Market outlook: Applying cycles analysis to the future direction of stocks, bonds, commodities, currencies & gold

In a world where we are continually bombarded with news, commentary and analysis, it is often hard to determine which information is truly relevant. One man that doesn’t struggle with this problem, however, is famed technical analyst Charles Nenner.

Rather than sifting through earnings reports, PMI figures and jobs data, Mr. Nenner uses “a unique algorithm that factors in multiple cycle movements”, and he does so to great effect. Over the past few years he has accurately predicted some of the biggest moves in the markets and as a result his advice is highly sought after.

Having previously worked as a technical analyst for Goldman Sachs and Rabobank, Mr. Nenner founded the Charles Nenner Research Center in 2001, and his firm now provides independent market research to hedge funds, banks, brokerage firms, and individual clients all over the world

Mr. Nenner’s approach is rooted in market cycles, i.e. the belief that the economy and financial markets move in cycles. In an interview on CNBC in December 2007 Mr. Nenner explained his analytical system, saying, “The whole system is based on the fact that everything is determined. I don’t believe in any economic influences. So it’s a closed mathematical box.”

His market calls are often so precise that he accurately predicts the exact day on which a particular market will turn, something which has earned him an excellent reputation.

“At times like these, it helps to use forecasting techniques that help you look around corners. For that we have cycle researchers, and one of the best over the years has been Charles Nenner.”  Jon Markman, Wall Street Journal – 23 June 2010.

Prescient calls

Back in August 2006 in an interview on CNBC, Mr. Nenner stated, “I think we are in for a substantial drop in the [US] housing market”. This prediction was made at the exact top of a 70 year bull market in US residential property prices.

So what is Mr. Nenner saying today?

When the S&P 500 recently reached 1,400 Mr. Nenner sold out of all his equity positions and although he thinks it’s possible that we will retest the recent highs, he points out that the current direction is down, “at least until the end of July.”

A 1 year chart of the S&P 500A 1 year chart of the S&P 500

Chart courtesy of stockcharts.com

In his long-term forecast, which takes into account both economic cycles, and those involving geopolitical conflict, Mr. Nenner sees the Dow Jones Industrial Average making a high in 2012 before falling for the next couple of years reaching as low as 5,000.

A 1 year chart of the DowA 1 year chart of the Dow

Chart courtesy of stockcharts.com

In terms of the bond market, Mr. Nenner is also completely out of US Treasuries. He believes that the US government bond market will reach a cyclical peak in August 2012. As a result he is already long TBT, which is the ETF that moves in the opposite direction to the 20 year Treasury bond.

In other words he is betting that bonds will fall and that yields (interest rates) will rise. In a recent interview Mr. Nenner said, “…if you think that interest rates in your lifetime will never go up again, then that’s the only possibility that you will lose on this investment. But if you think reasonably that this is not going to continue – these low rates – then you are going to make a nice profit on it.”

As for the gold market, Mr. Nenner has been out of gold since it reached $1,900 an ounce back in August of last year.

At that time he calculated a downside target of $1,375, however he recently stated that if gold reaches this level – which is more than $209 below where the price is today – it would still be in a bull market, and he maintains that over the longer-term gold will reach a target of $2,500.

He stated further that there are several cycles bottoming in August, and that investors who want to enter the gold market should wait for a close above $1,640, and that if this occurs it is a sign that we have seen the low.

A 1 year chart of goldA 1 year chart of gold

Chart courtesy of stockcharts.com

Mr. Nenner is currently long wheat, corn and soybeans, and he expects those prices to keep on rising, however these soft commodities are the only commodities he likes. He believes that the broad commodity bull market is over.

As for the bigger picture Mr. Nenner sees 2014 being a critical year. “I calculate that in 2014 we are going to have a major crisis on our hands”. At this point he believes that the bond market will begin to fall more sharply, and that we will begin to experience a currency crisis. He went on to say, “starting in 2014, and after that, I expect the United States to have the same problems as Europe, maybe even as bad as Greece… at that time the [US] dollar will really be in very bad shape.”

Unusual insights

One of Mr. Nenner’s more unusual insights is the fact that market movements show a strong correlation with solar sunspot activity, which is also cyclical.

His theory is that heightened electromagnetic activity on the surface of the sun affects human behaviour. More specifically it affects the mood of participants within the financial markets and therefore market sentiment. In short, as sunspot activity increases, global stock markets rise.

Interestingly NASA predict that solar sunspot activity (which has been tracked since 1755) will peak in early or mid 2013 with about 59 sunspots.

Different macro outlook

Mr. Nenner believes that, “stocks could be very dangerous on the downside” and that we are in a “deflationary crisis”. He states that, “Most people are not familiar with deflation and the problem in a deflationary crisis is that there is nowhere to hide. The problem people have, especially if they are retired, is that they need some income and there is simply nowhere to go. People should be very careful not to lose money even if it’s very hard to stand aside because you are not making any money, but these are very difficult times to make any money.”

As for being difficult times we certainly agree, but where our macro outlook differs from that of Mr. Nenner, is that we don’t see deflation as the primary factor influencing the economy and markets over the next 2-4 years. Rather we see inflation as a result of all the money printing being the biggest factor. It is our opinion that in terms of money printing we haven’t seen anything yet.

The difference in our macro outlook means that we are not as bearish on stocks and commodities over the medium term. That’s because central banks will go to exceptional lengths to prevent a deflationary episode from taking hold.

What is interesting is that despite our different outlooks, we both agree that we are headed for a currency crisis that will begin around 2014. In our view this will be the catalyst that propels gold into the final phase of its bull market and on to our target of $3,000 to $5,000 an ounce.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>