Monthly Market Analytics & Technical Analysis

October 2012 Edition

Gordon T Long
10/15/2012

1 October 2012 Edition

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Monthly Market Analytics & Technical Analysis

OCTOBER 2012
SUBSCRIPTION SERVICE: PLAN IV
BIG PICTURE - KEEPING YOUR PERSPECTIVES ..................................................................................................................................... 6
HIGHLIGHTS - WHAT YOU NEED TO KNOW ........................................................................................................................................... 9
SUMMARY ANALYSIS........................................................................................................................................................... 9
"QE Unlimited": Fed Panics - "OMT" Unlimited: ECB Panics ......................................................................................... 14
Defining Chart #1 - "Delusional Distortion" Expectations .................................................................................................. 14
Defining Chart #2 - Long Term ......................................................................................................................................... 15
Defining Chart #3 - Short Term ........................................................................................................................................ 16
Defining Chart #4 - Short Term ........................................................................................................................................ 17
OUR APPROACH - MACRO ANALYTICS ...............................................................................................................................................20

............................................................................................................................................................... 21
OCTOBER 2012: Global Macro Drivers .............................................................................................................................. 22
DRIVER: Real Wealth, Commodities & Dr Cooper ........................................................................................................... 23
DRIVER: Carry Trade & the : Cross .......................................................................................................................... 26
DRIVER: Currency & Forex Markets ................................................................................................................................ 28
DRIVER: Yield, Spread & Credit ...................................................................................................................................... 32
RECIPIENT: Global Equities ............................................................................................................................................ 34
RISK: Risk-On versus Risk-Off........................................................................................................................................... 35
RISK: Major Contrarian Warning Signal ........................................................................................................................... 37
RISK: Bearish Signals Indicating a Short to Intermediate Correction-Consolidation ......................................................... 38
RISK: Earnings Gamesmanship & Folly - Cheating ......................................................................................................... 40
RISK: Earnings Gamesmanship & Folly - Who Is Manipulating? ...................................................................................... 41
RISK: Earnings Gamesmanship & Folly - Equity Investors Fleeing Equity Markets .......................................................... 42
RISK: Earnings Gamesmanship & Folly - Historical Perspective ...................................................................................... 43
RISK: Earnings Gamesmanship & Folly - The Folly ......................................................................................................... 44
RISK: Avoiding Risk May Have Caused a Bond Bubble ................................................................................................... 46
TECHNO-FUNDAMENTALS ................................................................................................................................................ 47
PATTERN: QE III Doesn't Bode Well For Traders ............................................................................................................ 49
PATTERN: Short Shelf Life for QE3 & OMT ..................................................................................................................... 50
PATTERN: Markets Show Strong Correlation With QE Policy .......................................................................................... 53
PATTERN: Transports Flagging Non-Confirmation & Weakening Strength ...................................................................... 57
PATTERN: Consolidation or Topping Pattern?................................................................................................................. 60
PATTERN: Topping Signals Starting to Show .................................................................................................................. 61
OUTLOOK - ANALYTICAL ANALYSIS .....................................................................................................................................................63
STUDY: Earnings Estimates & Forecasts .......................................................................................................................... 67
EARNINGS ESTIMATES - 4.3 Up versus Down Revisions Highest Since 2001 ............................................................... 67
EARNINGS ESTIMATES - First Earnings Decline in 11 Months of - 1.34%...................................................................... 68
EARNINGS ESTIMATES - Stealth Warnings Season Not Going Well .............................................................................. 69
EARNINGS ESTIMATES - Goldman's Down then Up Call ............................................................................................... 70
STUDY: Earnings Warnings ............................................................................................................................................... 74
WARNINGS: Earnings Estimates Simply Don't Match Reality .......................................................................................... 74
STUDY: Preliminary Q3 Earnings Results ......................................................................................................................... 76
PRELIMINARY EARNINGS - Alcoa & Cummins .............................................................................................................. 76
STUDY: Valuations.............................................................................................................................................................. 79
VALUATION - Markets Seriously Overvalued by Most Metrics ......................................................................................... 79
VALUATION - Over Next Year Trailing PE to be Below Generational Norm. .................................................................... 81
VALUATION - Foreign Profits Kept Untaxed Offshore ...................................................................................................... 83

2 October 2012 Edition

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SHORT TERM TECHNICAL ANALYSIS ................................................................................................................................................84

SUPPORT & RESISTANCE ................................................................................................................................................. 84
Gann Analysis.................................................................................................................................................................. 84
Boundary Conditions........................................................................................................................................................ 85
Channels & Regressions.................................................................................................................................................. 87
Fibonacci - Controlling Time Extensions .......................................................................................................................... 89
Elliott Wave...................................................................................................................................................................... 94
SENTIMENT - Consumer, Investor & Trader ...................................................................................................................... 99
CONSUMER
Consumer Confidence - Conference Board ................................................................................................................... 99
Consumer Sentiment - Michigan ................................................................................................................................. 102
Consumer Comfort...................................................................................................................................................... 103
INVESTOR
Investors Intelligence .................................................................................................................................................. 104
American Association of Independent Investors .......................................................................................................... 104
National Association of Active Investment Managers (NAAIM) .................................................................................... 105
Small Business Optimism ........................................................................................................................................... 106
TRADER
Smart Money / Dumb Money Confidence .................................................................................................................... 107
Percentage Stocks Above 50 & 200 DMA ................................................................................................................... 108
Margin Levels ............................................................................................................................................................. 109
Mutual Fund Cash Levels v S&P 500 .......................................................................................................................... 113
OSCILLATORS & BREADTH: Indicators of Importance................................................................................................. 115
NYSE Overbought / Oversold ........................................................................................................................................ 115
OEX Open Interest (Puts/Calls) ..................................................................................................................................... 116
TRIN .............................................................................................................................................................................. 117
McClellan Oscillator ....................................................................................................................................................... 118
INTERMEDIATE TERM RISK ANALYSIS.......................................................................................................................................... 119
RISK SUMMARY- Aggregated Global Financial Risk Index ............................................................................................ 119
BANKING RISK - LIBOR-OIS SPREAD (Updated) ........................................................................................................ 120
BANKING RISK - TED SPREAD (Updated) ................................................................................................................... 120
CREDIT RISK - GLOBAL CREDIT DEFAULT SWAPS (Updated)................................................................................. 121
CREDIT RISK - EU CREDIT DEFAULT SWAPS (Updated) ........................................................................................... 122
CONSUMER RISK - HOUSING - RATE OF CHANGE (Reference) ............................................................................... 123
ECONOMIC RISK - ECRI LEADING INDEX (Updated).................................................................................................. 124
INFLATION RISK - MONEY SUPPLY GROWTH - M3 (Updated) .................................................................................. 125
INFLATION RISK - MONEY VELOCITY (Updated) ........................................................................................................ 126
MONETARY RISK - BANK LIABILITIES (Updated)........................................................................................................ 126
COST OF MONEY RISK - INTEREST RATES (Updated) ............................................................................................. 128
AGGREGATED RISK LEVEL............................................................................................................................................. 129
JULY - Signs Everywhere ................................................................................................................................................. 130
Blatant Distortions: Corporations Reducing EU Risk Exposure (aka: Bank Runs) ......................................................... 130
Blatant Distortions: Hong Kong's Hang Seng Warning (August) ..................................................................................... 131
Blatant Distortions: Deutsche Bank Warns of 5 -10% Market Correction (August) ......................................................... 132
Blatant Distortions: Canaries Singing but Few are Listening - TSE Halted (August) ...................................................... 132
MAY/JUNE - Everyone Is Suddenly Nervous ................................................................................................................... 133
Nervousness: GREECE: Investors Flock to Safety as Euro-Exit Fears Rise.................................................................. 133
Nervousness: FRANCE: Showdown in Europe: Hollande Takes on Merkel and Draghi, Insists on Renegotiation of
Merkozy Treaty .............................................................................................................................................................. 134
LONGER TERM - FUNDAMENTAL ANALYSIS....................................................................................................................................... 135
HIGHLIGHTS ...................................................................................................................................................................... 135
VALUATION METHODOLOGY .......................................................................................................................................... 136
Four Set Consolidated Market Valuation Indicators: Overvaluation Relatively Unchanged ............................................. 136
Crestmont from the Arithmetic ..................................................................................................................................... 138
Cyclical PE 10 Ratio ................................................................................................................................................... 140
Q Ratio ....................................................................................................................................................................... 144
S&P Composite Regression-to-the-Trend ................................................................................................................... 149
Estimating Future Returns ............................................................................................................................................. 150

3 October 2012 Edition

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S&P Fair Value .............................................................................................................................................................. 158

REFERENCE METHODOLOGIES ANALYSIS .............................................................................................................. 164
Rule of 20 ................................................................................................................................................................... 164
Cyclically Adjusted PE's (CAPE) are Richly Valued..................................................................................................... 165
Value Line Arithmetic .................................................................................................................................................. 166
Shiller PE Ratio ........................................................................................................................................................... 166
Comments on Estimated Forward Operating Earnings ................................................................................................ 167
S&P Earnings Yield versus Bond Yields................................................................................................................... 168
PE CONTRACTION & MARGIN COMPRESSION .............................................................................................................. 169
We Warned this was Coming, Now Here it is ........................................................................................................ 169
Corporate Earnings - Signals of Margin Compression .................................................................................................... 175
PE Ratios - Have Significant More Room To Compress ................................................................................................. 177
Expect Further PE Compression: Margin Squeeze ....................................................................................................... 178
Shifting Secular Sands - Emerging Impediments to Global Earnings Growth Rates ....................................................... 180
Cost Push now Creating Margin Compression! .............................................................................................................. 181
FUNDAMENTALS - ANALYSIS 2012................................................................................................................................. 186
AUG: Downward Revisions Accelerating........................................................................................................................ 186
MAY: Forward Guidance Significantly Lower than Reported Strength ............................................................................ 189
APR: Equity Valuations: It's All Downhill From Here ....................................................................................................... 191
APR: EARNINGS - Continuing to Weaken without much Media Fanfare ........................................................................ 193
APR: Corporate Margins - 2013 Margin Expectations Not Credible ................................................................................ 194
APR: EARNINGS - A Different Earnings Season. .......................................................................................................... 195
APR: Profits Have Stalled. Has the Market?................................................................................................................... 197
MAR: Government Spending Driving Profits: Artificially High Margins ........................................................................... 199
MAR: Inflation Expectations - Markets Mistakenly Expecting Growth & Profit To Accompany It .................................... 200
MAR: Major Warning Needs Heeding: FedEx ............................................................................................................... 201
JAN: What We Called for Is Beginning To Show ............................................................................................................ 203
JAN: Equities as a Matter of Belief ................................................................................................................................. 208
JAN: The Charts Wall Street Doesn't Want You To See On Annual Returns .................................................................. 211
JAN: Some Sobering Japanese Comparison Charts from Michael Darda at MKM Partners ........................................... 216
JAN: Are Corporate Profit Margins About To Grind Lower For Another 10 Years? ......................................................... 219
JAN: Corporations Have Captured 88% Of All Post-Recession Income Growth ............................................................. 220
JAN: Think Stocks Are Cheap? Here's 7 Reasons Why That's A Myth ........................................................................... 221

S&P 500 TARGETS ..................................................................................... 222

CONCLUSION .............................................................................................. 224
RISK-OFF >>>> "NET NEUTRAL"

4 October 2012 Edition

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