The US Dollar has developed a cycle ever since President Nixon removed the Gold Standard in August 1971. The average cycle from crest to trough lasts about 7.5 years, as clearly seen in the chart above. The immediate inference from this chart is that the US Dollar will very likely continue its Bull Rally to about January 2019, assuming it will last 7.5 years from 2011 when the Dollar bottomed and began a new Bull phase. The Projected target would be 120 for the US Dollar Index. I will base my analysis of all other asset classes on the US Dollar Cycle.
The 30 Year Commodity Cycle
The Charts of Gold & Silver above clearly show the 30 Year Cycle of these precious metals. The Bull phases last about 10 Years (1970-1980 & 2000-2011). The Bear phases last about 20 years (1980-2000). A new bear phase was started in 2011 and is likely to last till 2030
The above chart shows the Gold Chart with Commitment of Traders Report Net Positions. Note that the current positions of commercials & Speculators are nowhere near extreme bullish or bearish levels. Taking both the Dollar cycle & Commodity cycles into serious consideration, Gold may most likely continue it’s decline eventually breaking the $1000/Oz level. It should settle at 800-700 level which is also the 2008 panic low. This level also witnessed an Extreme Net Position reading in the Commitment of Traders Report in 2008.
Euro has just broken out of the rectangular consolidation pattern & inline with my bullish forecast for the US Dollar, the European currency will continue its decline after a pause for 2 years. The COT Net Position Indicator is right in between its extremities, therefore there is a minimum risk of a bottom here. The decline will accelerate and The Euro will eventually settle at 0.84 against the Dollar which is also the bottom made in 2001. The Euro offers a very good opportunity to go short for a long term horizon with a very decent risk to reward ratio.
The Aussie dollar has run into a very strong resistance & has formed a bearish flag pattern as shown in the chart. The COT Net Position Indicator is very similar to that of the Euro, It’s not at its extreme levels. Therefore the chances of a reversal are at a minimum. In line with a bullish US Dollar, the Aussie will eventually break out of the flag pattern continuing its decline. I believe it will revisit the lows of 2001 at 0.5 against the Dollar. The Aussie also presents a very good short opportunity, with the technicals, Sentiments & broad market cycles in our favour.
The S&P 500 has recently made a breakout of a 2-year range consolidation and also retested it’s breakout level. It has shot up like a rocket & is likely to continue its bull rally. Note that the COT Net Position indicator is at Extreme Levels. This is not a very big concern right now in this scenario. As you can see in the chart The COT was at extreme levels in 2013-2014 rally also, but S&P did not make any big corrections because the bullish sentiment was very strong. It is the same case now. Though COT us at its extremities S&P will likely continue it’s rally upwards. So now the Trillion Dollar Question is: – Is this a secular bull market and is this a buying opportunity for Long Term Buy & Hold Investors? The Answer is a very big NO!
This chart above the Shiller’s CAPE Ratio which is a 10-year average price to earnings ratio adjusted for inflation gives us a big warning sign. Notice that all the major market tops coincided with a CAPE ratio of 25- 30. The only exception was in 1999-2000 when CAPE reached a breathtaking 45. That was mainly because the tech bubble was so huge that the Tech Sector Outperformed all the other sectors by many multiples. The Frenzy over technology stocks was unparalleled in history & with the advent of online electronic trading, every Tom, Dick & Harry with a 100 Bucks was speculating in the tech Stocks. Also, No Secular Bull market in History began or continued for a long time when the CAPE ratio was above 20 & certainly not at 28 where we are now.In conclusion, I suggest all investors & traders not to keep long positions in the Stock Markets for a long time. Keep booking profits on big rallies & do not trade with huge leverage in your brokerage accounts. My Target for the S&P 500 is between 2460-2650 for 2017. These are the Fibonacci extension levels from the lows of 2008.