Signs Of The Times
"Sources said broker's margin calls were met, but the event unnerved
the Structured Finance Market (STACR)."
- Reuters Hedgeworld, July 27.
"Eight Companies About To Issue IPOs That Will Turn The Last Quarter
Of 2014 On Its Head"
- Money Morning, August 8
"Banks are lending to companies and individuals at the fastest pace
since the financial crisis, helping propel profits to near-record levels."
- Wall Street Journal, August 11
Stock Markets
On the bigger picture, the stock market has soared to excessive readings on
sentiment and momentum. These are only registered as a cyclical bull market
peaks. This is a process and market forces are beginning to change.
The item with the most constant support has been the A/Ds for the S&P.
This was constructive right up to the high it set on July 3rd. In trailing
the actual index since, it becomes a warning.
On the near-term, Sunday's ChartWorks noted that the decline was sufficient
to register a "Springboard Buy". Typically, these occur in an uptrend and the
last significant one occurred in October. Distinctively, Ross pointed out that
this "Springboard" is within what seems to be an ending pattern.
Recent examples included the tradable high in 2011 and the cyclical peak in
2007.
Other "indicators" include credit spreads which reversed to widening in June.
Our July 24th view was that the trend change was quiet but some drama would
influence the stock market.
Lower-grade bonds and spreads broke down later in July and while noticeable
the hit was not really dramatic.
Otherwise, the performance trio, Rosy Scenario, Goldilocks and Lady Bountiful
have been commanding the stage.
Mother Nature and the Drama Queens are waiting in the wings.
As represented by the STOXX, Europe has been a leader.
Recently it was to the downside, as it took out the 30-Week ema in mid-July.
This moving average provided the "buy the dips" opportunities in the bull
market that peaked in 2007. That "takeout" occurred in that July.
This time around, it did the same from November 2012 until a few weeks ago.
Last week, the S&P briefly dipped below its 30-Week ema, which is at 1920.
The index is at 1932 and a decisive takeout would get the US stock market in
line with Europe's.
For the S&P, the trading range at close to the 1880 level that lasted
from March until May could provide support. The equivalent on the STOXX was
3150 and it was taken out in mid-July.
The next support line for the SPX is the 200-Day. This is at 1865.
The next failure for Europe was the 200-Day ma which was at 1326. That was
taken out at the end of July.
Our July 21st advice was to sell the rallies.
Commodities
The CRB rallied on our "Rotation" theme from a double bottom at 272 set in
November and at the end of December to a double top set at 313 in April and
in June.
The decline since took out the 50-Day and 200-Day moving averages.
At 292, the index could recover for a few weeks, but most commodities are
vulnerable to developing problems in the credit markets.
Within this, base metals (GYX) were late to "Rotate", but rallied from 321
in March to 376 a few weeks ago. The Daily RSI reached 72, which was somewhat
overbought.
The index declined to 365 and has recovered to 369. This could continue for
a few weeks, but base metals are vulnerable to deteriorating credit markets.
Agricultural prices (GYX) remain weak.
There are two ways of looking at this. One is that the recent low of 317 extended
the bear market that started at 570 in March 2011. That high was set as our
Momentum Peak Forecaster called for a cyclical bear market in the hot commodities.
Including the precious metals.
The other way is to consider it as so oversold that a rally would be a natural.
We have been considering this since June, but good growing conditions continue.
The chart is now in a saucer pattern that could lead to a rally.
The struggle involves the guessing the weather as well as developing credit
concerns.
Good grief, but crude oil has been acting like the European stock market.
The recent decline has taken out the 50-Day and 200-Day moving averages. So
let's look at the bigger picture.
The rally made it from 91.24 in January to 107.68 in June. In looking over
out shoulder, this sees to have fit our "Rotation" theme. Actually, the chart
became somewhat overbought on the Daily and set a double top.
The decline has been to 96.55 and is not oversold.
However, there is support at the 97 level and crude prices could be steady
to firm over the next few weeks.
Gasoline's drop was impressive. The high was 3.12 in June and last week's
low of 2.70 pushed the daily RSI down to only 25. Steady to firm is possible
over the next few weeks.
Credit Markets
Junk became overbought at 41.81 late in June. In two steps it dropped to 40.06
when we noted the degree of oversold. That was in our July 24th edition.
The rebound has made it to 40.95. There is resistance at the 41.12 level and
we can't see it going much further.
Last week there were stories going around about "massive" redemptions of junk-bond
funds. The emphasis was on "massive" and it is by the public. The carry-trade
is still buying. Well, the spreads must be very appealing.
The Hunt brothers attempt to corner silver reached a monumental crescendo
in early 1980. This boosted the real price to unheard of level, but the public
took massive amount of silver objects out of the attics an basements and sold
them.
The public was correct on that that massive miss-pricing of silver. It could
be very right on this massive miss-pricing of interest rates.
Last year's hit in price amounted to 4 points and was sufficient to clear
the market. This one has clocked less than 2 points to become oversold. This
would not have cleared any problems out of the market.
Five years of reckless central banking have, indeed, caused amnesia and the
next slide in lower-grade bond prices will be in the season when financial
disasters have been discovered.
The bond future was likely to rally to around 140. The high on Monday was
140.3 and the action was not overbought. The correction could continue for
a week or so. The next slip in the stock market could prompt one more rally
in the USB.
However, our theme has been that the theories of central bank interventions
have always been a highly speculative notion. Moreover, the practice of late
has also been highly speculative. On top of this the public and fund managers
have been buying bonds, largely compelled by very low rates in shorter-maturities.
Unravelling of this unprecedented condition will be very interesting.
Precious Metals
Some things we have been concerned about seem to be working out. The precious
metals sector as an indicator has been anticipating a significant change in
the capital markets.
This became more intense today when silver dropped 19 cents as gold increased
by 6 dollars.
Since the opening this has relaxed a little, but one of the features of a
developing financial crisis has been sudden drops in silver relative to gold.
It is more significant if silver actually declines as gold rises. The value
of the signal can be enhanced if a silver analyst states that there is no reason
for silver's hit. After all, supply/demand numbers are always positive.
Two weeks ago this page noted that the gold/silver ratio had risen through
both the 50-Day and 200-Day moving averages and that it was a plus for the
trend. Also noted was that rising through 67 would set the uptrend, which would
indicate mounting financial pressures.
The low was 61.7 set in mid-July and it is now at 66.5.
The other indicator is gold's real price. Our Gold/Commodities Index (GCI)
is a proxy and it set what we took to be a cyclical low in June and in turning
up it began to anticipate change in the capital markets. The chart follows.
Earlier in July we thought that the rise could correct. It did and it is now
close to breaking above the 3.90 level. That would be one big step towards
the general discovery of credit problems.
The decade-long bull market in the precious metals sector completed in 2011.
One indicator on that peak was that the RSI on the silver/gold ratio soared
to 92. The only time this had been accomplished was in the fateful January
1980.
Speculation had become dangerous.
The decline in the GCI since 2011 represents a decline in fortunes in the
gold mining industry. We have been taking the recent low as the start of another
cyclical bull market for gold's real price.
This will improve operating margins.
But, the pending cyclical bear for orthodox investments will pull down most
gold and silver stocks.
Gold in dollar terms could continue firm, but there could be days when the
dollar is strong. In which case, gold will get hit.
This has been our theme for a while and it includes that silver could be weak
relative to gold.
Gold / Institutional Advisors Commodity Index
- As an indicator, the turn up in the GCI is anticipating the end of the
cyclical bull market in orthodox investments.
- Breaking above 3.90 would technically mark the beginning of a cyclical
bull market for the gold industry.
- The turn down from the cyclical high in February 2009 signaled the end
of the panic and the start of the financial bull market.
- The turn up in June 2007 anticipated the post-bubble financial collapse.
