Monthly time frame:

• So far there is no indication of a trend reversal, as the potential bearish December’s Spinning Top in order to be confirmed requires an end of month print below 1973. Therefore the December candlestick has to be considered as indecision between bulls and bears.

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Weekly time frame:

• From the October low we have a sequence of higher high/low therefore also in this time frame there is no indication of a trend reversal.
• In spite of the 2 weeks decline it finished the week considerably above the low and the 20 wma, printing a Doji. The long lower tail can be considered a constructive pattern due to the buying interest at the dip.
• We are at a resistance zone 2046 – 2054.
• If next week this resistance zone were reclaimed odds would favor a move back at the previous high.
• If instead bulls fail odds would favor a retest of the support zone which has a range 2019 – 2014.
• We can draw two trend lines: the upper one connects the July-November-December higher highs while the lower one connects the December-January higher lows. We can deduce that as long as the lower trend line is not breached odds should favor a move towards the upper trend line with new ATHs.
• If we add a third trend line that connects the October – January low, if the boundaries are not breached then we could make the case that price is forming a Rising Wedge. If this pattern pans out it could have bearish implications over multiple time frames.

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Although the long-term trend remains up we must be aware that weekly oscillators are not in agreement with the constructive price development. It stands out the RSI negative divergence in force since July 2014 and that the RSI trend line from the October low has been breached. If next week the MACD rolls down and issues a bearish cross the short-term outlook would be damaged.

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Daily time frame:

• At first sight we could consider the sharp down leg off the December high a failed breakout, however since the internal structure of the decline has unfolded a corrective move and so far we have a higher high and a higher low for the time being, it would be prudent to convey that the trend remains up biased.
• However probably the January 6 low is not another “V” bottom
• Friday’s candlestick with the eod print at the 50 dma (Most likely saved by the closing bell) could be interpreted as a consolidation of the gains achieved by the two previous days.
• Last week price action should have counterbalanced the sharp decline off the December high but does not exclude the odds of a larger corrective decline within the scenario of maintaining the sequence of higher lows if the 10 dma is not reclaimed.
• Therefore if next Monday the 50 d ma does not hold then I will be looking for a reversal signal either at the gap fill or at the Trend Line 3
• Hence my preferred short-term scenario calls for a Zig Zag higher from the January 6 low.

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Price could be forming two potential patterns:

• The suggested Ending Diagonal:

If price is forming an Ending Diagonal, since the two trend lines must be converging, from the November high price should have unfolded a Running Flat wave (II), therefore the current up leg must unfold a Zig Zag or a Double Zig Zag higher (No lower low is allowed).

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• Triangle:

If the next up leg establishes a lower high then odds would favor a Triangle provided price maintains the sequence of lower highs/ higher lows:

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Either the wave (V) of the Ending Diagonal or the thrusts following the completed Triangle are candidates to establish a Major Top.

60 Minutes time frame:

If next Monday Friday’s lod is breached a Zig Zag down would have an equality extension target at the gap fill. If this is the case I will be looking for to cover my short (I am long SPXU) and seek a long entry in UPRO.

It is noteworthy to mention that the 50 hma has crossed below the 200 hma. If this bearish cross were not erased probably the upside would be limited favouring the Ending Diagonal scenario.

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Next Monday I will be pay close attention to the NYSE TRIN, since if we have follow through to the downside, a reading above 2.00 should be the prelude of a potential short-term bottom.

A January Investment Outlook should normally be filled with recommended “do’s and don’ts,” “picks and pans” and December 31, 2015, forecasts for interest rates and risk assets. I shall do all of that as usual when I travel to New York City for the annual Barron’s Roundtable in a few weeks’ time. That is always an opportunity for me to engage in verbal jousting with Marc Faber, Mario Gabelli and the usual bearish forecast from the Gnome of Zurich, Felix Zulauf. So I’ll leave the specific forecasting for a few weeks’ time and sum it up in a few quick sentences for now: Beware the Ides of March, or the Ides of any month in 2015 for that matter. When the year is done, there will be minus signs in front of returns for many asset classes. The good times are over.

Timing the end of an asset bull market is nearly always an impossible task, and that is one reason why most market observers don’t do it. The other reason is that most investors are optimists by historical experience or simply human nature, and it never serves their business interests to forecast a decline in the price of the product that they sell. Nevertheless, there comes a time when common sense must recognize that the king has no clothes, or at least that he is down to his Fruit of the Loom briefs, when it comes to future expectations for asset returns. Now is that time and hopefully the next 12 monthly “Ides” will provide some air cover for me in terms of an inflection point. Manias can outlast any forecaster because they are driven not only by rational inputs, but by irrational human expressions of fear and greed. Knowing when the “crowd” has had enough is an often frustrating task, and it behooves an individual with a reputation at stake to stand clear. As you know, however, moving out of the way has never been my style so I will stake my claim with as much logic as possible and hope to persuade you to lower expectations for future returns over the next 12 months.

My investment template shares a lot in common with, and owes credit to, the similar templates of Martin Barnes of the Bank Credit Analyst and Ray Dalio of Bridgewater Associates. All three of us share a belief in a finance-driven economic cycle which over time moves to excess both on the upside and the downside. For the past few decades, the secular excess has been on the upside with rapid credit growth, lower interest rates and tighter risk spreads dominating the long-term trend. There have been dramatic reversals as with the Lehman Brothers collapse, the Asia/dot-com crisis around the turn of the century, and of course 1987’s one-day crash, but each reversal was met with a new and increasingly innovative monetary policy initiative on the part of the central banks that kept the bull market in asset prices alive.

Consistently looser regulatory policies contributed immensely as well. The Bank Credit Analyst labels this history as the “debt supercycle,” which is as descriptive as it gets. Each downward spike in the economy and its related financial markets was met with additional credit expansion generated by lower interest rates, financial innovation and regulatory easing, or more recently, direct central bank purchasing of assets labeled “Quantitative Easing.” The power of additional and cheaper credit to add to economic growth and financial asset bull markets has been underappreciated by investors since 1981. Even with the recognition of the Minsky Moment in 2008 and his commonsensical reflection that “stability ultimately leads to instability,” investors have continued to assume that monetary (and at times fiscal) policy could contain the long-term business cycle and produce continuing prosperity for investors in a multitude of asset classes both domestically and externally in emerging markets.

There comes a time, however, when zero-based, and in some cases negative yields, fail to generate sufficient economic growth. While such yields almost automatically result in higher bond prices and escalating P/E ratios, their effect on real growth diminishes or in some cases, reverses. Corporate leaders, sensing structural changes in consumer demand, become willing borrowers, but primarily to reduce their own outstanding shares as opposed to investing in the real economy. Demographics, technology, and globalization reversals in turn have promoted a sense of “secular stagnation” as economist and former Treasury Secretary Larry Summers calls it and the “New Normal” as I labeled it as early as 2009. The Alice in Wonderland fact of the matter is that at the zero bound for interest rates, expected Returns on Investment (ROI) and Returns on Equity (ROE) are capped at increasingly low levels. The private sector becomes less willing to take a chance with their owners’ money in a real economy that has a lack of aggregate demand as its dominant theme. Making money by borrowing at no cost for investment in the real economy sounds like a no-brainer. But, it comes with increasing risk in an environment of secular stagnation, demand uncertainty, and with the ROI closer to zero itself than an entrepreneur is willing to bear.

And so the miracle of the debt supercycle meets a logical end when yields, asset prices and the increasing amount of credit place an unreasonable burden on the balancing scale of risk and return. Too little return for too much risk. As the real economy of developed and developing nations sputter, so too eventually do financial markets. The timing – as mentioned previously – is never certain but the inevitable outcome is commonsensically sound. If real growth in most developed and highly levered economies cannot be normalized with monetary policy at the zero bound, then investors will ultimately seek alternative havens. Not immediately, but at the margin, credit and assets are exchanged for figurative and sometimes literal money in a mattress. As it does, the system delevers, as cash at the core or real assets at the exterior become the more desirable holding. The secular fertilization of credit creation and the wonders of the debt supercycle may cease to work as intended at the zero bound.

Comprehending (or proving) this can be as frustrating as understanding the differences between Newtonian and quantum physics and the possibility that the same object can be in two places at the same time. Central banks with their historical models do not yet comprehend the impotence of credit creation on the real economy at the zero bound. Increasingly, however, it is becoming obvious that as yields move closer and closer to zero, credit increasingly behaves like cash and loses its multiplicative power of monetary expansion for which the fractional reserve system was designed.

Finance – instead of functioning as a building block of the real economy – breaks it down. Investment is discouraged rather than encouraged due to declining ROIs and ROEs. In turn, financial economy asset class structures such as money market funds, banking, insurance, pensions, and even household balance sheets malfunction as the historical returns necessary to justify future liabilities become impossible to attain. Yields for savers become too low to meet liabilities. Both the real and the finance-based economies become threatened with the zero-based, nearly free money available for the taking. It’s as if the rules of finance, like the quantum rules of particles, have reversed or at least negated what we historically believed to be true.

And so that is why – at some future date – at some future Ides of March or May or November 2015, asset returns in many categories may turn negative. What to consider in such a strange new world? High-quality assets with stable cash flows. Those would include Treasury and high-quality corporate bonds, as well as equities of lightly levered corporations with attractive dividends and diversified revenues both operationally and geographically. With moments of liquidity having already been experienced in recent months, 2015 may see a continuing round of musical chairs as riskier asset categories become less and less desirable.

Debt supercycles in the process of reversal are not favorable events for future investment returns. Father Time in 2015 is not the babe with a top hat in our opening cartoon. He is the grumpy old codger looking forward to his almost inevitable “Ides” sometime during the next 12 months. Be cautious and content with low positive returns in 2015. The time for risk taking has passed.
–William H. Gross