A Roadmap for 2011

BarroMetrics Views: A Roadmap for 2011

Since it’s the start of the year, I thought it would be appropriate if I set out how I see 2011 developing. But first let’s state the two foundational assumptions on which the roadmap is built:

  1. That the current inverse relationship between the dollar and US Stocks will continue until the market perceives stagflation as a real threat to the US economy; and
  2. This will probably occur when the CPI starts to rally. The CPI ought to start its rally about six months after the FRED  graph has confirmed that US banks are again lending; until then I expect the US Stock Market’s 12-month line direction to be up. The target for this 12-month swing is 1537 to 1736.

That said……

I have  turning points in the time window Jan 14 to Jan 18. Hurst cycles suggest the dates will mark a high. If this is correct, we should see the S&P high between 1310 to 1269 (basis cash). I would then expect to see the S&P sell off into my cycle low around the second week of February. The rally off this cycle low will set the tone for me for the rest of the year – if I am right we should see a 4-year to 5-year high around Sept/Oct 2011.

If the picture above proves to be correct for the S & P, then we can expect the inverse pattern for Gold.

What are the short-term alternatives to this scenario? The most likely, given the poor breadth we have been seeing in the S&P, is for Jan 14 to Jan 18 to be a low rather than a high. If this is so, then we should see a sell-off beginning on Wed, Jan 5.

Time will tell which of the two shorter-term scenarios is occurring.

What about the longer-term alternative? Longer-term, the most likely alternative scenario is for the Sept/Oct 2011 high to be delayed or brought forward. The high will depend on when banks  lend again. The FRED graph will sound the warning in ample time since on average there is a time-lag of about 6-months between the FRED dropping and the CPI rising.

12 thoughts on “A Roadmap for 2011”

  1. Just curious, Ray, as to what particular lending statistics you follow. I look at consumer credit statistics in the form of % change, year-over-year. Revolving credit remains depressed, but the second derivative has turned up. More importantly (I believe), non-revolving has ticked up and turned positive in Oct 2010.

    Incidentally, the phenomenon of banks parking QE2 money back with the Fed that I noted a couple of weeks ago reversed in the second half of December.

    Finally, I think the selloff beginning Jan 5 is the most likely short term scenario. Some innovated breadth work by my friend Billy O’Nair may be found here: http://blog.alphascanner.com/?p=214

  2. Ray,

    I found your perspective really interesting.

    If you are correct, and gold is inverted to the SP500 pattern, then should we see a 4-5 year low (or some sort of multi year cycle low) in gold in the September, 2011 time frame?

    If we do, it would contradict the traditional 5 and 25 year gold seasonal pattern as described by Hirsch in his 2011 Almanac.

    going back to 1993, we have not seen a yearly low in September/October for gold.

  3. Hi EB

    Thanks for your comments as usual I found them interesting…..

    a) Consumer Credit is not one I follow. So, is the tick up in the second derivative suggest a warning that inflation may be on the rise?

    b) FRED graph: yes I notice that the latest one has again ticked down. Perhaps US banks will soon start lending in earnest?

    c) I agree that the sell off – whether now or later in Jan (if it occurs) will be a correction – I have it lasting about 2 weeks.

    Thanks for referring me to ‘alphax scanner’.

  4. Hi 6yardsitko

    Thanks for the comment and for taking time out to drop the blog a line – much appreciated. Turning to your question….

    If the inverse relationship holds to Sept/Oct, then yes, I would expect to see a tradeable low in Gold at that time.

    On whether a low at that time contradicts the seasonal pattern, we’ll have to agree to disagree…..

    The seasonal charts I use (MRCI) have seasonal lows on both the 15 and 30 patterns in early Sept and again in mid Oct. I’ll post these on the blog tonight.

    In the recent past, on my charts, we have a tradeable low on the weekly charts in Oct 2006 and one on the monthly charts in Oct 2008.

  5. Hi Ray,

    As always, love your insights.

    What are your target lows for the 2 week correction? Are they the same whether it is Jan 5 vs. 14th and did the strong move up today impact that?

    Finally, can you give me an assessment of NASDAQ for the year given that it is already only 4.5% from a 10 year high. I am wondering about a breakout later in the year and to what.

    Thanks

  6. Hi Bob

    Thanks for your comment.

    Until the S&P makes a move down, I have no reliable downside targets given the way the market ground up in the last few weeks of Dec.

    Today’s price action did not impact my analysis except to load the probabilities in favour of the higher end of the target zone 1310 (lower end 1269), basis cash S&P.

    I’ll see what I can do about the NASDAQ. It’s not an index I normally trade so it may be the weekend before I can have a squiz.

  7. Hi Squice

    Yes.

    There used be a strong, direct correlation between Gold and the S&P and that has been weakening.

    The 180-day direct correlation between Gold and the S&P has dropped from 82% to 69%.

    My view is once stagflation becomes the market’s assessment for the US, Gold and the S&P will invert.

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