The following is part of Quick Pivot that was published for our subscribers November 25, 2010.
"We are very confidant of our ability to exit when the time comes."
- November 15, 2010, New York Fed President William Dudley, on the enormous embrace of risk on the Fed's balance sheet. As the trading floor cynic would say "The bulls always know when to get out".
The action in commodities and the Dollar Index became outstanding - perhaps enough to consider that a cyclical high for many items has been set. Technical measures such as momentum and sentiment reached as good as it gets, as the street was enraptured by the constructive US election results, the Fed's renewal of its vows to depreciate the currency and a G-20 meeting.
The latter fundamentals were widely considered as "magic wands" that would banish all financial problems. To be serious, the market was building for a climax and the extreme was registered with vertically soaring commodities and extremely bearish views on the DX.
The latter was covered in our November 11 Pivotal Events. The DX registered a Downside Capitulation in early October and the other part needed for an important low came in on November 5th. That was the completion of the Sequential Buy pattern and the low close was 75.8 on November 4.
The obvious target on the initial move on the DX was around 80 and that was reached yesterday. The CRB, itself, soared to the highest RSI since the cyclical peak in 2008.
Ross is back from the Mediterranean cruise and the updated chart goes "bing" on the daily Upside Capitulation. That registered on November 5 to 9 and the high close for the CRB was 319 on November 9. The last such signal registered on July 3, 2008. That day was the cyclical high at 474.
Within this, agricultural prices (DBA) soared enough to record the highest RSI since the cyclical peak in 2008. That high was 42, the latest high was 31 set on November 9.
Cotton got stretched to the limit on a magnificent rally from 75 in July to 155 a couple of weeks ago. The plunge to 111 is an instruction on the buying frenzy. Some weeks of relief is possible. Sugar's action has been similar.
Base metal prices also enjoyed speculative attention with the GYX reaching one of the highest momentums since their cyclical peak in 2008. The high then was 528 and last week's high was 458.
Within this, copper established an RSI almost as high as in 2008. The price reached then was 4.08, which was eclipsed by last week's 4.0835.
The appropriate consideration does not deal with how far Chinese interests can promote commodities, but with the possibility of a cyclical high. That would be for the CRB. With the tendency of S&P earnings to trend up and down with commodities, the outlook for earnings is becoming vulnerable.
"Corporate Profits Were the Highest on Record"
- The New York Times, November 23, and that is from the Commerce Department's data base of 60 years.
While earnings themselves are not inherently dangerous, they can be hazardous to the unwary. We summed up the anomaly of declining stock indexes and rising earnings in August 1987:
|YEAR||CHANGE IN STOCK MARKET||CHANGE IN EARNINGS|
Our work in 2008 concluded that the momentum high in commodities was vulnerable to deteriorating credit conditions and a firming dollar.
Credit turned into the worst train wreck in history as the DX "firmed" from 70 to 89.
Ross is working on a "Litmus Test" on a make or break point.
The DX has increased to the 80 level, where it could rest for a while. But the move could make it above 85. Chart is attached.
The Canadian dollar accomplished a double top at 100 and slipped to 97. A test of the high is needed and could be completed soon.
The key event for stocks has been the All-One-Market high set on November 5. The next was taking out S&P 1204, which would likely lead to an intermediate decline. This is in the face of November and December usually being good months. As mentioned, Ross is working on a litmus test.
"Hold the moules et frites: Belgium has joined Portugal, Spain and Italy on the list of countries that may be heading for financial crisis."
- Guardian.co.uk, November 24, 2010
Ireland has been getting the headlines on soaring rates and widening spreads. Belgium risk premiums are now widening.
Clearly, liquidity has been disappearing from this sector and so far we haven't seen any boasts that the problem is "isolated" or can be "contained".
Over in corporate-land, our November 11 Pivot observed "The risk market has again been enjoying reckless enthusiasm and is eligible for a significant setback."
As Ross notes junk (JNK) the action became hot enough to register an Upside Exhaustion at the end of October and the price-high was 41.25 on November 4. The chart is attached.
The initial drop was to 39.87 and after a brief bounce the low has been taken out. The "Litmus" on this one will be taking out the 100-day moving average. We will advise.
In the meantime, the gains have been outstanding and investors should be taking cash off the casino table and hanging the risk somewhere else.
Five-year high grades should be a safe place to park. Should long-dated issues break down bottoms have provided very clear Downside Exhaustions for re-entry. The last such signal was on March 5, 2009.
The long bond accomplished a ten-point decline to our target at the 125 level. Last week we noted that the RSI had plunged to 29, which could rally the bond to around 130. A quick bounce to 129 has been followed by test with a slump to 126.47.
We had thought the rebound could run for a few weeks, but the volatility suggests the action is only for traders.
Investors have been defensive since our "Bye, Bye Bonds" published in late August.
Link to November 26, 2010 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1849