The following is part of Pivotal Events that was published for
our subscribers September 4, 2014.
Signs Of The Times
"Monetary policy ultimately must be conducted in a pragmatic manner
that relies not on any particular indicator or model."
- Janet Yellen at Jackson Hole
"Yellen Takes Dead Aim At A GOP Movement To Rein In The Federal Reserve
System"
- Business Insider, August 22
Obviously, Yellen wants to keep the US dollar on the PH.D Standard.
"2008 Meltdown Was Worse Than Great Depression, Bernanke Says"
- Wall Street Journal, August 27
Well, whether it was in 1825, 1873 or 1929 the crash you personally
experience is always the worst in history. "Consumer Confidence Hits
Seven-Year High"
- USA Today, August 27
This was the Conference Board number and it was 92.4 in August, compared
to 90.3 in July. Both numbers were the best since October 2007 (Emphasis
added).
"Italy's consumer prices this month dropped the most since records
began after the euro-area's third-largest economy slipped into recession."
- Bloomberg, August 29
"Brazil's economy slipped into recession after contracting more than
expected in the second quarter."
- Bloomberg, August 29
Perspective
There are two ways of learning how the economy really works. Decades ago,
this writer started reading what economists were writing. Essentially, economics
is the history of ideas. Then there is the history of the financial markets
as provided by newspapers of the day, chronicles, diaries and journals. This
is the history of reality.
The former is a world of theories only loosely connected to reality. This
is the foundation of interventionist central banking. The clear intention in
forming the Fed was to prevent the harsh financial setbacks that forced recessions.
According the NBER, June 2009 ended the 19th recession since the Fed started
business in January 1914.
The promise to prevent financial setbacks and recessions has yet to be fulfilled.
After so many decades it is obvious that the theory and practice of interventionist
central banking has been inadequate.
Within this it is worth emphasizing that harsh setbacks could be prevented.
The other absurd notion has been that once started a crash will continue unless
the Fed does something heroic.
Benanke's above boast seems uttered only to make his stand in 2008 seem even
more heroic. There was nothing heroic about it at all. All such massive crashes
end on their own.
At the next signs of weakness, policymakers will step up the rhetoric about
monetary ease.
Stock Markets
The usually positive transition from August to September has been, well, positive
for the stock market. This even includes Shanghai which is working on an uncorrected
11% jump since early July. The European STOXX set its high in June at 3250
and sold off to 2978. The rebound had made it to 3200 and seems to be struggling.
With consumer confidence at level unseen since 2007, US car sales have soared
to record levels. In this department, our theme has been that so long as the
stock market was trending up so would the economy.
Let's get technical.
Momentum and sentiment bullishness have been as good as it gets and one number
has now become more sensational. Investors Intelligence has been keeping track
of newsletter opinion since 1963 and the bear camp is down to only 13.3%. This
has not been seen since August 1987.
On our own work, the S&P has registered a Monthly Upside Exhaustion reading.
The last one was with the 2000 blow-off. It is quite something to have 500
stocks flying in loose formation accomplish such a reading.
Stock markets run on their own dictates and at this point on a "normal" cyclical
bull, interest rates would be rising and pundits would be worrying that it
would impair the
"recovery". At such points we would advise that rising rates is due to demand
by speculators and so long as rates were going up it was a plus for the stock
market.
Recently, we have seen someone else publish observations, rather than official
opinion on this. Of course, the observation has been that short-dated interest
rates go up with the stock boom and down with the bear. The latter has been
interesting because in 2000 and again in 2007 the street was convinced that
the "Fed-cut" would extend the stock bubble.
That was not the case an as usual interest rates plunged with the crash.
The Fed's recklessness has prevented a "normal" rise in short rates and there
seems to be little meaningful discussion about such a "normal" event.
[Today the ECB again embraced absurdity with a rate cut from 0.15% to 0.05%.
Could this be a pre-emptive move to prevent a contraction? Or maybe it is a
pre-post-hoc policy move? The plus for US stocks and bonds did not last long.]
Unfortunately, this could prevent the tout to stay fully invested at the top
because the Fed would engineer a perfectly-timed "Fed-cut".
Pity.
However, there is something going on in the yield curve that will be reviewed
in the next section.
Credit Markets
With last week's charts we noted that credit spreads were working on a reversal
similar to what was accomplished as financial speculation peaked in 2007 and
in 2000. This pattern continues and at 1.5%, it needs to break above 1.6% to
provide the alert.
As measured by the 2s to the 10s, curve flattening has been on since November
and in using the ETFs it has become the most overbought since 2007. The recent "rally"
reached .022, two weeks ago. This appears to be a test of .022 reached in late
July. Taking out .020 would reverse the trend.
In 2007 and in 2000, the reversal to steepening also anticipated each of those
undeniable contractions. In thinking a little more about this, once the boom
becomes a roaring party contraction is inevitable and undeniable.
Commodities
Last week we noted that crude was oversold and working on a Sequential Buy
pattern. Also noted was that it could take a few days to become effective.
Instead, it jumped too quickly.
It looks like the action is testing the low and with a little time a tradable
rally should follow. Considering the modest responses out of the previously
oversold grains, this also could be modest.
Oil stocks (XLE) soared to a very overbought condition at 101.5 in late June.
We advised taking some money off the table. The initial low was 94.5 which
took out the 50-Day ma.
The rebound made it to 99 last week, stopping at the 50-Day ma. Today's 1.6%
drop is serious and taking out 94 would turn the sector down.
Base metals (GKX) joined the "Rotation" a little late and set the low in March
at 321. The delay was due to liquidity problems in China, which may not have
gone away. The rally made it to 376 in July and set the highest Weekly RSI
since the cyclical peak in 2011. The correction was to 360 and at 372 now it
seems to be a test of the high.
The trade has been good for us and when it started we wondered if it could
be the start of a new bull market. Our Momentum Peak Forecaster did give us
a cyclical peak in March 2011 and it would be technically satisfying to get
the opposite.
While this seems possible, the action has to get rid of the overbought and
we are looking at seasonal weakness into late in the year.
Base metal miners (SPTMN) have done well and, in keeping with a long tradition,
had led the rebound in metal prices. The key low was 703 in December and somewhat
oversold. The high was 954 at the end of July and was somewhat overbought.
The subsequent low was set at 869 on Tuesday. Last week's slide took out the
supportive 50- Day ma. This now provides resistance at the 900 level. If the
test fails we should look to the mining stocks as leading the action in metal
prices. Down.
As part of retail food price inflation, butter has been rallying and is now
working on a hyperbolic blow-off. The chart follows.
We have been concerned that the firming dollar would have an effect on many
commodities.
Precious Metals
We have had some questions about Armstrong's Confidence Index. Ross has made
some trades off of it over a couple of decades.
We will give it a few days and see what happens.
In the meantime, we continue to watch gold as a financial indicator.
The gold/silver ratio increased to 66.9 in the middle of August and backed
off to 65.5. For the past week it has been at the 66 level and today's jump
to 67 is interesting. For new readers, the ratio becomes volatile and provides
a warning on the longevity of a boom. We have been noting that rising through
67 would be interesting and through 69 would be the key breakout.
If this is accompanied by widening credit spreads and a steepening yield curve
it would signal the end of the bubble.
Another indicator is gold's real price.
Our Gold/Commodities Index set its low at 2.28 in early June. After a couple
of corrections, the uptrend was set in the middle of July. At 3.75 now, rising
through 3.90 would extend the uptrend. As an indicator this would suggest that
orthodox investments would roll over.
As a proxy for gold's real price the next advance would confirm the start
of a new cyclical bull market for the sector. This would also show a marked
increase in the investment demand for gold.
In the meantime, a good buying opportunity could be possible in late October.
Butter: On A Roll
- This seems to be part of the inflation in food prices that government claims
not to be happening.
- This contract does not have a long history.
- At 96.7 on the Weekly RSI the rise is extremely overbought.
- The spike up to 220 in 2010 ended with the Weekly RSI at 93.
- Straight up, or hyperbolic moves in any commodity are fascinating.
- The action seems close to completing.
Link to September 5 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2014/09/investo...ngerous-signal/
