The following is part of Pivotal Events that was published for
our subscribers January 16, 2014.
Signs Of The Times
"China's audit of local governments exposed an increased reliance
on shadow banking, swelling the risk of default on $3 trillion of debt."
-Bloomberg, January 6
"Investors are bailing out of emerging markets from Turkey and Brazil
to Thailand and Indonesia, extending a selloff that began last year."
-Wall Street Journal, January 9
"A roaring revival in the market for loans is boosting the fortunes
of giant financial firms."
-Wall Street Journal, January 9
"Stay fully invested - we don't have bubble troubles yet."
-CNBC, January 14
Since November we have mentioned how fascinating it is when a methodical bull
market lifts off to a speculative surge. Typically buying becomes compulsive
and the numbers are now at levels seen only at important highs.
How long can this degree of levitation last?
Can the overbought condition be eased by a minor setback to flat trend?
Perspective
It has been an interesting week.
On Monday, the S&P tanked on a bearish report from Goldman. It also accomplished
an Outside Reversal, showing signs of uncertainty and diminishing liquidity.
Yesterday, the stock market jumped on good news on the Empire State Manufacturing
number and mortgage applications. And then there was a bullish report from
Goldman.
Similar ups and downs are seen in lower-grade bonds and credit spreads. As
mentioned, spreads declined (widened) below the 50-day moving average which
had provided support on each dip over the past year.
Crude oil declined to the lowest low since last summer and yesterday's pop
was a plus for the stock market.
This is near-term noise.
The key conditioner since October has been the "Springboard Buy" of October
9th. The extreme overbought is the new condition to reckon with and this is
indelible. The tattoo machine does not have an eraser.
Getting off of the highs for sentiment and momentum will not be easy. We should
recognize that these readings are only seen at cyclical highs.
And then there is the economy. In the usual business cycle, the stock market
leads the economy by around 12 months. At the end of a great bubble stocks
and the business cycle turn down at the same time.
This worked for us in 2007 and it was likely that when the panic ended in
March 2009 that the economy would turn up with the stock market. The delay
was two months.
It seems appropriate to have good economic reports with stock market highs.
Quite likely, both will roll over at virtually the same time.
Credit Markets
As noted above, technical action in spreads gave an alert. This was mainly
due to the spirited rally in treasuries. To make it more meaningful, lower-grade
yields should be increasing.
In the meantime junk and the high-yield continued to rally. The Daily RSI
on JNK has soared to 81. The last time it reached 81 was in early May. As Ross
notes in today's ChartWorks, this is accompanied by a Sequential Sell.
Lower-grade bonds are poised for a selloff. The rally has had little regard
for risk. The decline in price and rise in yields could be substantial.
The reversal in May was seasonal and initially severe - severe enough to force
Bernanke to talk about tapering, in order to look in charge of rising rates.
The ending hammered the RSI which was distressful enough to prompt Bernanke
to ease worries about the taper.
The point is that in May a seasonal reversal overwhelmed the Fed buying program.
JNK plunged from 40.30 to 36.89 as the RSI swung from 81 to only 22.
JNK has rallied with only minimal setbacks from August to this week.
JNK/TLT (junk vs treasuries) violated the 50-day moving average, traded slightly
above it yesterday.
Often the bond market can rally through Christmas and into January and reverse
- seasonally.
Accounts could begin to lighten up on low-grade issues.
The treasury bond future declined for eighteen months to a low of 127.35 and
a Weekly RSI of 30 at Christmas. The rally has made it to 131 last week. This
seems to be part of the rotation from high-flyers to no-flyers. It has further
to run, but we don't see a cyclical bull market.
Issuance of treasuries has been absurd and the rally in commodities could
also limit the action.
Commodities
This week's resumption of the rally in base metal miners (SPTMN) has been
outstanding.
The low was 704 in early December and at 855 it is through resistance at 849
set in September and October. The Daily RSI is up to 78 which suggests a brief
consolidation.
With this, Cameco (CCJ) has also jumped above its resistance at the 21 level.
Uranium, the oxide, set its big high at 73 in March 2011, which with base
metals, reversed on the signal from our Momentum Peak Forecaster. We expected
a cyclical bear market.
Uranium set a key double bottom at 34.5 in October and at the end of the year.
At 35, breaking above 36.4 would set the uptrend.
In November, we began to look for an important rotation whereby the resource
sector could bottom and turn up.
Base metals (GYX) rallied from 330 at the first of December to 355 late in
the month.
The correction was to 339 and this week's excitement has driven it to 360.
This is the resistance level and a rest is due.
Crude oil declined to 91.77 in late December and joined the action in base
metals. The initial rally to 100.75 was fast - too fast. The decline to 91.24
last week was rather quick.
The recovery to 94.20 needs a pause, but 100 seems possible.
On the longer term, since 2008 crude has been in a secular bear market.
Currencies
The Dollar Index is again trying to get through the 81 level.
The key low was 79 in October and rising through 82 will extend the uptrend.
This seems likely. As lower-grade bonds roll over it will inhibit the Fed's
ability to depreciate the dollar.
Stock Markets
The rotation from high-flyers to the resource and materials sectors seems
to be working out.
A cyclical high for the senior indexes at around now needs confirmation with
a distinctive break. Taking out the December low of S&P 1768 would do it.
It is worth noting that the long bear market in base and precious metals did
not impair the action in the hot sectors. Perhaps the base metal sector can
continue to rise as the senior stock indexes roll over.
Precious Metals
In olden days, when coming out of a cyclical bear market for golds the seniors
would be the first to rally. Then after a while, mid-sized companies would
rally and much later the juniors would participate in the bull market.
No longer, as they all turn up at the same time.
Of interest is that the seniors (GDX) have rallied 10%, the middling companies
(GDXJ) have rallied 20% and the juniors (GLDX) have jumped 24%.
This is good.
Continuation will require silver to outperform gold. So far, the silver/gold
ratio increased from 154 (leaving out decimals) in early December to 166.
At 162 now, rising through 166 will set the uptrend.
If there is a day when silver does a serious plunge relative to gold we will
review our policy.
A cyclical bull market for precious metals is developing, but there could
be volatility on the way.
Link to January 17, 2014 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2014/01/lower-g...ales-going-nuts
