The following is part of Pivotal Events that was published for
our subscribers October 23, 2014.
Signs Of The Times
"Energy companies now account for a record portion [17%] of the below
investment grade issues placed this year."
- Bloomberg, October 14.
"Fannie and Freddie, as well as other mortgage players, are pressing
borrowers to pay whatever they still owe on mortgages that they defaulted
on years ago."
- Reuters, October 14.
"I also think that inflation expectations are dropping in the U.S.
And that is something a central bank cannot abide. We have to make sure
that inflation and inflation expectations remain near target."
- Financial Times, October 16.
Now anyone with a smidgeon of curiosity may ask "Why?" But, then the arbitrary
mind is hard to fathom.
Especially as it was uttered by James Bullard who heads up the St. Louis
Fed and is usually a "hawk" on monetary policy.
Fed-Heads must be getting worried, for he ventured his own view with "My
forecast is for rising inflation." Quite likely he means CPI inflation and
is overlooking financial asset inflation. Some would say that soaring stock
and low-grade bonds have reached the equivalent of hyper-inflation.
And now for a remarkably interesting concept:
"Billionaire Mayayoshi Son's 300-year business plan for SoftBank Corp
sees no pause in acquisitions that saw him splurge $51 billion in five
years. SoftBank is Japan's biggest corporate bond issuer." (The stock
symbol is SFTBY)
- Bloomberg, October 17.
"Hedge funds are on course for their worst year since 2011."
- Financial Times, October 16.
To look to the bright side, there are 46 trading days left in the year.
Stock Markets
A few weeks ago our theme was Exuberance, Divergence and Volatility. The first
two were reviewed in September and Volatility raised its ugly head in early
October. The Resolution to the preceding excesses has yet to be fully realized.
But before going there it is worth noting that the exuberant phase drove bearish
sentiment down to only 13.3%, last seen in 1987. It also registered a Monthly
Upside Exhaustion on our proprietary model, last seen in early 2000. On volatility,
the VIX has recorded the biggest jump since 2011. The one in 2008 was twice
as big.
Of interest is that on the initial slide there were some huge swings from
day to day.
The latest huge swing is a Weekly up-bar which could soon roll over to a Weekly
downbar. How big? We won't know until next week.
Technically, the initial plunge took out key moving averages similar to the
action in 2007. Last week's intraday low was 1821, which took out the gains
since early February. However, let's look at the low close at the 1860 level
which was the support on the May
"dip".
The first line of support is at 1860 and the "game over" line is the 1820
level. It is also worth noting that the season (October) for discovering liquidity
problems is ending. Traditionally, the test of such problems has happened in
November from which a tradable rally would follow.
Also it is worth noting that swings in JNK have provided distinctive oversold
and overbought signals that have keyed the swings in the S&P. This week's
pop in JNK has registered an Inverse Springboard, which is a "sell" within
a downtrend.
Commodities
We have had a good year in the energy sector. Initially it was on the big "Rotation" out
of depressed conditions for most commodities last December. The low for crude
was 91.24 at the first of the year and the high was 107.68 in June. Our targets
had been 105 and 112.
The July 7th ChartWorks "XLE - Overheated", noted the Upside Exhaustion and
Sequential Sell patterns. The July 10th Pivot noted that the big "Rotation" was
maxing out and that the commodity sector was vulnerable to a firming dollar.
As well as to the potential of a discovery of liquidity problems in the fall.
Our other theme has been that the degree of oversold or oversold readings
sufficient to call for a trade could be overwhelmed by exceptional moves.
Two weeks ago the plunge in the XLE registered a Springboard Buy. It has now
generated an inverted Springboard as the rush drove it to 86.71 yesterday and
today's high has been 86.69. The low earlier in the year was 80.58 and the
high in late June was 101.00.
On the move, crude dropped to 79.78 last week and bounced to 83 yesterday
morning. Then it slipped to 80.3 and today's high has been 82.3.
Technically the condition is interesting. Crude was oversold last week, but
this may only prompt a brief rally. The seasonal pattern is for weakness into
December. The "sell" on the XLE suggests the decline for the sector has further
to go in time and in price.
Base metal prices (GYX) waited until March to start the "Rotation" and topped
at 377 in early September. The decline to 339 ten days ago found support at
the June setback. The bounce to today's 352 is right at the 200-Day ma which
could provide a lid.
Metal miners (SPTMN) topped at 954 in July, anticipating the high for metals.
The decline has been to 670 in the middle of the month and at 30 on the Weekly
RSI it is somewhat oversold. But copper typically sets a seasonal low in mid-November.
This sector could bottom over the next six weeks or so.
Agricultural prices (GKX) were the first to set an oversold and then extend
the slump. That was in July and the next slump took the GKX to really oversold
at 19 on the Weekly.
A relief rally has taken the index to resistance at 310 - the 50-Day ma. Through
this and a trading range could prevail into the spring.
Cotton is in a similar condition and the price could stabilize over the next
few weeks.
Credit Markets
At the end of every cycle in the credit markets Mother Nature bullies the
central bankers. In so many words and in so many instances the Fed cannot push
the curve or spreads as a boom culminates.
Curve flattening ran from November a year ago and became overbought at the
end of September. The reversal has been down to support at the 200-Day ma.
Correction is under way and it could be brief.
The main thing is change and this shows up more dramatically in credit spreads.
This shows in the JNK which has been volatile recently. A fortnight ago the
plunge registered a Springboard Buy and the rebound was strong enough to register
the opposite. An Inverted Springboard, which could take a few days to become
effective.
The other view on spreads (BBB vs Treasuries) is updated and follows.
After breaking out in late September, the widening trend is established and
has taken a pause. The trading "sell" on JNK suggests widening could resume.
A week ago Wednesday the Ten-Year note, which is one of most liquid items
in the solar system took a huge swing. Quite likely the biggest Daily bar in
history. In one instant there were no bids and a little while later there were
no offerings.
This showed up as the five-point jump in the bond future, which we took as
forced covering.
That drove the action in the bond future to overbought enough to back off.
However, on the next stock market setback the bond can rally.
Credit markets seem to be working on an important change.
European bonds have ended their extreme decline in yield and are stabilizing.
The Greek bond has reversed to a rising trend.
Precious Metals
In dollar terms, gold set a low at 1179 in June 2013, 1181 in December 2013
and 1183 two weeks ago.
Other than the very subtle uptrend on lows this is not doing much for the
gold industry.
In real terms, as deflated by our commodity index, it has increased from 3.28
in June to 4.15 yesterday.
This is constructive for gold miners and is likely to continue. When the current
liquidity problems clear gold shares will rally.
This year's low for the GDXJ was 29.86 yesterday, which could be setting a
double bottom with the low of 30.39 set earlier in the month.
We have been looking for a "buying opportunity" to appear around late October.
Well, it is later in October, but we don't see anything to prompt an accumulation
program.
Spread Reversal: Current
Low: June 25, 2014: 1.4% Breakout: September 26 at 1.59% The high has been
1.72%
Spread Reversal: Summer 2007
Spread Reversal: Spring 2000
Link to October 24 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2014/10/few-pos...gns-in-markets/
