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"The
European Central Bank will be overextended and no longer able to fulfill its
price stability mandate if it engages in more sovereign bond buys."
~ Former ECB Executive Board member, MarketNews International, August 28
"U.S. Fed
Still Has Tools to Battle 'Rocky' Recovery, IMF Official"
~ Financial Post, September 1
Somehow this reminds of the
semi-official boast in 2007 that the "Dream Team" of
economists was in control and that nothing could go wrong. Or the similar
boast in 1929 that because of the "new and scientific"
Federal Reserve System nothing could go wrong. At the time, the Fed was
headed up by bankers - not economists. Then, as the 1873 Bubble was becoming
strained the boast was that because the US did NOT have a central bank and
was NOT on the gold standard - nothing could go wrong.
The Bubbles of 1929 and 1873 were
followed by a series of severe recessions and weak recoveries that have been
the feature of every Great Depression.
"Moody's
Changes Euro Zone Rating Outlook to Negative"
~ CNBC, September 3
"Fears
Rising, Spaniards Pull Out Their Cash and Get Out of Spain"
~ The New York Times, September 4
"[Iron Ore]
Spot Prices Down More Than 20% in August"
September 5
Hello Autumn!!!
Perspective
As noted, earlier in the summer stock
market sentiment was unusually bearish, which suggested a good rally. In a
short time, sentiment has changed to rather optimistic. Not as high as it can
get but enough - at this time of year - to focus our attention.
We are beginning to turn cautiously
pessimistic.
Over at his www.thechartstore.com site, Ron Griess has a good eye on the bigger picture and the
following chart on the S&P tells a story.
"Internals" such as trading
volume and the difference between advancing and declining individual stocks
can provide an early warning on pending change. Typically going into an
important top, volume will decline (ü) as participants focus on fewer
sectors and then stocks that can be bulled up (ü).
This shows up in the A/D line and
typically at a top the S&P will set a higher high as the A/Ds set a lower
high (ü). The chart shows this was the case in the build to the peak in
2007 - and now. It would be somewhat nicer if current action was on more of a
spike, but the completion of the pattern is key, and
that lies in the A/Ds.
In 2007 the duration was 18 weeks
from the A/D primary high to the secondary high. The high on the index (1566)
and on the secondary A/D were both on October 9.
This year there has been 19 weeks
from the primary to the secondary highs in the A/D line.
The question is about the timing on
the high for the index and so far the 1426 high on August 21 is within a few
days of the August 17 secondary high on the A/D.
America is getting close to the
Fiscal Cliff and the election on November 6th will be a clear cut vote on
whether to continue the reckless experiment in authoritarian government or to
begin the wonderful denial of privileged government classes. In so many
words, will the producers continue to pay to be abused by bureaucrats
inspired by unlimited ambition?
Also, it looks like the stock market
is on the edge of a seasonal cliff.
Credit Markets
Corporate spreads narrowed until two
weeks ago and there has been little change since. There was enough party to
make us wary of all spread products.
As we have been noting, the price
action has been outstanding with treasury bonds topping in June-July, with
investment-grade corps (LQD) next and then emerging market bonds (EMB). Each
high was dynamic enough to suggest more than an intermediate decline in price
and rise in yields.
That's the technical side - basically
the fundamentals are that there is not enough cash flow in the global economy
to service massive debt taken on during the reckless jubilation of a
financial bubble.
We've been waiting for the sub-prime
mortgage bond to break down, Over the past two weeks it has been testing the
high set in mid-August.
Fortunately, at extremes in spread
markets the gold/silver ratio acts, well, like a credit spread. Lately it has
been on a rush as it has plunged from 59.5 in June to 51.8. With this, the
daily RSI has plunged to less than 22.
This compares to 10 accomplished in
April 2011. That culminated the sharpest rally for silver relative to gold
since that fateful January of 1980. It is uncertain how long this impulse may
last, but it is doubtful if the extremes of last April or of 1980 will be
reached.
In so many words, the exit is close.
Today's Financial Post had a
good-sized headline:
"Helicopter
Ben VS Super Mario"
The story was about ECB President
Mario Draghi having more influence over the global
economy than Chairman Ben. Well, we would guess that it's because Europe is
leading on the nest phase of the post-bubble contraction.
At any rate, the ECB promise to buy
all the bonds that would be needed to end the contraction has inspired a
price rally. For example, Spanish bonds have declined in yield from 6.85%
last week to 6.41% today.
This move will likely be short lived.
Commodities
"Sequentially
yours" - sounds like the salutation on an old fashioned
letter, but it is a description of a reliable ending pattern for any
speculative price action.
For us, the Sequential Sell kicked in
on as the strong rally in wheat was topping in July. Then it worked as corn
was topping in August and, more recently, for crude oil.
Now the ending pattern is developing
in soybeans. As with the other signals, beans need to stay above a certain
level until Friday. On the July contract this is 1450, today's price is 1580.
One could say that soybeans are
following a sequence of important tops and will soon roll over. Overall,
agricultural prices (GKX) recorded a surge with a good overbought on the
daily RSI - and has been trending sideways. That's with the worst drought in
50 years. Chart follows.
Base metals have been working on a
"saucer" bottom, centered upon the low of 346 set at the first of
August. Over the past week it has jumped from 355 to 368. There is resistance
at the 374 to 389 level.
It should be noted that metals have
been down-trending since the cyclical high of 502 in April 2011. The recent
346 took out the low of 353 set in last year's panic about European debt.
Most commodity prices are vulnerable
to further weakening of the global economy.
 
- The
worst U.S. drought in 50 years drove the index to 533, and a high RSI.
- The
high of 570 in March 2011 still stands as a cyclical peak.
- Taking
out 450 would provide additional confirmation.
Bob Hoye
Institutional Advisors
The opinions in
this report are solely those of the author. The information herein was obtained
from various sources; however we do not guarantee its accuracy or
completeness. This research report is prepared for general circulation and is
circulated for general information only. It does not have regard to the
specific investment objectives, financial situation and the particular needs
of any specific person who may receive this report. Investors should seek
financial advice regarding the appropriateness of investing in any securities
or investment strategies discussed or recommended in this report and should
understand that statements regarding future prospects may not be realized.
Investors should note that income from such securities, if any, may fluctuate
and that each securitys
price or value may rise or fall. Accordingly, investors may receive back less
than originally invested. Past performance is not necessarily a guide to
future performance.
Neither the information nor any opinion expressed
constitutes an offer to buy or sell any securities or options or futures
contracts. Foreign currency rates of exchange may adversely affect the value,
price or income of any security or related investment mentioned in this
report. In addition, investors in securities such as ADRs, whose values are
influenced by the currency of the underlying security, effectively assume
currency risk.
Moreover, from time to time, members of the
Institutional Advisors team may be long or short positions discussed in our
publications.
This essay is part of Pivotal Events that was published for our subscribers August
16, 2012.
Copyright © 2003-2008 Bob Hoye
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