The economy remains weak, earnings are poised to continue contacting for a 6th quarter in a row yet stocks have broken out to new record highs in August from an important technical base. Without a strong rebound in earnings we have a price-earnings multiple expansion stretching the faith of many investors. Option trader optimism basis call option buying seems to have peaked and the Advance Decline ratio of stocks has fallen to levels that raise the risk of at least a mild correction.
Our belief is year over year comps with the commodity price rebound will allow earnings to gradually catch up to price into the 2nd quarter of 2017 allowing another 3% rise in the SP to the mid 2200’s with potential for the upper 2300’s at a later time. Shorter term it’s likely the election news climax of narrowing Presidential polls along with this momentum pause may prevent strong stock market gains until the 4th quarter. If Oil prices can move above $50 a barrel there may be enough support for Stocks to again creep to new highs short term. Conversely if Oil prices falter on the chimerical view that an OPEC production freeze will keep prices up without lost market share consequences, then stocks will correct. Currently Oil has rallied $9 over the past 13 days and holding just below the important $50 – $53 resistance zone. A move above that zone is where many technicians are expecting to lead to an inverse head and shoulders breakout for another leg up. Rising inventory and production levels by year end imply that any further rally will be highly speculative.
In other markets:
Wheat: We remain medium to long term Bullish on Chicago Wheat in the $3.20’s to $3.40’s (basis Futures market) and the $7.60’s to $7.90’s basis the the stock (WEAT ). Money Managers and Large Spec traders are holding record levels of Selling short providing an opportunity for a significant percentage upside should WEAT breakout from this base.
Yen: Overbought conditions prevail as investors have pushed up Yen values based upon the perception that the massive Bank of Japan asset purchases (QE) can’t generate inflation and Yen depreciation. In fact the growing feeling is that Fiscal Stimulus will be the primary mantra which is supportive for Yen values. Another push higher should reach levels needed for a correction phase. 1.013 to 1.023 Dollars per Yen should stop rallies.
Cotton: Our HS Model caught both the rally and the top near 78 in recent weeks. The sentiment shifted quickly from strong Buy signals to very strong Sell signals recently as can be viewed by our HS model portfolio entries. Currently there is no hint of the Sell signal abating, however a modest retracement now is likely. Our HS model exited its recent short at 68.50 today and will likely re-sell sharp rallies.
Sugar: Concerns about supply shortages have kept prices up, but extreme Spec fund buying strongly suggests Sugar prices will be sharply lower over the next 6 months. 20 to 22 is major resistance, while under 19 looks like a breakdown.
Precious Metals: Bullish forecasts by the pros abound, yet we remain skeptical given extreme gold and silver holdings by Large Spec Funds. If prices rally into early September it may provide a Sell zone. Low to mid $1400’s remains resistance for Gold.
Free link coming soon, but here is this weeks interview of ExecSpec on Financial Sense where only a few minutes are free to listen.