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December 31, 2014

Market Themes for 2015

In the past I have written market outlooks around this time of year. However, these posts are all too often interpreted as predictions rather than possibilities. No one can predict what the market will do, but setting expectations is an important part of a trader's analysis because one can then be prepared to ride a trend. So rather than an outlook, I hereby present several themes which I believe have a strong chance of developing in 2015. I will then follow cyclical and trend signals, to be discussed in the Member Letter, to determine when and if to trade these themes.

Japanese Yen Rally
The premise for a Yen rally is simple: the currency is due for a yearly cycle low.

I have no view (yet) on where the Yen will be a year from now. This play focuses only on a yearly cycle bounce. If the new cycle is destined to fail, perhaps we will be on the other side of the trade during the second half of the year.

Significant Rebound for Oil
As with the Yen, oil's nose dive eventually sets up an opportunity to catch a sharp, countertrend bounce. Except with oil, I believe we may see more than a countertrend move. Commodities are due for a 3-year cycle low in early 2015, and the bounce out of this low could add a big boost to oil's bounce.

In fact, oil may be ready to bounce ahead of the general commodity complex. As with the dive into the 2008 low for the commodity complex, oil is unfolding a devastating, left-translated weekly cycle lasting more than 50 weeks.

From a cycle standpoint, the time is ripe for a bounce, and the new year may herald a new weekly cycle for oil. So I remain alert for constructive action in this commodity.

End of Stock Bull
Coming into 2015, the equity bull market is approaching its 6-year mark. Considering that equities typically run in 4-year cycles, this stretch is impressive. Even the extended, multi-year cycle ending in 2009 saw a trough to peak run of under 5 years.

Furthermore, the equity rallies we have seen since the October low are taking on characteristics of bear market rallies. So at the very least, we should be prepared for more volatility in 2015, and if my cycle analysis delivers a definitive bear market indication, I will be ready to get aggressively short.

End of Gold Bear
Gold has many reasons to rally in 2015. First, the yellow metal typically enjoys a multi-year cycle running about 7-9 years. With the previous multi-year low occurring in 2008, gold is about to enter its timing band for a major low. With a low having been set in 2008, gold's next major low should arrive between 2015-17.

Gold could still have some unfinished business to attend to around the $1000-1050 zone where a major pivot lies, so we will have to await further bullish developments before getting aggressive. Either way, gold should still benefit from the 3-year commodity cycle. The confluence of these major cyclical lows could exacerbate gold's own bounce.

Finally, gold has recently taken a habit of strengthening during session in which the stock market is weak, hinting that gold may be gaining traction as a safe haven play. If the stock market becomes volatile or rolls over into bear mode, gold will have a third reason to rally. We must be prepared to shift trading tactics from range trading to trend mode.

Terminal Move of Bond Bull Market
Many people smarter than I have called an end to the bond bull over the last few years, and they have all been wrong. However, interest rates have remained near zero, and the Fed had been purchasing assets at the rate of $1 trillion per year. These supportive conditions are ending, and if the Fed follows through on their hints of higher rates, bonds may come under pressure.

Ironically, my view for a possible peak in bonds corresponds with a possible peak in equities. In recent bear markets, bonds have benefitted as a flight-to-quality play. However, bonds and stocks may decline for the same reason this time: rising interest rates.

I will conclude by reiterating an important point: these themes are possibilities, not predictions. I would not take positions solely based on subjective views. As I have told Members many times, if I traded every time I had an opinion, I would go broke. Price action must lead us into these trades.

A happy and prosperous new year to all...n

 

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