), the January and April 2010 highs and possibly the July and October lows of 2011 as seen in the chart here.
One alternative worth considering if we hold above 1000 is a Head and Shoulders pattern which would take us back to 1200-1300 by year end.
The Cycle Progression for Silver and Gold suggest a choppy high into May
Most Gold and Silver cycles point to a high in 2012 which matches the expected low for the US Dollar in late 2012, and is probably the reason why Gold has not gone parabolic yet like Oil and Natural Gas with gains of 14-15 times from their lows.
Even a gain of 10 times would take Gold and Silver to 2,500 and 40 which is the 1980 high in Silver, and we are still short of these typical targets and much further from the recent Energy gains of 15 times which could take Gold and Silver to 3,750 and 60 in 2012.
I used Silver for the analysis since its large moves makes the Cycle Progression more obvious but the same May high can be seen in the Gold chart here. Silver also displays a more typical Wave 3 in the second half of 2010 which implies a choppy Wave 4 in 2011 and much higher highs in 2012.
One reason to be cautious with Gold and Silver in 2011 is that the Commitment of Traders chart below show record long positions by Hedge Funds and if Oil is to drop big, then Gold sould at least pull back and that means the US Dollar is likely to rally in 2011. The COT’s for Gold and Silver show much more moderate long positions and are not likely to drop as much as Oil.
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