Signs Of The Times
- Financial Post (Toronto), August 14
- Bloomberg, August 18
"Pimco Scoops Up Quality Junk Cast Off In High-Yield Fund Exodus"
- Bloomberg. August 19
- Financial Post, August 19
Perspective
Impressive dynamics going on out there!
Which involves going from oversold to overbought during the summer.
More specifically:
Junk bonds registered a Weekly Springboard Buy as well as a Sequential Buy
at the first of August.
Also early in the month, the same registered on the S&P.
Sharp rallies have followed, sharp enough to set up the opposite patterns.
An Inverted Spring Board is in and the action is working on a Sequential Sell.
That is for both Junk and the S&P.
Consequences could be profound.
Credit Markets
We have the distinction of living in an Age of Bubbles and their failures.
In 1980 it was commodities, wages, the CPI and the precious metals. Then the
action shifted to inflation in financial assets which included the blow out
in Tokyo on 1989 and the Tech Bubble in March 2000.
That crash set up the 2007 Bubble, which with outstanding action in residential
real estate was a "Classic" bubble such as ended in 1929 or 1720.
The 2007 financial mania included the biggest bubble in the real price of
base metals in a hundred years of data.
What hadn't been bubbled?
Lower-grade bonds.
As we have been outlining the bubble has been magnificent.
Since the panic ended in 2009, junk has returned 150 percent which compares
to the return of 90 percent from the S&P.
The default rate which had soared to 15 percent in 2009 has plunged to only
1.5 percent on the June report.
One would think that this is about as good as it can get.
How long can it stay?
The surge in JNK into late June reached the most overbought (RSI 81) on a
chart back to 2008.
The plunge into late July ended with a Springboard Buy and the Sequential
Buy.
The rebound was robust enough to set the opposite reading with a Inverted
Springboard and is working on a Sequential Sell.
The high was 41.81 and the low was 40.06. So far, the rebound has made it
to 41.35.
Technical patterns suggest it may not get much further. There is resistance
at this level.
Taking out the 40 level will mark a reversal that will rank with the forces
that reversed all of the great bubbles listed above.
Stock Markets
The most recent "event" for the stock market was the Springboard Buy and Sequential
Buy registered earlier in the month. Usually these occur in an uptrend, as
did the one in October. But the latest could be part of the ending action.
Part of this would be the test of the highs.
This week the surge drove the NDX to a new high as the levels reached by the
DJIA and SPX are below the July highs.
The test can include the other senior indexes eking out fresh highs.
One key now seems to be that the rise has been bold enough to register an
Inverted Springboard. The other is that another Sequential Sell is building.
Completion of the latter would negate the "Buy" of earlier in the month.
On the bigger picture, sentiment and momentum numbers that only occur with
a cyclical peak in the stock market have been accomplished.
Such excesses were noted in 2007 and in 2000.
Bullish Sentiment has swung from a low of 29% to 46% on Thursday's report.
This could get a little higher to become an alert.
It is worth reviewing Ross's work on the STOXX, which in setting its high
in June led the S&P. The chart follows and the key was a Combination Sequential
Sell. A near-term Sequential Buy was clocked early in the month.
At each cyclical peak the trigger was the change in credit and currency markets.
Commodities
As noted above, the return from junk-bonds has been 150% since the panic ended
in March 2009. The return from the S&P has been in the order of 90%.
On the way up the classic bubble that completed in 2007 Wall Street was advising
institutions to build up to a 6% weighting in commodities. The Fed was finally
and fully recognized as the agent of inflation.
The niceties of diplomacy would avoid calculating the returns from the CRB's
peak at 474 in 2008.
To keep with the method, the return from the CRB's low at 200 in 2009 to the
recent 288 amounts to only 44%.
This is in the face of the most reckless central bank "inflation" in history.
The instruction remains that the public decides which sectors it will play
in and which sectors it won't.
Lately it has been in lower-grade bonds and without that bid the Fed's desperation
to inflate currency/credit would not have been as successful.
There is a popular notion that all of that reckless policy will at some time
drive commodities to the moon.
Not likely, because when the greatest bond bubble in history fails most asset
prices will fail as well.
Despite legions of Latter-Day Malthusians, agricultural prices continue to
decline. The GKX set a cyclical peak at 570 in April 2011 and new lows were
set at 316 at the first of July. On the Weekly RSI, this generated the most
oversold reading on a chart back to 1996.
But good growing conditions continue and prices remain depressed, which seems
to be easing the overbought.
Base metals also did well on our "Rotation" theme of December. The GYX did
not start its rally until March. Remember Chinese liquidity problems.
The rally started at 321 and made it to 376 in mid-July when it declined to
support at 360.
With some vigour, the test of the high is underway.
On the bigger picture, the rise in the real price of base metals was by far
the greatest in over a hundred years. It also stayed up for a long time prompting
a huge increase in capacity.
It could take a long time to correct the excesses.
Crude oil's "Rotation" rally took the price from 91.24 in January to 107.68
in June. It became as overbought (Daily) as it was oversold.
The decline has overwhelmed old seasonal charts and the price is down to 94.26.
This has been somewhat oversold for a month.
With the Neo-Soviet aggression in Eastern Ukraine we noted that if crude's
price was to collapse it would deprive Moscow of much-needed dollar reserves.
Reagan worked with the Saudis to assist that decline in crude from around 35
to around 10. It helped collapse the first Soviet experiment.
Cotton also set a cyclical peak in 2011. The high was 219 and the low of 62
set at the first of the month extended the bear. But, as with the grains it
is very oversold. This could be eased with a modest rally or just burned off
over time.
Most commodities are vulnerable to the rising dollar and the prospect of a
liquidity crisis.
Precious Metals
Today's trade is interesting. Gold and the dollar down on the same day.
But then stocks and junk bonds are up, illustrating the opposing action.
And our case has been that the cyclical bull market for stocks and lower grade
bonds is completing as the cyclical bear for precious metals is also completing.
As we have been noting; this is a process.
In this pattern gold in real terms would set an important low. Our Gold/Commodities
Index set its low in June and has reversed trend.
The next extension of the trend would enhance the warning.
A similar reversal was accomplished in May 2007 and it anticipated the most
sensational financial collapse since the 1930s. Credit spreads and the yield
curve reversed in the following month.
With this the S%P set an important high at 1576 in July, corrected to 1370
in August and made the ultimate high at 1576 in October.
This time around, the S&P set the initial high at 1991 in July, corrected
to 1904 and as of today has made a new high.
What has been missing?
The curve has not reversed and spread widening has been modest.
Credit markets seem so constrained and manipulated that the façade
is close to cracking.
With that lower-grade yields would explode.
Now we will look at the gold/silver ratio as an indicator.
In order to signal the onset of financial concerns, the gold/silver ratio
needed to rise through 67. It reached 66.9 on Monday and has retreated to 65.8.
This is part of the resumption of the old party and the deferral of the pending
party in the gold sector.
As noted last week, our Gold/Commodities Index needed to rise above 3.90 to
extend the trend. This would be the warning.
The ideal time to accumulate gold stocks could be in the fall.
