This is a chart drawn by Sergey Tarasov: http://www.timingsolution.com/ . He obtained long term data series for the AA investment grade corporate bond yield, US P/E ratios, and PPI. I think these monthly data going back into the 18th century came from the Foundation for the Study of Cycles. Tarasov then detrended the data to make it more amenable to analyzing true oscillations. Subsequently he performed a standard Fourier spectrum analysis of the detrended data and synthesized the highest amplitude cycles found into a master cycle. For the bond yield series he found a 62 year long wave cycle from top to top and bottom to bottom. This is interesting in that the last bottom was 1948/49 which has always been considered a long wave bottom by many people eyeballing many market and economic factors. The next low in Tarasov's long wave cycle would be 2011.
The last previous high was 1982. (I show a triple bottom on T bond futures in September, October 1981 and February 1982, so that fits).
The P/E chart is actually the earnings yield or E/P. It last bottomed in 1948/49 and topped in 1982! It is due to bottom in 2012.
The PPI chart is very similar with a peak in the 1981, but on the way down in each 62-63 year cycle there are three bottoms. For this cycle they were/will be 2003, 2016, and 2023....so theoretically interest rates would bottom in 2011 but commodity prices (PPI) wouldn't finally bottom until 2023'ish....That would make sense historically as rates bottomed in the 1940's ahead of commodities.
I have been interested in the Kondratieff long economic wave for three decades at least. One problem has always been fitting current data and the 18th century into what appeared to be regular 54 year 19th and 20th century cycles. I will deal with some of these theoretical issues in another post, but the practical aspect is that it's quite likely that the Tarasov cycles of corporate interest rates, P/E ratios of stocks, and commodity prices (PPI) could bottom in 2011-2012.
I have seen earlier Fourier analyses of long term data for economic cycles showing a shorter and more conventional 54-55 year cycle, but that hasn't worked out for interest rates or the economy over the past few years. This new analysis needs more "looking" but is very interesting as a possible solution to the long wave issue in real time.
US Treasury Secretary Tim Geithner and Secretary of State Hillary Clinton will host Vice Premier Wang Qishan and state council member Dai Bingguo in Washington on July 27-28.
The U.S. sells a record $115 billion in bonds and notes this week, starting with 20-year Treasury Inflation Protected Securities today (July 27) to be followed by $42 billion in two-year notes tomorrow, $39 billion in five-year securities on July 29, and $28 billion in notes maturing in seven years on July 30. The previous record was $104 billion in two-, five-, and seven-year debt sold the week of June 22.
The on-going "difference of opinion" of China and the US on the "trade question" is threatening to levitate to a more exciting level. If China had not kept its currency pegged artificially low to the US dollar, we wouldn't have bought as many consumer goods from them, and they wouldn't have so many dollars in US Treasurys to worry them. Now they may want us either to guarantee repayment in their currency--convert their US bonds into yuan--or they won't take any more bonds. This is the standard democrat analysis of the issue, and the democrats rule Washington. But the current image of the democrats abroad is one of ignorance and amateurism at best. So the Chinese are coming to test those perceptions.
Not taking more of our bonds, or not even rolling over current holdings, brings up the issue of what the Chinese will or can buy instead. They have been flooding their own banks with a mammoth stimulus, and they have been buying huge stockpiles of commodities (some, perhaps much, privately, to be sure), but what else can they do to spend down their trillions of Treasurys without moving markets adversely for themselves as well as others?
Do they expect us to change the bonds to payment in yuan and then watch them revalue the yuan upwards? Or do they expect us to devalue the dollar ourselves explicitly or via gradual monetization of all the required Treasury debt sales leaving them with 50% on the dollar in bonds? It's not what one would call a "win-win" situation for either party in these discussions this week.
The US weak place is that someone has to buy the trillions of bond, note, and bill offerings for the next decade unless we plan to downsize the national government dramatically, and that is not in the democrat plan. If we anger one of our best customers for Treasurys, we might have a problem, but so will the customer have a problem if their exports fall even further and their stimulus package doesn't create an instant consumer economy in China.
In either event, it's questionable whether the fear of deflation will continue to provide alternative buyers for the accelerating sales of Treasurys. We both and all have a problem.
This email came to me today which crystalized my thinking about stock market-based sentiment as measured by the 2CS:
"Just found your blog last week and am curious about the recent action in the 2CS.
"I have the 2CS going to 88.9 on Tuesday, 7/21, but it has now begun moving back up and based on my calculation it is now, after the close of 7/24, up at 98.97.
"The 88 reading wasn't as low as the 70 reading you were looking for from your last blog entry so I'm wondering if this change is notable. Does this change in the 2CS just mean that the 2CS has changed direction and that one should not expect a change in market direction until the 2CS finally drops into the 70 or less area? Or does this change in the 2CS portend a change in market direction?
This afternoon I am wondering the same thing. By the way, I have always used the VXO or old VIX of the SP100, so my numbers are a bit different from yours (93.4 on Tuesday and 100.9 today), but question remains as you have asked. What does it mean now?
Over the years since I started (1996) doing this 2CS measurement (5 day running totals of each day's final CBOE P/C ratio times each day's final CBOE VXO), I have noticed what I call "sentiment divergence" at some tops and bottoms. Normally we would expect sentiment to be most bullish at a top (lowest 2CS). But sometimes the lowest 2CS reading can come a few days to a few weeks ahead of the price top.
However, we also have another problem right now which you also mention, namely that it would be very unusual to have the lowest reading for a top with 2CS in the 90's after such a dynamic and time-consuming rally, even if it's a bear market rally.
I have been thinking about these two aspects of price and sentiment for weeks. The best answer I can give so far is that the stock rally either has quite a bit farther to go up in price and in time OR this is a very bearish sentiment divergence both short term (current short term divergence) and long term (deviation from normal market top 2CS levels. Either/or doesn't seem like a very useful conclusion, but I think it gives some help. At the very least it is saying that the risk/reward profile of the market may have changed for the worse. Normally I might not even say that since the short term divergence is only a few days, and that happens sometimes. But the deterioration of the 2CS during these few days occurred when the price of the SPX rose quite a bit.
Different people will have different responses to a change in risk/reward probabilities. I tend to start exiting positions slowly, bit by bit, as the market rises.
Anyway, I appreciate your interest and your understanding of the problem. Let me know your ideas, and feel free to post at the weblog site if you wish.
July is generally the last month of the year for a new stock market high until November/December. You may remember all the July market highs in the 1990's.
On the seasonal chart of SPX since 1949 we see that even in the face of perhaps the strongest down draft in stocks in history, the seasonal did make a weak but lengthy rally from October 2008 into the new year. Following the script, early January was the high, thereafter with a small seasonal rally into February and a dreadful plunge into March.
The March to May rally is the second largest of the year after the great October/November rally to January. When it extends as it is doing this year, the rally normally will top out in July, "normally" being the seasonal chart itself which is an average of direction (not price as such) the past 60 years. From the March 9 intraday low to the June 11 intraday high, this powerful rally of 2009 gained 43.4%. I suspect that SPX will soon make a higher high for the year and then resume the January to October seasonal decline.
I have not been wildly bullish but became somewhat so in April, well after the March low. Since I am primarily interested in income, I don't have a compulsion to be in "generic" index stocks, so I have played it primarily through corporate bonds (LSBDX) plus the stock/bond fund VWINX in some retirement accounts. Rounding out the stock exposure were the oil and gas trusts, gold stocks, and a few closed end bond funds (GGN and GIM still held in a fairly large quantity).
Market sentiment of both the personal opinion and the market opinion types has remained very bearish, and that has supported stocks and led me not to get bearish too soon. I have mentioned several times that the 2CS (five day total of daily CBOE P/C times daily CBOE VXO) has remained too high for a market rally top or a bull market top. (Keep in mind that 2CS is inverted to price.) Major bear market rallies and bull market legs up do not end until the 2CS is well under 100. Many rallies in 2006 produced 2CS readings in the 40's! But most strong bear market rallies, as in 2000-2003, find the 2CS in the 70's.
Friday a week ago at the end of the recent pullback in stocks, the 2CS got as high as 149, so I was estimating that the rally would last much longer when it resumed. However, this past week's rally and especially events surrounding the options expiration resulted in the 2CS falling to 102 on Friday. This is the lowest reading in 2CS since the August 2008 rally. (During the May rally in 2008, 2cs got as low as 72.) In any event I was surprised last evening to see 2CS at 102, down from 149 in a week. It would take a strong next week to drop the 2CS into the 70's but it could happen. It's quite possible that it might not get to the 70's if this is a secondary rally in a continuing bear market.
Next week on the 22nd July is one of the highest tidal swings of the year during a solar eclipse which is a tide-strengthener. Someone reminded me of Steve Puetz's work http://www.internetnews.com/bus-news/print.php/783611 on crash environments in which he demonstrated that many historical crashes occurred in a window of 9 days around a lunar eclipse occurring within six weeks after a solar eclipse. There is a lunar eclipse on August 6th, so the Puetz crash window is in effect from about July 30 to August 8. Puetz always cautioned that lunar eclipses closely follow solar eclipses often but crashes occur rarely, but that crashes rarely occur outside one of these time windows. If not for the work I have put into tide work under the influence of Robert Taylor's important book, Paradigm, I wouldn't give this much heed. Also I want to stress that this is not astrology but instead is the geophysics of solar and lunar gravity effects upon the earth.
The same friend who reminded me of Puetz's work also re-directed me to Didier Sornette's latest paper. Sornette, who is a geophysicist and mathematician turned market and other large event analyst, predicted the 2000 crash and bear market on his model, and is now predicting a crash in the Chinese A shares market (SSEC) in this very same time window. http://arxiv.org/ftp/arxiv/papers/0907/0907.1827.pdf
I should point out that Sornette thought the stock markets would crash again in 2003/2004, and they didn't. But in June 2008 he did predict an approaching top in the crude oil market. On e very simplistic way to grasp his concept, since his mathematics are far beyond my understanding, is that when markets increase at faster than logarithmic rate, they are on dangerous ground. Note on the enlarged chart of the SSEC index that the rate of rise has itself accelerated and that the corrections have become progressively smaller as it rose. We know that markets are not independent in these times, so a decline in the Chinese market, the hottest on earth this year, would doubtless impact all stock markets before long. Sornette does NOT say that markets like these must crash violently, only that they will decline.
For the next two weeks I will be closely watching price and sentiment, of which the 2CS is just one very simple way to gauge it, and which anyone can follow each day with pencil and paper with closing data from: http://www.cboe.com/data/mktstat.aspx
Whether the recent stock market and commodity retracements are over today won't be clear for a few days. The tidal model was, however, looking like a short cycle (4 days) double bottom with last Wednesday/Thursday for stocks and other reflation beneficiaries, and a double top for disinflation beneficiaries like Japanese yen and bonds and US bonds. The tidal cycle length varies naturally between four and eleven days, with eight days being typical. The next one runs to about the 23rd of July.
Both breakout strength for stocks from early March and market breadth remain positive and similar to many market bottoms of the past two decades. The daily NYSE advance/decline has held well.
Several charts below show sentiment remaining mixed but certainly not with a hyper bullish attitude. The short term "crash mode" spreads of XVX (three month VIX) to regular one month VIX and one year US Treasurys to three month LIBOR are evidence of greater confidence or at least a return toward normal toward
I saw a chart of consumer durables versus consumer disposables which is a good market measure of consumer confidence. Also The Dow Jones Transports are holding which reflects expectations and lower fuel costs.
All in all it seems there is a good probability that the rally out of March 9th isn't over yet. Some of the better real economists seem to think the worst is over, amongst whom Paul Kasriel remains my favorite. Despite all the talk pro and con versus "green shoots" most of the everyday news remains bearishly slanted, which is a positive in the twisted world of sentiment.
I've been looking a lot at the portfolio but have made very few changes. I've added a bit more on weakness in several oil & gas trusts, and I moved HSTRX, a big favorite, from the IRA funds to taxable accounts as it pays a low dividend and is geared more toward "Total Return" as it name clearly states. I am still wondering whether to replace it in the IRA with Bill Gross's PTTRX or with the Vanguard GNMA Fund VFIJX/VFIIX. PIMCO's Unconstrained Bond Fund PFIUX is another possibility and is now over a year old and looking good.
In taxable accounts I am still holding nearly 75% in VWSUX since I expect municipal rates to rise, and this one will be hurt least if they do. I have too much in gold-related assets there and will lighten up on a larger rally and look to add another hedge fund-like fund to RYMFX and HSTRX, perhaps the PIMCO All Asset All authority Fund PAUIX overseen by Rob Arnott. These three all have financials (fixed income) in them but also are geared toward inflationary expectations in a long/short or long/flat way instead of always being long.
As of June 1 I was up 8.6% on the year for all accounts plus gold, but I gave back about 40% of that in June and through Friday up 5.15%. My goal at this stage is 6.5% per year without a lot of risk, so I am on course. Last year I was up only 0.18% on the year!!