Martin Pring s InterMarket Review

Transcription

1 Martin Pring s InterMarket Review Publishing a synopsis of the world s Intermarket Analysis for over 20 years Sweetmeadow Circle, Sarasota, FL February, VOL. 28, NO. 9 Market Summary Markets Requiring Action 1. Inflation sensitive markets (risk on) experience whipsaw breakouts to the downside. Such action usually means much higher prices but it can also involve an extended trading range. 2. Bond barometer remains at 100, but technical indicators hint at a price top. 3. US Market is likely to under-perform the rest of the world for the first quarter. 4. For the first time in a couple of years we are starting to get bullish on China. Markets approaching important benchmarks. (These are not predictions, merely important chart points.) Commodities: CRB Spot RM Monthly close above 574 for a positive 12-month MA crossover or above 550 for a positive 65-week EMA crossover. Currencies: Dollar Index - Month-end close below 76.4 for a negative 12-month MA crossover; below 77.8 for a negative 65-week EMA crossover. x Credit Markets: ishares Lehman 20-year Trust - Friday close below $107 for a negative 65-week EMA crossover; below $106 for a negative 12-month MA crossover. ~ IMR Data Links ~ You can now access links for data (economic and market) referenced in the InterMarket Review. They can be accessed for free at Please note our web site (pring.com) now allows you to plot the daily KST and smoothed RSI or the short, intermediate and long-term KST s, as well as the Special K for all stocks and a variety of key indexes. By Googling other sites such as Yahoo Finance India Yahoo Finance Canada, etc. Non US subscribers can also chart local stocks. Contents Global Equities: MSCI World ETF - Above $45.7 for a positive 12-month crossover and $43.9 for a negative 65-week EMA crossover. Precious Metals: Gold - Friday close below 1544 for a negative 65-week EMA crossover, and below $1599 for a positive 12-month MA crossover. US Equities: S&P Composite - Estimated month-end close below 1267 for a negative 12-month MA crossover; a Friday close below 1235 for a negative 65-week EMA crossover. Chart of the Month...2 Guidelines for IMR Asset Allocations...2 U.S. Dollar-Based Asset Allocation...4 Overview and Global Financial Markets...6 U.S. Stock Market...12 Martin s Stock Picks...19 U.S. Credit Markets...23 Commodity Markets...27 International Markets...29 Currencies...37 Precious Metals...41 Data Sources and Reuters Symbols Amex Brokers Index.XBD CRB Spot Raw Material Index - Gold Bugs Index.HUI JOC-ECRI IP Index (Barron s Market Lab). Goldman Sachs Indust Metal Index.GYX Goldman Sachs Energy Index.GJX Goldman Sachs precious Metal Index.GPX Eurotop Index.AEUR Philadelphia Gold and Silver Share Index.XAU Dow Jones World Stock Index.WIDOW InterMarket Review / Volume 28, No. 9 1

2 CHART OF THE MONTH: Government Bond Yields vs. an 18-month ROC Chart 1 This chart features the 20-year government bond yield together with its 18-month ROC. The arrows show when the oscillator reverses from or beyond the + and 25% levels. Remarkably, sixteen of the seventeen occurrences were followed by important trend reversals. Only the 1981 instance, flagged by the dashed arrow, proved to be a failed signal. We can even take this exercise back to There were five additional occurrences and only one failure. The current situation looks very much like another reversal, thereby putting the odds at a fairly high level that bond yields could rally at any time. 2 InterMarket Review / February, 2012

3 Asset Allocation Recommendations Recommended U.S. Sector ETF s Dow Jones Aerospace (ITA)****$67.75 Dow Jones Home Construction (ITB)**$11.50 Dow Jones Pharmaceuticals (IHE)**$68.50 Dow Jones Select Dividend (DVY)**$49 Dow Jones Technology (IYW)**$64 Dow Jones Utilities (IDU)**$81 Guggenheim Defensive (DEF)**$26 Holders Biotech (BBH)**$101 Holders Retail (RTH)**106 KBW Regional Banks (KRE)**$23.70 Spider Consumer Staples (XLP)**$29 Spider Homebuilders (XHB)**$16.10 Bonds 30% * Dependent on market action. ** Stop is based on Friday close. **** Buy on Friday close above. Short Double Euro (EUO) 10% Cash 20% Stocks 40% Guidelines for IMR Asset Allocations The portfolio allocations presented above for the Intermarket Review (IMR) have two functions. First, they are intended as a guide for a neutral investor; i.e., one who lies between conservative and aggressive. For example, we may recommend a 40% allocation to US stocks. An older more conservative subscriber looking for income and safety may conclude that such an allotment may be too aggressive. On the other hand, a younger investor, who has time and cash flow on their side, could find the 40% overly conservative. The basic point is that these allocations should only be taken at face value if you consider yourself to be a neutral investor. The second purpose of our allocations is to summarize our thinking about the markets in a practical, executable way. For example, we might conclude from the position of our indicators that inflation hedge stocks and commodities are headed higher. In that instance, the allocation page would be used to emphasize those views by recommending inflation driven sectors, resource based country ETF s, such as Canada and Australia, as well as commodity index ETFs or individual commodity ETF s. We might even include an inverse bond ETF to undermine our inflationary expectations. By the same token, if our indicators suggest a global bear market for equities, that portion of the portfolio would be greatly reduced. This equity exposure would most likely comprise defensive sectors such as utilities and consumer staples. Greater exposure to long-term bonds and cash would round out the picture. Various asset classes and sectors perform differently in different parts of the business cycle. Our recommendations are usually consistent with the prevailing stage as flagged by our models. Technical factors that we take into consideration are long-term moving averages, such as the 12- month or 65-week time span, the absolute long-term KST, relative action and the long-term KST for relative action. Individual US equity sectors are compared to the S&P Composite and country ETF s to the MSCI World Stock ETF (ACWI). Since there is always a bull market somewhere and some investors have an insatiable appetite to be constantly active, we do, from time-to-time, recommend spreads where it s possible to take advantage of a trend in a relationship that can benefit regardless of the market s direction. For example, transports tend to be an early cycle leader and energy a laggard. If the technicals were consistent, a long transports/short energy ETF trade might be appropriate. In most instances, risk management stop losses are recommended. The stop will typically be placed below a previous short-term low or more commonly under a 65-week EMA. Each month the stop levels are reviewed and where possible are raised. When a market or sector is considered vulnerable, stops will be tightened aggressively. Because markets can move strongly between issues, new subscribers should always assess the risk between current prices and stop levels to make sure that the difference is manageable. If it is not, it probably means the security in question is overstretched and you are better advised to wait for a correction. InterMarket Review / Volume 28, No. 9 3

4 U.S. Dollar-Based Asset Allocation Our US based barometers continue to signal a Stage I environment, which is bullish for bonds and bearish for stocks and commodities. However, when compared to their 12-month moving averages, we find that stocks are bullish thereby placing this technical model in a Stage II, the most positive of all phases. In addition, it is worth noting that the Barometer is calculated as a two-month moving average of the sum of its monthly components in order to reduce the number of whipsaws. That monthly number at the end of January stood at 50%, so unless a deterioration sets in during the month of February, the Barometer will turn bullish. We also note that one of our best equity models, the 120% Rule, has already moved into positive territory. It does this when the yield on 3-month commercial paper is below its 12-month MA (a proxy for an easy monetary policy) and the S&P responds by crossing above its 12-month MA. The economy can languish for many months, even when short-term interest rates are declining or low as they are now. However, it is not until the stock market senses that it is about to turn by crossing above its MA that conditions for a strong performance are signaled. We would not normally question such bullish signals but the problem is that they are being triggered at a time when the short- and intermediate trends are overstretched and therefore vulnerable to a signal reversing correction. In addition, the long-term KST for the S&P is still declining and remains at a moderately overstretched level which also offsets other bullish indications. Our policy therefore is to go with the signal and expect higher prices but not to allocate assets as aggressively as we normally would at this stage of the cycle. In the middle of last year several of our long-term technical indicators started to deteriorate as the economy began to slip. Historically reliable series, such as the ECRI weekly LEI and the ratio between government and BAA corporate bonds, sank to levels that have consistently called recessions in the past. However, in the last three months it has become obvious that the economy has not fallen into recession, but has gained a second wind. Spearheading this process has been a rise in housing starts, a sector that never recovered during the 2010/11 stage of the recovery. Improving inventory/sales ratios for new homes and a rally in the Wells Fargo Housing Index, a broker sentiment indicator, give credence to the idea that housing starts will continue to grow. It s not that home building is a large part of the economy; it s not. We look at it more from a chronological sequence point of view that tells us the economy is pulling away from an actual contraction. Indeed, the Conference Board s leading Economic Indicators, thanks to a high money supply weighting, never sank at all last year. In addition, the Barometer Signals and the Six Stages of the Business Cycle Date 9/30/1955 6/30/1956 3/31/ /31/1957 9/30/1958 6/30/1959 3/31/ /31/1960 9/30/1961 6/30/1962 3/31/ /31/1963 9/30/1964 6/30/1965 3/31/ /31/1966 9/30/1967 6/30/1968 3/31/ /31/1969 9/30/1970 6/30/1971 3/31/ /31/1972 9/30/1973 6/30/1974 3/31/ /31/1975 9/30/1976 6/30/1977 3/31/ /31/1978 9/30/1979 6/30/1980 3/31/ /31/1981 9/30/1982 6/30/1983 3/31/ /31/1984 9/30/1985 6/30/1986 3/31/ /31/1987 9/30/1988 6/30/1989 3/31/ /31/1990 9/30/1991 6/30/1992 3/31/ /31/1993 9/30/1994 6/30/1995 3/31/ /31/1996 9/30/1997 6/30/1998 3/31/ /31/1999 9/30/2000 6/30/2001 3/31/ /31/2002 9/30/2003 6/30/2004 3/31/ /31/2005 9/30/2006 6/30/2007 3/31/ /31/2008 9/30/2009 6/30/2010 3/31/2011 This chart graphically shows the stages since 1982 as defi ned how our barometers have signaled the stages in recent decades. Although we only recognize six stages, mathematically there are a possible eight combinations. Stage VII develops when bonds and commodities are bullish and stocks bearish; whereas Stage VIII is when Stocks go bullish and bonds and commodities bearish. The models signal Stages VII and VIII about 10% of the time but in order to preserve the sequence when registering a Stage VII or VIII we have held the data at its previous stage until the models return to a recognized one. It is apparent that the cycle normally progresses in a chronological sequence, but there are the odd occasions when it retrogrades or even jumps a stage. 4 InterMarket Review / February, 2012

5 trend of initial claims numbers continues to improve as did today s ISM numbers. Thus, barring negative unforeseen exogenous forces, the US economy will continue to bungle along, with neither robust growth nor a cataclysmic contraction. At some point, stronger business activity results in rising commodity prices and bond yields which sow the seeds for the subsequent contraction. However, as long as the S&P can remain above its 12-month MA it indicates that the market is not worried about such possibilities. Consequently, we believe that the more aggressive investment stance we adopted last month should be expanded slightly. This does not change our view concerning the secular bear market, as the excessive optimism seen at the turn of the century has not yet reverted to the kind of pessimism experienced at a secular bear market low. Recent readings in the Shiller P/E ratio (21.4), S&P Dividend yield (2.12%) and the Tobin Q (.85) are a far cry from their average secular bear termination readings of around 7.5, 6-7% and.30. If our assumption of higher equity prices plays out, we are likely to see a limited extension to the bull market that began in March of 2009 that returns inflation adjusted stock prices closer to their post 2000 highs. For a couple of years we have been negative on the Chinese market but several positive technical developments are starting to take place. Most noticeably is a tentative but major positive relative strength trendline break for the China ishares, the FXI. If that proves to be valid then it would imply a resurgence in business activity there; and given the correlation between Chinese equities and commodity prices, a commodity rally. It s not quite a definite trend reversal signal yet, but needs to be closely monitored in February. Our allocation for US equities continues to expand. Last month we recommended a 25% allocation which was increased to 30% because we were stopped into several new ETF s. This month we are raising that allocation to 40% because of the triggering of our 120% rule, discussed in Section II. We would like to raise this number to a more aggressive level, but with the market being overstretched on a short- and intermediate basis, it is possible that we might experience some kind of a correction in February. Last month were stopped out of Advisor Shares Active bear and a couple of our cross sector spreads. Those we were not stopped out of are no longer recommended. Since the relative strength of the US market is starting to look tired, we will be recommending some international ETF s provided they experience Friday closes above $67.50, $40, $67.50, $31 and $79.50 for Brazil (EWZ), China (FXI), S. Africa (EZA) Indonesia (IDX) and Emerging Latin America (GML), respectively. The total allocation to these country funds would be 15%. The December downside break in the gold price turned out to be a whipsaw and we were duly stopped out of a small 5% allocation. As a play on the dollar, we are continuing to recommend the Double Short Euro (EUO), to the tune of a 10% allocation. The daily close stop is being raised to $ February 2, 2012 Martin J. Pring Allocations The Bond Barometer remains bullish and we continue to recommend a reduced 10% exposure to the Barclay s Aggregate Bond ETF, the AGG with a Friday close stop at $107. We are also recommending a 10% allocation to the Iboxx Corporate Bond ETF, the LQD, with a Friday close stop of $110. Even though we are nervous concerning long-term bonds, these ETF s are acting well technically and the stops are fairly close to current levels, offering little in the way of risk. We are also recommending a 10% allocation to the Peritus High Yield Fund (HYLD). This ETF has an average maturity of just over 3-years and a current yield of 10%. A daily close stop has been placed at $47. Continued on page InterMarket Review / Volume 28, No. 9 5

6 World Overview & Global Financial Markets Global financial markets have reached a crucial point. On the one hand, the longer-term indicators still continue to point to lower equities and deflation (bonds being favored over commodities). On the other, the short- and intermediate series are indicating the opposite. The current situation is crucial because continued strength in the short-term series could easily reverse the longer-term indicators, thereby indicating higher stock prices and superior performance of commodities against bonds. Chart 2 shows that the long-term KST for our World Bond Index has violated an up trendline and gone bearish. This weak action suggests that the 10-year up trendline for the Index itself will eventually be violated. However, Chart 3 points out that this could happen later rather than sooner because the short- term KST is in a bullish mode and likely to support higher near-term prices. Nevertheless, last year s penetration of the 2008/11 bull market trendline suggests that upside momentum has dissipated and that the positive short- term KST is more likely project prices in a sideways rather than an upward trajectory. Chart 4 tells us that the Global Commodity Index is still overbought on a long-term basis. The arrows show that bull markets have traditionally been launched when the KST reverses from below zero rather than its current relatively lofty position. That s not to say that it can t happen, but since the price is still below its 12-month MA it definitely raises the bar. Chart 5 tells us that the Index has managed to rally back above the neckline of a head and shoulders top. There is a good chance it can build on this strength because the short- and intermediate momentum series are bullish. However, the fact that it has managed to break above the 2011 down trendline suggests that a worthwhile rally is in the cards or at the very least, an extended trading range. However, if these assumptions prove false and the Index breaks below the whipsaw low, that would definitely confirm that the bear market is alive. World Bond ETF Index (BWX*3 plus 3+AGG Spliced) and a Long-term KST Chart 2 6 InterMarket Review / February, 2012

7 World Bond ETF Index (3xBWX plus 1x AGG) and Two KSTs Chart 3 Global Commodity Index and a Long-term KST Chart 4 InterMarket Review / Volume 28, No. 9 7

8 Global Commodity Index and Three KSTs Chart 5 It would be nice if the ultimate global inflation/deflation relationship in Chart 6 could point us in the right direction but that is not the case since we again have a conflict between the short- and long-term momentum series. Technically speaking, the ratio is in a bear market because it remains below its 65-week EMA and the previous minor high. However, it would not take much in the way of strength to reverse these conditions and place it in a more neutral/bullish technical position. Chart 7 shows us how critical the recent low might prove to be. That s because the Index, if we ignore the 2007 whipsaw break, has managed to hold above the breakout trendline for 20 years. The line has also been touched or approached on numerous occasions and therefore represents very important support. We believe its violation would represent a major deflationary signal. Our best guess at this point is that it experiences some ranging action but does not violate the line. The vertical lines in Chart 8 show that upside reversals in the derivative of the OECD Leading Indicators (shown in the bottom panel) have consistently called rallies or extended trading ranges in global equity prices. There were two exceptions; 1989 and 2001, as flagged by the orange lines. That makes things interesting as the indicator looks as though it may have stopped declining. It again goes back to our original conclusion at the beginning of this section that global markets may have reached a critical juncture point. Chart 9 shows that a smoothed series calculated from the number of international markets below their 12-month moving averages has reached a very oversold level. The green arrows indicate that upside reversals from below the dashed horizontal line have usually resulted in a major rally. The two exceptions are shown in orange; but on neither occasion, did the price rally above its 12-month MA. In the current situation, the indicator is still falling and the Index ($44.50) remains marginally below its 12-month MA at $45.35, so a signal has not yet been given. However, Chart 10 holds out some hope that it might, because the two momentum indicators are bullish but not overextended. Also, the violation of the 2009/12 down trendline on the short-term KST suggests that the current buy signal may be the start of something more important than normal. 8 InterMarket Review / February, 2012

9 Global Commodity/Bond Ratio and Three KSTs Chart 6 Global Commodity/Bond Ratio and a Long-term KST Chart 7 InterMarket Review / Volume 28, No. 9 9

10 MSCI World ETF (ACWI) and Two Indicators Chart 8 ishares MSCI World Stock ETF (ACWI) and a World (12/6) Diffusion Indicator Chart 9 10 InterMarket Review / February, 2012

11 ishares MSCI World Stock ETF (ACWI) and Two KSTs Chart 10 InterMarket Review / Volume 28, No. 9 11

12 U.S. Stock Market Our Stock Barometer is based on a 2-month MA of the monthly total of its components in order to reduce whipsaw signals. It improved slightly to a 41% reading last month and is just one indicator shy of a bullish 50% reading. Since the raw monthly data for January was 50%, there is an excellent chance that it will go bullish in February. Several other long-term indicators have already turned positive. For example, our Total Return Model, which compares the momentum of the total return on stocks against cash experienced a sell signal a couple of months ago and has now gone bullish. Chart 11, shows that previous bearish whipsaw signals like the one just seen, were all followed by worthwhile rallies. Also, our 120% Rule is on a buy signal. This one goes bullish when the yield on 3-month commercial paper is below its 12-month MA (a proxy for Fed easing) and the equity market responds with the S&P Composite crossing above its 12-month MA. At Pring Turner, we call it the 120% Rule because positive returns for equities is substantial in such an environment. Indeed, Formula Research editor Nelson Freeburg tells us that it s the most profitable system he has ever tested, with his research goes back to The results came back with a compound annual return of 10.59% vs. 9.91% for S&P total return. Maximum drawdown was 16.4% vs. 54.7% for the S&P. In other words, when the Fed is easy and the market responds, expect above average returns. Chart 12 shows bullish and bearish periods back to Bearish periods develop when both series are negative; i.e., when yields are rising and stocks falling. Last month we introduced our commodity model, which goes bearish when commodity prices become unstable in either direction and equities respond negatively. Red highlights in Chart 13 show such periods. The market is no longer responding negatively to this condition and so the model is no longer bearish. S&P Composite and the New Stock Barometer Chart InterMarket Review / February, 2012

13 S&P Composite and The Total Return Model Chart 12 S&P Composite and the 120% Rule Chart 13 InterMarket Review / Volume 28, No. 9 13

14 We also pointed out last month that the ratio between stocks and commodities had moved above their secular down trendline. A rising ratio usually means a very positive stock market. Chart 16 shows that generally speaking, a rising ratio usually favors deflation sensitive over inflation sensitive equities. As you can see, this ratio stands right at its secular down trendline and the 2 ½-year horizontal trendline and 36-month MA. In other words, it has not yet confirmed the stock/commodity ratio. If it does break out, it will say nothing about the absolute performance of either of its components; merely that deflation sensitive stocks are likely to out- perform their inflation sensitive counterparts. One such deflation sensitive group, homebuilders, is featured in Chart 17, where it is fairly evident that a KST buy signal is likely to fuel the two major breakouts that have just developed. Finally, Chart 18 shows the strong connection be- CPI Adjusted Stocks and Two Indicators Chart InterMarket Review / February, 2012

15 S&P Composite vs. the Stock (S&P) Commodity (CRB Spot) Ratio Chart 15 Stock/Commodity Ratio and a Deflation/Inflation Ratio Chart 16 InterMarket Review / Volume 28, No. 9 15

16 tween economic momentum and confidence in the bond market. The center panel features our Master Economic Indicator, a composite economic series that has been smoothed with a 6-month MA. Underneath is a 4-month MA of the 12-month ROC of the ratio between government and BAA corporate yields. A rising ratio indicates growing confidence as the spread between the two series narrows in favor of the BAA series. The relationship between this measure of confidence and that of economic momentum is certainly not a tick by tick one, but there is a definite correlation. Perhaps equally as important is the fact that reversals from around the green dashed line correspond with great buying points for equities and are flagged by the arrows. At present, the indicator is at a very depressed level, but since it is still declining it has not yet registered the all-clear. However, Chart 19, which features its weekly progress, has just experienced a marginal upside breakout and both KSTs are in a positive mode. That suggests the ratio will rally over the near-term and that will likely reverse the series in the previous chart. On the other hand, if the ratio now slips below the horizontal red line, say to.475, that would indicate a further deterioration in confidence, delaying any equity rally. Homebuilders and a Long-term KST Chart InterMarket Review / February, 2012

17 S&P Composite, The Economy and Bond Market Confidence Chart 18 S&P Composite and Bond Market Confidence Chart 19 InterMarket Review / Volume 28, No. 9 17

18 S&P Composite and the Food Model Chart 20 Finally, our Relative Food Momentum Model, in Chart 20, has gone bullish again. This happens when the (green) intermediate KST for the S&P crosses above that for the relative strength of the food group. Such action indicates that investors have begun to shun defensive equities, like foods, in favor of more speculative ones. Such an improvement in confidence typically results in higher prices, as you can see from the green highlights. 18 InterMarket Review / February, 2012

19 Martin s Potential Buy Candidates Chart a-1 First Business Financial Services Inc. and Three Indicators - FBIZ Each month we introduce several technically attractive looking stocks. The basis for the selection is that the long-term KSTs are usually below, or close to, zero and above the their EMA s. Some times the stock will have broken out and is an immediate buy, while others will need to be stalked for a short-term correction. Finally, some may appear to be forming bases, but have not broken out. These situations will usually have a short-term KST buy, just requiring the price to confirm. Such stocks are recommended in anticipation of a breakout. Conservative investors may wish to wait for the long-term chart entry point to be achieved, and traders can use the lower numbers on the short-term charts. Some stocks may already be owned by the editors or their clients. First Business Financial Services Inc. and Two Indicators - Symbol: FBIZ Chart a-2 InterMarket Review / Volume 28, No. 9 19

20 FTI Consulting Incorporated and Three Indicators - Symbol: FCN Chart b-1 FTI Consulting Incorporated and Two Indicators - Symbol: FCN Chart b-2 20 InterMarket Review / February, 2012

21 North Valley Bancorp and Three Indicators - Symbol: NOVB Chart c-1 North Valley Bancorp and Two Indicators - Symbol: NOVB Chart c-2 InterMarket Review / Volume 28, No. 9 21

22 Whitney Holding Corporation and Three Indicators - Symbol: WTNY Chart d-1 Whitney Holding Corporation and Two Indicators - Symbol: WTNY Chart d-2 22 InterMarket Review / February, 2012

23 U.S. Credit Markets Our Bond Barometer remains at its maximum bullish reading of 100%, but we are wondering if this state of affairs can last much longer. For example, our Inverted Master Yield series is close to its upper trend channel and the long-term KST is very overextended. That does not necessarily argue for an immediate reversal, but consider Chart 1. Here we see the 20-year government bond yield together with its 18-month ROC. The arrows show when the oscillator reverses from at or beyond the+ and 25% level. Remarkably, sixteen of the seventeen occurrences were followed by important trend reversals. Only the 1981 instance, flagged by the dashed arrow, proved to be a failed signal. We can even take this exercise back to There were five additional occurrences and only one failure. The current situation looks very much like another reversal thereby putting the odds at a fairly high level that bond yields are about to rally. The 20-year yield is plotted inversely in Chart 23, together with its 13-week ROC. In 2010 the ROC experienced an extreme swing. These phenomena develop at the end of a lengthy price move when the oscillator moves to a multi-year high and reverses to a multi-year low. In this case, the high was a record and it indicated major buyer exhaustion. The reversal to a multi-year low was indicative of a major change in sentiment. Usually an extreme swing is followed by a primary trend reversal but in the current situation we saw a subsequent move to a marginal new high in the price and another record ROC reading. This extreme volatility is very similar to that which took place at the start of the secular bull market in the early 1980 s, but this time it s in reverse ishares Lehman 20-year Trust (TLT) vs. The Bond Barometer Chart 21 InterMarket Review / Volume 28, No. 9 23

24 Master Yield (Inverted) and a Long-term KST Chart year Government Yield (Inverted) and a 13-week ROC Chart InterMarket Review / February, 2012

25 Government 20-year Yield (Inverted) and Three KSTs Chart 24 and the oscillator gyrations are that much greater. Finally, Chart 24 shows how vulnerable the price may be. First, the long-term KST is very overstretched, but it is still rising. However, the arrows show how reversals in the intermediate KST from an overbought level have consistently been followed by declines of extended trading ranges in the last 11 years. Finally, the short-term series has just completed a head and shoulders top and the price itself has violated a steep up trendline. In a slightly different department, Chart 25 shows that the downward trend for Moody s BAA corporate bond yield is still intact. However, it is very close to its 2008/12 primary bear down trendline. We think it will rally through because the short- and intermediate series are bullish. If it does move above the trendline, that will mean a buy signal from the long-term KST and a primary bull market signal. InterMarket Review / Volume 28, No. 9 25

26 Moody s Corporate BAA Bond Yield and Three KSTs Chart 25 Published and all rights reserved by Pring Research. In addition to publishing the InterMarket Review, the International Institute for Economic Research, d/b/a Pring Research, also acts as a consultant on financial markets and operates as an investment advisor. Before making specific investments, further investigation is recommended. Although information contained in this publication has been derived from sources which are believed to be reliable, they are not always necessarily complete and cannot be guaranteed. Neither Pring Research, Inc. nor any of its employees, or any person(s) or firm who is represented within this publication shall have any liability for any loss sustained by anyone who has relied on the information contained in this publication. Employees of this company may at times have positions in the securities referred to in this publication and may make purchases or sales of these securities while the publication is in circulation. The INTERMARKET REVIEW is published monthly by Pring Research, Inc., at 4830 Sweetmeadow Circle, Sarasota, FL First class postage paid at Sarasota, FL. INTERMARKET REVIEW. Address all subscription mail orders, change of address, etc. to Circulation Dept., INTERMARKET REVIEW, 4830 Sweetmeadow Circle, Sarasota, FL 34238; phone , Monday - Friday, 9:00 A.M. to 4:30 P.M. EST. The current mailing label or a facsimile should accompany subscription or change of address. SUBSCRIPTION RATES: - $75.00 introductory quarter, $ quarterly renewal, (12 issues). All payments in U.S. currency only, please. Cancelations MUST be made in writing via fax or to or info@ pring.com, respectively. Unused months will not be refunded unless requested. 26 InterMarket Review / February, 2012

27 Commodity Markets The secular or very long-term trend for commodities is still positive. This can be seen from Chart 26, which indicates that the secular price oscillator is rising and is still shy of the three pervious secular peaks. Also, our secular commodity model, constructed from trend and momentum series, remains in a positive mode. We are therefore treating the current cyclical or primary trend bear market as a correction under the context of a secular bull trend. That should mean that it will be fairly brief in terms of time. Generally speaking, as a secular uptrend progresses, cyclical corrections become progressively weaker in magnitude terms. That suggests that the current bear market will be of a smaller magnitude than the 2008 shakeout. Our Inflation Barometer remains in a bearish mode but improved slightly in January to a 12.5% reading. The arrows in Chart 27 show that, in the past when this model has fallen to a zero reading and subsequently started to rally, this has typically been associated, either with a bottoming process for the CRB Spot, or the start of an actual bull market. The only exception developed in 1966, and here the signal represented a premature reversal. Bearing in mind the probability that the secular bull is still operating, this reversal strongly suggests that the December low either represents the start of a trading range or the beginning of a new bull market. We are likely to find our pretty soon because the global economy has reached a critical point. This is illustrated in the bottom panel of Chart 28, where the shaded areas point up that negative readings in the Global Economic Momentum series have typically been associated with declining prices. Since the indicator is right at the plus/ minus demarcation line it is at a make-or-break level. The two arrows show that it is not unprecedented for this CRB Spot Raw Industrials and The New Commodity Barometer Chart 26 InterMarket Review / Volume 28, No. 9 27

28 CRB Spot Raw Materials Index and the New Commodity Barometer Chart 27 CRB Spot Raw Industrials and Global Economic Momentum Chart InterMarket Review / February, 2012

29 Master Commodity (CRB Spot Plus DJP) and Three KSTs Chart 29 series to reverse its course at the equilibrium level. Chart 29 features our Master Commodity Index. No commodity Index is perfect, but by blending the industrially based CRB Spot with the more broadly weighted Dow Jones UBS Commodity ETN, the DJP we arrive at, what we think, is a broader index. As you can see, this series has just violated its bear market down trendline and both the short- and intermediate KSTs have reversed to the upside. This should give the Index some near-term strength, which is important because it is currently just below its 65-week EMA. The arrows show that this EMA has recently offered timely primary bull and bear market signals. Given the positive short-term momentum another one is likely to develop in February. That will leave the long-term KST as the only negative, but its recent sideways trajectory suggests that a reversal to the upside is certainly within the realm of possibility. We are keeping a very close eye on the DJP (Chart 30) because its short-term KST has just violated its 2010/12 down trendline. Moreover the intermediate series has just gone positive. That means that a challenge on the 2011/12 down trendline for the price itself and the 65- week EMA at just over $45 is likely. If that happens, it would greatly enhance the chances that prices could move significantly higher. InterMarket Review / Volume 28, No. 9 29

30 DJ UBS ETN (DJP) and Three KSTs Chart 30 Commodity/Bond Ratio and a Price Oscillator (60/360) Indicator Chart InterMarket Review / February, 2012

31 Inflation/Deflation Ratio and Two KSTs Chart 32 Inflation/Deflation Watch Chart 31 reflects the secular trend of the all-important Commodity/Bond ratio, the ultimate inflation/ deflation relationship. It, of course, remains within the trading range of the last few decades but has fallen back to the area of the dashed support trendline. Since the secular momentum indicator in the bottom panel is still rising, the odds of a break above last year s high and the upper end of the trading range are high. If so, it would indicate that a major, multi-year trend favoring commodities over bonds was underway. Last month we pointed out that the ratio between inflation and deflation sensitive stocks had broken down from a complex head and shoulders pattern. However, January s price action has shown that to be a whipsaw as the price has moved decisively back above the line again. Now it is faced with some overhead resistance in the form of the 65-day MA and two converging trendlines. Since the two KSTs are in a positive mode, there is an excellent chance that this series will experience upside breakout. If so, it would indicate the likelihood of a very strong (inflationary) rally. That s because whipsaws are typically followed by above average moves in the opposite direction to the whipsaw. Since such action would indicate superior performance by inflation sensitive equities, the implication would be that the cyclical bear market for the Commodity/Bond ratio in the previous chart has terminated. InterMarket Review / Volume 28, No. 9 31

32 International Markets For some time we have been bullish on the relative action of the US versus the rest of the world. There is nothing at the moment, apart from an overstretched long-term KST to suggest a reversal to primary a bear status. However, the short-term KST has completed a top and the intermediate series looks as though it may be in the process of peaking. The two red arrows show the sizeable corrections in the on-going bull market followed the two previous intermediate peaks. Our conclusion is that the US market is likely to underperform the rest of the world for several months. Last month we pointed out that the four markets in Chart 34 has broken down and were therefore in a position to lead the world lower. In the last few weeks though, each one has pulled back from the brink and broken above an 8-month down trendline. To some extent they have each succeeded in moving above the extended necklines of their respective head and shoulders tops. This action now suggests that the breakdowns will turn out to be whipsaws and that we should now expect higher prices. Of course, if they now drop below their December lows, all such bets will be off. Given the most recent pricing points however, that is not likely. One beneficiary of potential US relative weakness are the BRIC countries (Brazil, China, India and Russia). Their ETF, shown in Chart 35, has broken above a dashed down trendline and is now at resistance in the form of last year s rally high. More impressive is the fact that the RS line has violated its 2010 down trendline. It s true that the two KSTs are bearish, but their trajectories have gone flat, so a breakout by the price itself would likely place them in a positive mode. We have been bearish on China for a couple of years but for the first time we are starting t see some encouraging signs. For example, the relative strength line for the China ishares, the FXI, has broken above a 2 ½-year down trendline and its Special K has also experienced a breakout. The price itself has completed an S&P (SPY) vs. the EAFE (EFA) and Three KSTs Chart InterMarket Review / February, 2012

33 ishares Taiwan and Three Indicators Chart 34 MSCI BRIC (BKF) and Three Indicators Chart 35 InterMarket Review / Volume 28, No. 9 33

34 China ishares (FXI) and Three Indicators Chart 36 ishares Brazil and Three Indicators Chart InterMarket Review / February, 2012

35 Emerging Latin America (GML) and Three Indicators Chart 38 ishares MSCI South Africa (EZA) and Three KSTs Chart 39 InterMarket Review / Volume 28, No. 9 35

36 Chart 40 Indonesia (IDX) and Two KSTs 8-month reverse head and shoulders and crossed marginally above its 65-week EMA. Brazil, another BRIC country has also broken out on an absolute and relative basis and it looks higher as well. The pattern for the Emerging Latin America ETF, the GML, is very similar except that the price has not quite broken out from its base. South Africa has moved above its down trendline and the 65-week EMA and its short- and intermediate KSTs are bullish. That suggests that the longterm series, which is quite flat, will also reverse to the upside. Indonesia is back above its 65-week EMA and both KSTs are positive. Finally, we have been quite hard on the Greek market in the last year but for the first time we see two positive signs. First, an outside month in January and second, a reversal of the 9-month ROC from below its oversold zone. The outside bar can only be expected to have an effect for 5-10 months but it is worth bearing in mind that many previous important Athenian turning points have been characterized with one and two bar price patterns. Athens General and a 9-month ROC Chart InterMarket Review / February, 2012

37 Currencies Dollar Index The short-term KST for the Dollar Index has violated an important trendline and that strongly implies further corrective activity and a test of support in the area. If that gives way we would seriously question the primary bull market scenario. Euro The Euro is experiencing a positive short-term KST and it s possible that the intermediate series may be reversing. However, unless the currency rallies above the evident resistance at 136 on a Friday close basis, we will continue to assume a primary bear market. US Dollar Index and Three KSTs Chart 42 InterMarket Review / Volume 28, No. 9 37

38 Euro and Three KSTs Chart 43 Japanese Yen and Two Indicators Chart InterMarket Review / February, 2012

39 Canadian Dollar and Three KSTs Chart 45 Yen The yen continues to trade in an extremely quiet manner and is just above crucial support in the form of its 200-day MA and the two converging trendlines. The Special K is also just above a very important trendline. The quite nature of recent trading suggests that the balance between supply and demand is extremely fine. That may well mean that if the support gives way, the currency could experience a very sharp decline. Note that the KST has just started to roll over. February could be an interesting month! Canadian Dollar The Canadian dollar recently experienced a whipsaw break to the downside but now the short-term KST is in a strong uptrend. The price has managed to break to the upside, so the dollar is likely to continue its advance. The only problem we see is the bearish and moderately overbought long-term KST. InterMarket Review / Volume 28, No. 9 39

40 Australian Dollar and Three KSTs Chart 46 Australian Dollar The Aussie dollar is in a similar though less advantaged technical position. That s because its long-term KST is more overstretched and the price has not yet managed to break above the resistance trendline. However, the bullish short- and intermediate KSTs suggest that there is a good chance that it will. 40 InterMarket Review / February, 2012

41 Precious Metals Gold & Gold Shares In December the ipath Dow Jones Precious metals, ETN, broke down from a head and shoulders top and crossed below its 200-day MA. However, January s snap back action suggests that the downside break will turn out to be a whipsaw. This view is reinforced by the fact that the price also moved above the green down trendline. Complicating matters is the fact that the Special K has completed a top and has experienced a series of declining peaks and troughs. This type of action is usually a reliable signal of a bull market peak. We are giving the benefit of the doubt to the secular bull trend but there are two juncture points we are focusing on. First, if the price is able to rally above the right shoulder at $100 that will likely mean that the downside break was a whipsaw. On the other hand, the overbought Special K reminds us that the primary trend is very overstretched and therefore potentially vulnerable. In this we are reminded of the fact that occasionally a particularly vicious head and shoulders experiences a move back above the neckline and then takes out the breakdown low, which in this case would be the December bottom at $86. The equivalent levels for the gold ETF in Chart 48 would be $175 and $150. ipath Dow Jones Precious Metals (JJP) and Two Indicators Chart 47 InterMarket Review / Volume 28, No. 9 41

42 Gold ETF (GLD) and Two Indicators Chart 48 Gold Miners ETF (GDX) and Three KSTs Chart InterMarket Review / February, 2012

43 ishares Silver Trust (SLV) and Two Indicators Chart 50 Silver Chart 49 also offers a whipsaw for the GDX, which is now above its 65-week EMA. The Special K for silver has not broken down but has bounced from its 2009/12 up trendline. Since the short-term KST is rising, the odds that the SPK will continue to move higher are better than 50/50. Note that the price also broke down from a head and shoulders top. In this case, the right shoulder closing high is at $34.25 and the December low is at $ Gold/Bond Ratio Finally, a key inflation/deflation relationship is that between gold and bonds. Not surprisingly has traced out a similar pattern to the precious metal ETF. It also looks as though it may have pulled back from being just over the brink. InterMarket Review / Volume 28, No. 9 43

44 Gold/Bond (GLD/TLT) and Three KSTs Chart InterMarket Review / February, 2012