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:
- 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
- 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.
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.