Investors dodged another
bullet recently as geopolitical instability temporarily subsided after Russias annexation of Crimea. Although U.S.
equities have experienced an internal correction since then, most of the
damage has been relegated to over-extended tech stocks that were in need of a
pullback.
A reflection of the
recent lifting of selling pressure on Russian equities can be seen in the
daily chart for the Market Vectors Russia ETF (RSX), a proxy for Russias stock market. RSX has rallied 10 percent
off its year-to-date low and is now above the 15-day moving average to signal
at least a temporary break of the immediate-term downtrend.
Wall Streets
concern with Chinas slowing economy has also
diminished from earlier this month and is reflected in the 4 percent rally of
the Shanghai Composite Index recently. With China, Russia and the
emerging markets on the backburner, equity investors should enjoy a temporary
respite of worries until at least later this spring. While U.S. stocks
are under mild selling pressure right now, the fact that the S&P 500
Index (SPX) is hovering close to its highs despite the correction in growth
stocks suggests that the bulls havent yet given
up their control over the market. A spring fling�� to new highs cant be ruled out before the final descent of the
long-term deflationary cycle makes its presence known.
Maybe not in the next
couple of months, but certainly by the summer we should see signs of
increasing market volatility and accelerating selling pressure, especially as
we head closer to the final bottom of the 60-year deflationary cycle this
fall. If China and/or other emerging market countries are experiencing
turmoil at that time, it will only serve to exacerbate the volatility.
Speaking of China, its worth noting that Goldman Sachs Group has warned
that financing arrangements in China using commodities to obtain credit may
unwind in the next 12 to 24 months. The unwinding would likely be
driven by increased volatility in the yuan
currency, according to Goldman. The unwinding would be bearish given relatively limited physical liquidity to absorb
the shock,�� Goldmans chief commodities analyst Jeffrey Currie
wrote.
Already weve seen preliminary signs of what the next global
market crisis could look like. The problems have originated in China
and Russia with other countries (e.g. Brazil, Chile, Turkey) playing
supporting roles. This is very similar to what happened in 1998 with
the financial crisis that rolled across the globe beginning with Asia and
extending to South America, Russia and finally hitting the U.S. like a
tsunami. Few market analysts in 1998 (a super boom year) believed the Asian contagion�� would
infect U.S. markets, but they were dead wrong. It happened very quickly
in 98 with most of the damage occurring in July through September the
final hard down�� phase
of the 4-year and 8-year cycles. Not coincidentally, 2014 is also a
bottom year for the 4/8-year cycles as well as several others.
Also worth noting is the
latest action in the bond market. In the Feb. 28 commentary entitled The deadly undercurrent of deflation,��
we discussed buy signal for bonds confirmed by the Coppock
Curve indicator for the iShares 20+ Year Treasury
Bond ETF (TLT). The Coppock Curve is one of
the single best indicators for issuing buy signals on bonds (though it is
less helpful for determining tops). The Coppock
Curve is derived by adding the 14-month and 11-month rate of changes for bond
prices and smoothing the result with a 10-month weighted moving
average.
As I wrote in the Feb. 28
commentary: The recent Coppock
Curve buy signal for bonds, assuming it pans out, means that Treasury yields
will be declining while bond prices rise. Declining yields are very
much consistent with the Kress cycle scenario for 2014, which suggests that
disinflationary if not outright deflationary pressures will increase until
the long-term cycles bottom later this year.��
While I dont expect selling pressure to be very
strong against equities until after May, the fact that TLT broke out above an
8-month trading range ceiling this week is an indication that investors are
becoming more concerned about deflation and its effects on global market
volatility.
Contrary to Wall Streets expectations, global market volatility is still
a prime consideration for stocks in the intermediate-term. Chinas slowing economy may come to exert a significant
drag on global equities as the year progresses, and Russia will remain the
proverbial powder keg until the Ukraine situation has been fully
resolved. Until then, investors are advised to fasten their seatbelts
as there will likely be increasing turbulence this summer.
Again, this summer the
4-year, 8-year, 10-year, 12-year, etc. cycles through the 60-year cycle will
also be cascading into their final bottoms around late September/early
October. It would be surprising indeed if the financial market somehow
emerged unscathed by this crescendo, especially given the fragile state of
the global economy.
Kress Cycles
Cycle analysis is
essential to successful long-term financial planning. While stock
selection begins with fundamental analysis and technical analysis is crucial
for short-term market timing, cycles provide the context for the markets intermediate- and longer-term trends.
While cycles are
important, having the right set of cycles is absolutely critical to an investors success. They can make all the
difference between a winning year and a losing one. One of the best
cycle methods for capturing stock market turning points is the set of weekly
and yearly rhythms known as the Kress cycles. This series of weekly
cycles has been used with excellent long-term results for over 20 years after
having been perfected by the late Samuel J. Kress.
In my latest book �Kress Cycles,� the third and final installment in
the series, I explain the weekly cycles which are paramount to understanding
Kress cycle methodology. Never before have the weekly cycles been
revealed which Mr. Kress himself used to great effect in trading the SPX and
OEX. If you have ever wanted to learn the Kress cycles in their
entirety, now is your chance. The book is now available for sale at:
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Order today to receive your autographed copy along with a free booklet
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Clif Droke
is a recognized authority on Kress cycles and internal momentum, two valuable
tools which have enabled him to call most major stock market turning points
from 1997 through the present. He is the editor of the Momentum
Strategies Report newsletter, published three times a week since 1997.
He has also authored numerous top-selling books, including his most recent
one, Kress Cycles.��
For more information visit www.clifdroke.com
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