Listen To Your Doctor

My favourite indicator is getting ready to make a diagnosis. It coincides with my favourite time to be a speculator -Q4. But before you go jumping the gun, a few more things have to fall into place first.

Dr. Copper has prescribed a strong dose of harsh medicine for markets this year. The commodity supercylists, most notably Jeff Currie and Trafigura, are licking some serious wounds now after the total breakdown in the economically sensitive commodity markets. Metals traders and mining executives are in London for 'LME Week' and the mood is worse than a Blue Jays fan club meeting.

Fund flows in the copper market, illustrated below by the price chart of Copper and its accompanying volume indicator have had a repeating pattern lately. We can clearly see the ebbs and flows of optimism in the Chaikin Volume Indicator (top panel) with green denoting accumulation, and orange denoting liquidation on a momentum basis. Speculative positions on the CME are at two-year lows now.

Copper - Chaikin Volume

A poll of attendees at this week's LME meetings showed more than 53% giving the nod to copper as the top bet for the year ahead. Most narratives supporting this view involve a more stimulative environment in China combined with some version of a soft landing for the rest of the world. At that point, the bulls argue, the supercycle will re-emerge, fuelled by de-carbonization efforts involving more copper usage.

I can see it happening that way, but is my eyesight failing me?

Those 'few more things that have to fall into place' are certainly troubling. Is China able to stabilize its domestic economy in the face of declining demographics and bloated bad debts? Is the Fed actually done hiking rates? Is the Middle East powderkeg about to explode into direct conflict between Iran and Israel? All good questions to which the answers are lacking in this period of uncertainty.

But that is what speculation is all about. It involves the suspension of disbelief. It requires looking over the valley. And make no mistake - it is at the heart of what Tuesat11 is all about - the anticipation of the anticipations of others.

The optimist in me is getting itchy after almost a full year of being cautious. I said in my cover email note last week that it is time to close your eyes, hold your nose, and do some bank buying. I still hold to that despite the events of last week that involved a war and a bond buyers strike that took yields even higher.

It has been said "They don't ring a bell at the bottom" but I have also heard the expression "Buy on the sound of cannons, sell on the sound of trumpets" too. We just heard cannons on Saturday morning and the heartless markets don't stop to consider the human side of such tragedies. These maxims may be hoary artifacts of a bygone era but they speak to the risk tolerance and investor convictions that still dominate investor behaviour. And that is my stock-in-trade as a professional investor.

Three measures of confirmation that I watch are heading in the right direction - Small Caps, Equal Weighted, and Value are bottoming and trying to turn up from their oversold positions against the S&P500. Although they are nascent moves, I like that they are all turning together.

Small Cap Index vs S&P 100

Equal Weight ETF vs SPY

Value vs Growth

And I especially like that the market bottomed last Tuesday at around 11 and was successfully tested three days later!

S&P 500 ETF - $SPY

I'm sorry to be all optimistic about a market that has so many uncertainties and unknowns. And we still need to see confirmation from the Risk Model (more below) that is in an off position this week. We especially need to hear from our medical metal - Copper - before it is full 'risk-on', but I'm getting more positive for full commitment to risk assets with every bad headline. A weaker PPI and CPI this week may help a lot but what we really need is a rally in copper. That would be the best medicine I can think of now.

Risk Model - 2/5 - Risk Off

Although on the cusp of turning positive, the Model will need to do some work here to a bullish stance. The VXV is still elevated and the AAII Bull/Bear ratio is negative. Although the actual reading of Copper-Gold is bullish, I want to see it break one way or another more definitively first before buying the Deep Cyclicals and commodity plays.

The Fed is talking out of both sides of its mouth lately, so nobody can tell what they want to do. I don't think they know either, but they don't like to make predictions, being the bureaucrats that they are. The Fed's motto of "data dependence" is more like data Depends!