The following is part of Pivotal Events that was published
for our subscribers September 13, 2012.
SIGNS OF THE TIMES:
"Organic Food Not Healthier Than Non-Organic: Study"
- Yahoo News, September 3
It's about time, and we are looking forward to a study from high places
that a gold standard is very much healthier than fiat money.
"China Iron Ore Prices Dropped 24% last month...to the lowest since
October 2009."
- Bloomberg, September 4
"Honduras Signs Deal to Create Private Cities"
- AP, September 5
"Investors face an 'Age of Inflation', which typically provides a
headwind, not a tailwind, to securities prices - both in stocks and
bonds."
- Bill Gross, Bloomberg, September 5
Apparently, the term "Financial Asset Inflation" has yet
to make to be fully understood by the chattering classes.
"French Unemployment Rose to a 13-Year High"
- Bloomberg, September 6
Perspective
Now let's think about the in-your-face announcement that the ECB is going
to aggressively buy bonds out of the market. And then today's Fed announcement
to buy mortgage bonds added to the prospects of salvation through inflation.
How will a deliberate short squeeze improve the condition of insolvent European
countries?
But, it did take the dollar index down to 79.2 earlier today. This is below
our target of 80.2 and is adding to the oversold. This has prompted rallies
in a number of markets that are likely to be brief.
Why brief?
It's that time of year and the action has become very compulsive.
Commodities
First of all, the big drought-driven grain rally is over. For the season and
likely for this business cycle. Last week's "Sequentially yours" theme noted
that wheat was the first to complete its topping pattern. That was in July
and the next was corn in August and then last week soybeans needed to hold
a certain price to record another "Sequential Sell" pattern. It did and the
next step will be taking out 1700.
The overall index (GKX) set its price-high at 533 and this compares to 570
reached with our Momentum Peak Forecaster in March 2011. The Forecaster signal
suggested most commodities were then setting a cyclical high.
Recently, the momentum-high was accomplished at 82 on the RSI in the middle
of July. This was at the level that had ended a number of rallies over the
past decade.
At 512, the index was up only 3 points today. Taking out 495 would turn the
drought-rally into a downtrend.
Base metals (GYX) set their cyclical high at 502 in the spring of 2011. This
was confirmed earlier this year when last fall's panic low of 350 was taken
out on the way to 346 in August.
Last week, we noted the "saucer" bottom and thought that the rebound could
find resistance at as high as 389. So far the high has been today's 393. Possibly
important - the RSI reached 79 which has turned back all the rallies of the
past two years.
Late in August, crude oil's action completed a Sequential Sell and as Ross
noted on August 30 the run could extend for a few more bars. This has been
the case, and we are looking at some heavy crude oil action.
The couple of "more bars" has helped the CRB in reaching a good overbought
at 74. This is close to the level that can end the move.
It is interesting that different commodity sectors are becoming overbought
at the same time as the USD is becoming oversold.
Currencies
The ECB policy short squeeze was given extra thrust by a court approval -
and is being called the "Bazooka". The term has been used in financial context
for a while, but with the German court's approval the term should be "Panzerfaust",
resulting in a jump in "wolatility".
But it is volatility in the direction the market wanted to go, and now with
the Fed's announcement extended enough for a reversal. The USD slipped to
79.2 and to an RSI low of 23, which is close to the limiting level. But, when
looking at the RSI 82 reached on the rally the action has accomplished a huge
transit from overbought to oversold. In so many words, the Fed's "elastic" currency
is being stretched to the limit.
Going the other way, the Canadian dollar popped to today's 103. This is a
few "bars" beyond overhead resistance at 102 and the action is eligible for
reversal.
Stock Markets
Last week, we reviewed the negative divergence of declining A/Ds against the
uptrend in the S&P. Mainly it records that fewer and fewer individual
stocks are capable of keeping up to the leaders, which is typical of an important
top.
The following chart shows that the timing is becoming somewhat late for the
top in the index. The secondary high on the A/D was set on August 17 and has
not been surpassed. Continuing negative divergence suggests the ultimate high
on the S&P is pending.
Ross's work on the VIX also shows a negative divergence typical of an important
top. This indicator has yet to complete the signal.
Last week's review noted that more of a spike up would fit the pattern, and
thanks to today's Fed announcement this is happening. The promise to buy $40
billion of mortgage-backed securities (MBS) a month reminds of central bank
pledges to sell so many tons of gold per year into the lengthy bear market
for bullion. That pathetic policy ended at 253 in July and August of 1999.
It is interesting that the sub-prime mortgage bond rallied to new high for
the move this week before the news.
It is uncertain how long the speculative spike will last, but often such spikes
are brief.
Ampersand
Bernanke's remarks included the boast that Fed policy had created stable inflation
over the past decade. That would mean CPI inflation, which calculation has
been suspect since the Clinton revision. But financial asset inflation and
volatility has become dangerous.
This cannot work out well, despite the belief that massive stimulus will revive
the failing global economy. The 24 percent plunge the price of China's iron
ore price is a voice of opposition to Fed and ECB wishful thinking.
We can't help but wonder about Romney's statement that as president he would
retire Bernanke from the Fed. Perhaps the MBS buying program is an attempt
to help Obama, which would likely insure that Bernanke's career as the great
inflator continues.
"[The] 1901 [Bull market] was . . . speculative demonstration
based . . . on the assumption that we were living in a new era; that
the old rules and principles and precedent of finance were obsolete;
that things could safely be done today which had been dangerous or
impossible in the past. The illusion seized on the public mind in
1901 quite as firmly as it did in 1929. It differed only in the fact
that there were no college professors in 1901 who preached the popular
illusion as their new political economy."
- Alexander Dana Noyes (1930)
Stock Market Negative Divergence
- This model worked well going into the top of 2007.
- It will likely be effective in seeing through current excitement.
Link to September 14, 2012 'Bob and Phil Show' on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2012/09/a-world-of-easing/