CHARLES NENNER´S TRENDS & TRADES : INVESTORS ROAD MAP FOR 2010-2011 ( VERY HIGHLY RECOMMENDED READING - A MUST READ )

Charles Nenner's Trends and Trades: Investor's Roadmap for 2010-2011

by: Cliff Wachtel CPA

April 08, 2010

From The Oracle of Amsterdam - Answers From The Great Beyond

Who He Is

Charles Nenner may be the most famous man you’ve never heard of.

Of course, the Oracle of Amsterdam is quite well known to market insiders. Before founding the Charles Nenner Research Center in 2001, he spent years as a senior technical analyst for Goldman Sachs, and prior to that he was head of trading research at Rabobank International.

Since 2001, he’s been quietly providing his unique market research all over the world to hedge funds, banks (including his former employer Goldman Sachs), brokerage firms, and wealthy individuals.

Why You Want To Know His Thoughts

They have made many rich, and could do the same for us.

Some of his recent forecasts include:

- In early 2009, when markets appeared on the brink of collapse, Nenner said the S&P 500 was going from 660 to over 1000 within the coming year.

- In early 2009, foretold gold’s 6 month run from June in the low 900s to 1220, within mere dollars of its ultimate peak at 1225.

- More recently, in December 2009 he called the top in US stocks within 4 days.

While not infallible, his accuracy over the year has been sufficiently impressive to keep clients coming back for more. Per Nenner, his weekly and monthly cycles are always right, and his daily cycles usually are too.

His Method

One System to Rule Them All, or, Answers From The Great Beyond?

What gives Nenner such a refreshingly accurate and contrarian perspective on the entire range of major asset markets is his unique proprietary Cycle Analysis System, the product of three decades of painstaking data mining (at times going back hundreds of years), research and refining.

The cycles’ primary focus is to tell him when there should be highs and lows in specific instruments, and thus identify the best opportunities to focus on for further analysis of entry and exit points over various time frames. This allows the thinking trader to visualize how the entire spectrum of major asset markets: currencies, bonds, stocks, commodities, etc., align for potentially trend-changing activity. It also allows such investors to note the implied possible changes in inter-market correlations, a neglected and thus profitable factor to consider.

The cycles are then further refined by a complex model that appears to consist of multiple overlays of indicators, both traditional and unique mathematically derived time and momentum technical indicators, and some reference to Elliot Wave theory. This enables Nenner to forecast not only the dates of tops and bottoms for every major market in the world, but also the actual highs and lows themselves, allowing followers to use both dates and levels as confirming data for identifying optimum entry and exit points. He covers all major asset markets: stocks, forex, commodities, and bonds.

As is usually the case with technical analysis, Nenner’s is art as well as science, as he applies his own judgment to resolve conflicting evidence to discern the overall theme for a given time frame.

Part of his unique take on markets is his virtual indifference to what most consider to be the fundamental forces driving markets, like earnings, major central bank biases, or ongoing debt crisis in the EU or international banking. Rather he sees these as mere manifestations of the deeper forces revealed in the cycles he has identified through years of painstaking research.

Thus while other market gurus will expound at length on the reasons for a given market or investment thesis, Charles tends to avoid public speculation about immediate, or superficial causes of movements in given markets. Thus his answer to why he holds views will invariably be, “that’s what the system shows.”

If you speak to him long enough, you feel an almost spiritual quality to the analysis, as though the cycles simply attempt to reflect a deeper underlying historical force behind it all.

Answers from The Great Beyond?

STOCKS

The Cycles Show Final Highs Soon, Then Down, Next Highs In 2012

High Conviction Trends

- Stocks peak around the third week in April around 1170,

- Pullback May - June, potentially up to 10-20%

- Then recovery and final peak in August (no level given)

- Then down for the next 6-12 months, potentially to around March 2009 lows well into 2011,

- At some point around mid 2011, stocks to recover to prior highs peaking in 2012

- Then begins a longer term downtrend from 2013 for many years.
Indeed, in prior interviews Nenner has called the period a ‘lost decade’ similar to that experienced by Japan. FYI, his cycles regarding military conflicts point to a big one in 2013.

The cycles show that’s the big picture for stocks.

Beginners should be reminded that within these time frames there will be, as always, shorter term counter trends, and some indices will of course perform relatively better, but will still follow overall trend.

Contrary to many pundits, Nenner‘s cycles show the global economy for the coming months is stronger than people think. While his cycles top in April and show some weakness in May-June, stocks may not drop much until after the final peak around August 2010.

While Nenner’s bearish views on stocks are hardly consensus, he is in some very good company. See Rally to End Soon, Says Morgan Stanley, in which they too see a near term drop coming within the context of a longer term bear market.

How To Profit – The Cycles Suggest These High Conviction Trades

The Short Term: Late April – August:
Play the short term pullback of late April-May and recovery peaking in August according to your expertise and time frame. However, Nenner suggests that those with less expertise or time to monitor portfolios might be better off just taking profits and sitting with cash.

The Longer Term From August: Once stocks start hit their August peak, take profits in stocks, then either stay in cash OR take positions that benefit from a LONG 6-12 month overall downtrend, that can withstand any short term rallies without hitting any tight stop losses. Shorter term traders are free to play those counter rallies as they wish. His subscribers get morning updates 3 times per week, a weekly summary, and additional updates as needed to allow short multiday time frame trading.

BONDS/INTEREST RATES

Cycles show deflation until into 2011, then multi-year inflation

- Contrary to many, Nenner’s cycles show that from now until early to mid-2011, deflation is the bigger threat than inflation. FYI this has so far been correct, see Disinflation Continues - Dallas Fed
- Deflation especially likely if USD remains strong as it causes US to ‘import deflation’ as imported goods become cheaper relative to domestic ones. As noted below in the FOREX section, the USD appears set to retain strength against most major currencies during this period.

- At some point in 2011, probably by the spring, a long period of inflation begins

HOW TO PROFIT - High Conviction Trade:Profiting on the deflationary period 2010-2011

Starting now, take positions that benefit from deflation. Nenner specifically mentions buying longer term US bonds starting now, as the cycles show yields are expected to peak in the coming weeks, along with bond prices falling. For 10 Year Treasuries, consider 4% yield the top, lowest price, then these bonds rise, yields fall as deflation takes hold.

Profiting from the Inflation that starts in 2011

When signs of inflation appear, take positions that benefit from this multi-year trend.

Nenner specifically mentions going short 30 Year T Bonds as a multi-year position. In the coming years, cycles show bond yields almost double, meaning bond prices drop almost 50%. In prior interviews, he has noted that once inflation really takes hold these bonds could fall much further, and yields could revisit their November 1981 highs of 13%.

The window of opportunity closes by June, when bonds should have highest yields, though Nenner suggest buying now and not risk missing the boat. Makes sense, considering his above call that stocks (and by implication risk appetite) will go lower in the third week in April, suggesting something will scare markets and drive safe-haven bond prices higher for at least the rest of 2010.

For another take on playing the longer term inflationary scenario, see Nenner’s thoughts on commodities below for his highest conviction pick.

Implications – Back To The Stagflation Of The 1970s?

As I contemplated Charles’ observations after our conversation, I noted:

Low Growth: Charles’ foretold a long term down trending stock market, especially after the final peak in 2012, for a number of years, strongly suggesting poor economic conditions and low growth.
Inflation: Yet interest rates are set to go much higher for a prolonged period at some point in 2011.

That sounds like stagflation to me.
FOREX

Highest Conviction Trends- Through At Least The End Of 2010

Cycles show that the AUD and CAD will be the strongest currencies for at least the rest of the year.

As for the key USD, a participant in over 80% of all forex trade, it will not perform as well as these, though it will outperform the EUR and JPY, which will be the worst of the major currencies during this period.

Highest Conviction Trades- Long Term

- Buy the AUD/JPY, or in some other way sell the yen vs. AUD. For example, those without Forex accounts could simply use ETFs, be long FXA and short FXY.

- Second choice, worthy for diversification alone, would be to buy the CAD/JPY or similar to the above, buy the FXA and short the FXY.

- Given the above trends, the implication appears to be that those seeking diversification should consider :

- For long forex positions: substituting the USD in forex long positions (or the UUP) for the AUD and CAD, and

- For short forex positions substitute the EUR for the JPY, or the FXE for the FXY, in a major portion of your short forex positions.

When asked about the fate of the EUR given the ongoing EU debt crisis, Charles (true to form) avoided speculating on how the crisis would play out or drive the EUR, but rather simply noted that per his cycles the near term downside was 1.3350, and seemed quite confident that this strong support level would hold.

This was impressive, because when we spoke about it on March 24th, the EUR was already below that level. Sure enough, it soon recovered within a day and retook the level.

He also noted that if the EUR/USD held below 1.3100, that would signal a real crisis in the euro. FYI he had called the euro’s high around 1.5100 months beforehand, when there was real discussion of the euro usurping or sharing the USD’s reserve currency status.

Significant Implications 1- AUD and JPY Correlations To Stocks Weakens

Charles noted that the AUD would “have a life of its own” (distinct from its established correlations to stocks) and continue to show at least relative if not absolute strength over the longer term, despite his forecasted trouble for stocks.

This statement, along with the above forecasts for the yen and stocks, set off alarm bells.

For forex traders, the above forecasts about stocks, the AUD, and JPY are very significant.

We forex folk constantly monitor correlations between currencies and various other assets for hints about future movements. One of the basic correlations over the past years has been that the AUD, as the primary risk currency, rose along with stocks, which are considered the prime barometer of risk appetite. Conversely, as the primary safe haven currency, the JPY moved opposite stocks.

Per what Nenner’s cycles say, these correlations will be breaking down over the rest of the year, especially into the latter part of 2010. Opposite of the norm, despite stocks soon to be in an overall downtrend for at least the rest of the year, the AUD will be strong, and the JPY will be weak – the exact opposite of what we’d expect.

Significant Implications 2: Twin Global Debt Bombs Behind the Forecasted Market Pullbacks?

As I’ve written repeatedly over the past months, the current primary threats to global asset markets are the EU debt crisis, and the wave of US mortgage resets beginning this July. See The EU Debt Crisis: Two Minute Dummies Summary & How To Profit for details.

EU Debt Crisis

As I’ve written repeatedly over the past months, the current primary threat to global asset markets is the EU debt crisis.

At this stage, the EU’s contingency plan has failed. The goal was to calm bond markets and allow the PIIGS group to borrow at affordable rates. Greece tested the plan this past week with bonds sales that saw weak demand and rising rates, suggesting that the threat of default is alive and well, with just weeks to go before Greece needs around €10 bln euros just to pay off maturing bond obligations.

The EU plan theoretically has enough cash (around €20 bln) for Greece, however the numerous ambiguities involved (see The EU Contingency Plan: Doomed By Its Main Strength) it remains uncertain whether Greece will get the needed funds in time, at rates and conditions that are any more acceptable than what the bond markets are offering. IMF medicine is not tasty. Moreover, Spain will be looking for €30 bln in July, and is not the only other weak economy hawking bonds of dubious safety. While Spain is in better shape than Greece, if Greece has not been smoothly resolved, that could complicate things for Spain. Thus the cash contemplated by the EU plan may prove inadequate.

Could a worsening of the EU Debt Crisis be the catalyst for the forecasted stock pullback for late April and May?

US Mortgage Resets

Beginning in July, a wave of mortgages will reset with higher rates. The last time a reset of this magnitude hit, it became the subprime debt crisis, which became the crash of 2007. Could the twin detonations of the EU Debt Crisis and US Mortgage Crisis II be the catalysts of the forecasted multi-year pullback beginning around August?

COMMODITIES

High Conviction Trend

2011 begins big bull in wheat and soybeans (also in related assets like fertilizer, though I was unable to clarify with Charles whether these stocks would rise while overall stock market is down. Such things can happen (eBay (EBAY) during the dot com crash) but are very rare.

High Conviction Trade

Long Wheat and Soybeans: After the summer big low in wheat and soy beans, then a big 2 year bull in wheat and soy for about 2 years.

Gold & Precious Metals: After having sold at 1220 just short of the high, Nenner’s cycles show gold in a sideways to down trend, with a bottom and possible new long position signals around September-October 2010. This makes sense given that he sees inflation coming a few months later.

Regarding the other most popular commodity for dollar hedging, crude oil, the cycles don’t show much upside for the rest of year, and lots of downside, ditto oil stocks. Natural gas also remains in an overall downtrend.