May 12, 2022

3:38 pm

Some analysts believe that stocks are becoming reasonably priced at 15-16 times forward earnings.  That’s a bunch of B.S.  The attitude of the glass half full is still holding sway.  In reality bear  markets are likely to bottom at 5-7 times earnings.  By contrast, the 2009 low was at 13.7 times earnings.  We haven’t seen a real bear market since 1981,when I entered the business.  In addition, earnings estimates are still too high.  We are in a recession and margins will become much thinner.


12:14 pm

The Ag Index has launched from its 50-day Moving Average at 561.80 to begin a new Master Cycle.  This Cycle may only be about 3 weeks in length, as the prior MC stretched.  The objective is to rise above the neckline at 592.00.  Should it rise with sufficient amplitude, the neckline may then offer support in the next Cycle.  An alternate view is that it remains beneath the neckline for another test of downside support, due to market liquidity issues.  Stay posted on this one.

ZeroHedge reports, “As global food prices remain at record highs and war wages in Europe between two of the world’s largest grain suppliers, troubling videos from China show farmers slashing winter wheat production ahead of harvest times, adding even more uncertainty about food security.

Bloomberg reports China’s agriculture ministry is very concerned about the matter. The ministry is investigating if there’s illegal destruction of wheat crops.

The ministry said this comes three weeks before harvests, adding the crop was subjected to devastating floods late last year. There’s also concern that soggy field conditions in southern China due to abnormal rainfall could affect farmers’ ability to harvest.”

ZeroHedge further explains, “If you think that things are bad now, just wait until we get into the second half of this year.  Global food supplies have already gotten very tight, but it is the food that won’t be produced during this current growing season in the northern hemisphere that will be the real problem.  Worldwide fertilizer prices have doubled or tripled, the war in Ukraine has greatly reduced exports from one of the key breadbaskets of the world, a nightmarish bird flu pandemic is wiping out millions of chickens and turkeys, and bizarre weather patterns are absolutely hammering agricultural production all over the planet.  I have often used the phrase “a perfect storm” to describe what we are facing, but even that phrase really doesn’t seem to do justice to the crisis that we will be dealing with in the months ahead.


10:08 am

The Banking Index, our liquidity proxy, has been making new lows as it approaches its Master Cycle low due next week.  To pinpoint it more precisely, the Cycles Model informs us of a triple strength play around May 20.  That makes the Cup with Handle target possible, as impossible as it may seem.  It appears that liquidity may become scarce in the following week.  Don’t let it surprise you.  Note that the BKX has already fallen nearly 30% since the first of the year.


7:50 am

Good Morning!

The Shanghai Composite Index appears to be completing its last period of strength in the current Master Cycle prior to a larger decline into the end of May.  While it seems excessive, the Cup with Handle target is still in the running for the final resting place.

ZeroHedge comments, “The most recent macroeconomic figures show that the Chinese slowdown is much more severe than expected and not only attributable to the covid-19 lockdowns.

The lockdowns have an enormous impact. Twenty-six of 31 China mainland provinces have rising covid cases and the fear of a Shanghai-style lockdown is enormous. The information coming from Shanghai proves that these drastic lockdowns create an enormous damage to the population. Millions of citizens without food or medicine and rising suicides have shown that the infamous “zero covid” policy often disguises mass population control and repression.

It is easy to use the covid-19 lockdowns as the reason for the weakening of the Chinese economy but that would be a gross simplification. The problem is deeper.”


NDX futures continue the decline on heavy volume after yesterday’s failed bounce.  Tomorrow’s options are deep into short gamma beneath 12100.00.  The heavy population of puts tapers off after May 20.  While the Cycles Model suggests the Master Cycle may on or shortly after May 20, the VIX suggests a probable extended Master Cycle.  The Cup with Handle target may be achieved by then.  Analysts are still predicting a bounce, so we aren’t close, yet.


SPX futures dipped beneath 3900.00 this morning as the decline extends.  SPX is now in free fall territory and whatever happens today may only be a prelude to another very strong down day tomorrow. In tomorrow’s expiring options the Max Pain zone is 4095.00.  Puts dominate the options population beneath 4070.00 and short gamma begins at 4050.00.  While the options taper off on Monday, there is another large crowd of puts on Friday, May 20.

ZeroHedge reports, “The relentless slow-motion crash sparked by the Biden Fed (which is hoping that a market collapse will halt inflation) that has sent stocks lower for the past 6 weeks continued overnight, and Wall Street’s main equity indexes were set for more declines after losing $6.3 trillion in value since their late-March high as stubborn inflation in the world’s biggest economy bolstered the case for more aggressive monetary tightening by the Federal Reserve.

Nasdaq 100 futures were down 0.7% at 730am in New York, a day after the underlying gauge sank to its lowest since November 2020 on concerns that higher-than-expected inflation in April would lead to an even more aggressive pace of policy tightening by the Fed. S&P 500 were last down -1% and dropping below 3,900, the level. And with eminis trading around 3,900 means that stocks are now at bearish Morgan Stanley’s year-end base case price target of 3900, and 100 points away from Michael Hartnett’s Fed put of 3,800.”


While the NYSE Hi-Lo Index decline wasn’t as steep yesterday as previous days, the Cycles Model suggests a very deep day today in the Hi-Lo.


VIX futures made an overnight high at 34.76.  In the May 18 options expiration, the Max Pain zone is 29.00 .  Options turn positive at 30 and long gamma starts at 35.00.  A breakout may change the sentiment of the VIX options market and a rally above 40.00 may be unstoppable.


TNX futures dropped to  an overnight low of 28..16, but opened slightly higher.  Crossing the Cycle Top support at 28.42 creates a sell signal.  The Cycles Model suggests the decline may last through the end of May.


USD futures made yet another high at 104.74 this morning.  Today and the weekend may prove to be the high points of this corrective expansion as the USD may reverse down early next week.  The Cycles Model suggests a decline through mid-June in the current Master Cycle.


West Texas crude challenged the upper trendline of the Broadening Wedge at 106.20 this morning, then changed course to a slight loss. — The Organization of the Petroleum Exporting Countries cut its forecast for world oil demand this year, due to the effect of COVID-19 lockdowns in China and the war in eastern Europe.

In its monthly report for May, OPEC said it now expects global demand to grow by an average of only 3.4 million barrels a day this year, down from a prior estimate of 3.7 million b/d.

That masks a dramatic slowdown in growth between the first and the second quarters of this year. While first-quarter demand was up 5.2 million b/d, demand growth is expected to fall to 2.8 million b/d in the current quarter.

ZeroHedge remarks, “The Biden administration has canceled one of the most high-profile oil and gas lease sales which was pending before the Department of the Interior, at a time when Americans are suffering from record-high prices at the pump.

Getty Images via Fox News

The DOI’s reasoning? A “lack of industry interest in leasing in the area” of more than 1 million acres in the Cook Inlet in Alaska. What’s more, the department also halted two leases under consideration in the Gulf of Mexico due to “conflicting court rulings that impacted work on these proposed lease sales,” according to CBS News.”


Gold futures declined to 1839.24 this morning, near the weekly mid-Cycle support at 1828.37.  Should it drop through that level, the Wave count will have to be modified.  Since recent laws have made the transport of gold illegal, it has changed it from a potential alternate currency to just another commodity.  As a result, gold may be affected by  the lack of liquidity in the market  (see BKX).  A further decline may search out support at 1675.00.  The next Master Cycle low may occur in mid-June.


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