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Dear Daily Crux reader, This week, we're checking in with market forecaster Charles Nenner. Longtime readers know Charles studies market "cycles" to make short- and long-term forecasts on everything from stocks to commodities to the economy itself. Charles and his unique research have been featured in The Wall Street Journal and Financial Times, and he's been a frequent guest on Bloomberg Television, Fox Business, and CNBC. We last spoke with Charles in June 2011, just days before the end of the Federal Reserve's QE2 program and the start of an incredibly volatile time in the markets. Charles shared his "big picture" thoughts on a range of markets including stocks, bonds, precious metals, crude oil, natural gas, and more. To see how these forecasts panned out – and get Charles' latest thoughts on the markets – read on… Good investing, Justin Brill Managing Editor, The Daily Crux www.thedailycrux.com |
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The Daily Crux: Hi, Charles. The last time we spoke – in June 2011 – you shared several market forecasts with us. Today, we'd like to revisit those calls and get your latest thoughts on the markets. Before we get into it, can you quickly review how you make your forecasts? Charles Nenner: Sure… The analysis we use at the research center is based on cycles. It's a model I built more than 25 years ago while in medical school, after becoming fascinated with seemingly unexplained patterns in nature. The primary idea here is that markets do not move at random. While hard to understand at first – and difficult to accept emotionally – our research has shown time and again that cycles can in fact determine highs and lows, based on historical repeating patterns. It all starts with a study of the cycles. We create them by looking at the historical closing prices for all traded asset classes and instruments. Our service covers stocks, bonds, currencies, commodities, and economic indicators. The cycles tell us when highs and lows are going to happen. Of course, cycles only work in any data series where we have enough data. A stock that has only been public for a short time – such as Facebook – does not have enough data for us to create good predictable cycles. But our system is not based only on cycles. It's more than simply seeing that a cycle is bottoming and deciding to going long, or seeing that a cycle is topping and deciding to sell or go short. A second system is deployed to determine price targets, which is based on our proprietary mathematical analysis. We also have developed a unique "overall technical model," which takes into account many other indicators. This does not change often, but keeps us out of trouble by avoiding shorts and longs at the wrong time. It's only when everything lines up for our cycles, targets, and technical models that we advise taking positions. ----------Advertisement--------- What if you had passwords to the best of S&A's research? One of S&A's lead analysts is doing something unusual. He's using his proprietary passwords so you can access our best handpicked investment research—including some of our favorite ways to invest in gold and gold stocks now. Full details here. --------------------------------- Crux: Sounds good. Let's move on to your forecasts… Last time we spoke, both gold and silver had rallied throughout the spring and had pulled back to start the summer. Silver had been especially volatile. It rallied from around $30 to start the year all the way up to $50 in March, and had fallen all the way back to the mid-$30s when we spoke. You said we could see more weakness in gold and silver, but forecast a resumption of the long-term bull market, with targets of $2,300 gold and $50 silver over the next two to 2.5 years. Silver fell almost immediately, while gold went on to make new highs that fall before pulling back… But both metals have been range-bound for much of the past year. What do you expect for precious metals now? Nenner: Looking ahead, our upside target for gold is still $2,300, but with some stages in between. Cycles project the first short-term upside at $1,840. Once it closes above that, we'll be looking for $2,040. With silver, our first upside target from here is $40. Crux: Your call for the major U.S. stock indices was for significant weakness in the second half of last year, followed by a rally into year-end… And that's what we saw. Stocks rallied into July, crashed from August until October, and rallied into the end of the year. But you also said you expected a return of a larger bear market over the next two or 2.5 years. In fact, you said you expect the Dow to fall to 5,000 before it's finished. So far, the major indices have been holding up. Do you still expect a major decline? Nenner: The short answer is yes, a big decline is still expected over time. However, I'd like to note that we did call the rally up to this point. About a year ago, we predicted the S&P 500 would reach 1,449. Earlier this year, that target was refined to 1,460. Now that we are trading near that target, we don't advise clients take new positions here. With the Dow Industrials, a close below 12,500 will now be a sell signal from longs. The S&P 500 hit our upside target last week as I mentioned, and will be a sell with a close below 1,429. The Nasdaq is also looking very risky. The bottom line is that I think it's becoming very risky all around. We are tightening stops and waiting for a sell signal. If we rally strongly above the levels where we're trading now, it could be a different story over the near term, but for now, we don't have much of a long position, and expect lower prices. Crux: You also predicted we wouldn't see any significant new highs in oil over the next year. At the time, oil was trading around $90… And despite a decline last summer and a rally to start this year, oil did not best its 2011 highs, and is again trading around $90. What is your forecast for oil now? Nenner: According to cycles, we still expect lower crude prices into next year with a maximum downside risk of 72. Over the last several years, we have called crude from the $30 range to the mid-$140s, then back to the high $30s, and then back up to the $100-plus range. We believe these cycles should be taken seriously, since the so-called "fundamentals" cannot explain these moves. Crux: Probably your most controversial call last year – other than Dow 5,000, of course – was that natural gas was about to crash. At the time, "natty" was trading around $4.50… and had traded around that level for most of the previous two years. You forecast natural gas would fall to near $1.70 over the coming year – a 60% decline – and create a significant bottom. Natural gas began moving lower almost immediately, bottomed this past April around $1.90, and has been moving higher since. What are your thoughts on natural gas now? Nenner: Well, for the record, we actually called for natural gas to go to $1.70 when it was trading above $6! It is interesting that many banks that made loans to natural gas companies when the price was around $5 or $6 started calling in the loans as the price came down. This is an example of how we view cycles as indicating what the news will be, before it happens. As we said, this is difficult to accept emotionally – but it is the reality. Prices fell to $1.87, which was close to our long-term downside target of $1.70, and then cycles bottomed. We expect it could experience more weakness again by the beginning of the year. However, the major low we were looking for has passed, so we expect higher prices longer term. Crux: You also said copper had made a significant long-term top. It was trading near $4 when we talked. After a short pop to $4.50, copper declined throughout the summer, bottomed at $2.99 last October, and has not closed above $4 since. Do you see more weakness ahead for copper? Nenner: Yes, cycles suggest copper is still headed down over the long term, but short term, copper should continue to bounce into next year. Crux: You predicted grain prices were set to begin multi-year rallies over the coming months. How has this forecast worked out? What do you see for grains now? Nenner: Let's go through the major grains individually. The wheat price in June 2011 was around $6.50, and we called for it to trade up all the way to $9.50, which it did. Right now, we are in a correction for wheat – and grain companies – that should last until later this year. Soybeans were trading around $13. They went as high at $18, and are now also in a correction that could take until later this year. Corn was trading around $6.30, and we called for it to trade up all the way to as high as $8.35. It peaked near $8.50 this summer. Cycles show that corn is also in a correction that will last until later this year. Longer term, cycles indicate that grain prices should continue rising. Crux: Turning to currencies, you had predicted the short-term rally in the euro in early 2011, but over the longer term, you believed it was headed to zero. The euro has fallen from the 1.40s to under 1.30 today, so it's certainly headed in that direction. But do you still expect the euro to break up? Have any of the recent "save the euro" plans changed your forecast? Nenner: The euro has been given some extra time due to recent events, but the big problems continue to exist. Right now, the euro is in a bounce, but it will renew its down move once it closes below 1.26. Crux: You also said you thought the dollar was forming a significant long-term bottom. The U.S. Dollar Index was trading around 74 at that time. It made a higher low around 73 last September and has moved higher ever since. How much higher could the dollar go? How long will this rally last? Nenner: Ultimately,we still expect a major crisis for the dollar in 2014. But until then, I think it can hold up, and the dollar index could even reach as high as 92. Crux: Your forecast for 30-year U.S. Treasury bonds was for a move higher in prices – and a move lower in interest rates – into the end of the year… And again, that's almost exactly what we saw. Over the long term, you said you expect to see a major decline in bond prices – and rise in interest rates – until 2040. Yet, bond prices have moved even higher this year. Do you still see a big long-term decline in bond prices? When do you expect it to begin? Nenner: Our opinion of much lower bond prices over the next 30 years is still on track. This is based on the fact that 1980 had high rates, 1950 had low rates, 1920 had high rates, etc. This 60-year interest rate cycle goes back centuries. I think the long-term rise in rates has started already… it will just take some time for the bear market in bond prices to develop. We often cover the TLT and TBT in our updates, which as your readers know are popular ETFs used to invest in the bond market. Crux: Finally, you made some interesting forecasts on unemployment and war. You predicted unemployment would worsen over the coming year. You also said you expected a "major war" to begin in 2013. We've certainly seen a great deal of unrest recently that suggests this could be possible. Do you have any updates to these forecasts? Any new information we should know? Nenner: Unemployment has stayed high and cycles still project higher unemployment ahead. Regarding war – based on cycles – it looks like a crisis could start as early as March of next year. We'll be watching this closely. Crux: Any parting thoughts? Nenner: I'd just like to invite any interested readers to contact us at our site:www.charlesnenner.com. We would be happy to sign them up for a short trial of our research, so they can see in real time how the power of cycles and targets can help with timing and avoiding bad trades in these very challenging markets. Crux: Thanks again for talking with us, Charles. Nenner: My pleasure. Thank you very much for inviting me back. |
Sunday, 7 October 2012
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