The following is part of Pivotal Events that was published for our subscribers September 6, 2012.
"The European Central Bank will be overextended and no longer able to fulfill its price stability mandate if it engages in more sovereign bond buys."
~ Former ECB Executive Board member, MarketNews International, August 28
"U.S. Fed Still Has Tools to Battle 'Rocky' Recovery, IMF Official"
~ Financial Post, September 1
Somehow this reminds of the semi-official boast in 2007 that the "Dream Team" of economists was in control and that nothing could go wrong. Or the similar boast in 1929 that because of the "new and scientific" Federal Reserve System nothing could go wrong. At the time, the Fed was headed up by bankers - not economists. Then, as the 1873 Bubble was becoming strained the boast was that because the US did NOT have a central bank and was NOT on the gold standard - nothing could go wrong.
The Bubbles of 1929 and 1873 were followed by a series of severe recessions and weak recoveries that have been the feature of every Great Depression.
"Moody's Changes Euro Zone Rating Outlook to Negative"
~ CNBC, September 3
"Fears Rising, Spaniards Pull Out Their Cash and Get Out of Spain"
~ The New York Times, September 4
"[Iron Ore] Spot Prices Down More Than 20% in August"
As noted, earlier in the summer stock market sentiment was unusually bearish, which suggested a good rally. In a short time, sentiment has changed to rather optimistic. Not as high as it can get but enough - at this time of year - to focus our attention.
We are beginning to turn cautiously pessimistic.
Over at his www.thechartstore.com site, Ron Griess has a good eye on the bigger picture and the following chart on the S&P tells a story.
"Internals" such as trading volume and the difference between advancing and declining individual stocks can provide an early warning on pending change. Typically going into an important top, volume will decline (ü) as participants focus on fewer sectors and then stocks that can be bulled up (ü).
This shows up in the A/D line and typically at a top the S&P will set a higher high as the A/Ds set a lower high (ü). The chart shows this was the case in the build to the peak in 2007 - and now. It would be somewhat nicer if current action was on more of a spike, but the completion of the pattern is key, and that lies in the A/Ds.
In 2007 the duration was 18 weeks from the A/D primary high to the secondary high. The high on the index (1566) and on the secondary A/D were both on October 9.
This year there has been 19 weeks from the primary to the secondary highs in the A/D line.
The question is about the timing on the high for the index and so far the 1426 high on August 21 is within a few days of the August 17 secondary high on the A/D.
America is getting close to the Fiscal Cliff and the election on November 6th will be a clear cut vote on whether to continue the reckless experiment in authoritarian government or to begin the wonderful denial of privileged government classes. In so many words, will the producers continue to pay to be abused by bureaucrats inspired by unlimited ambition?
Also, it looks like the stock market is on the edge of a seasonal cliff.
Corporate spreads narrowed until two weeks ago and there has been little change since. There was enough party to make us wary of all spread products.
As we have been noting, the price action has been outstanding with treasury bonds topping in June-July, with investment-grade corps (LQD) next and then emerging market bonds (EMB). Each high was dynamic enough to suggest more than an intermediate decline in price and rise in yields.
That's the technical side - basically the fundamentals are that there is not enough cash flow in the global economy to service massive debt taken on during the reckless jubilation of a financial bubble.
We've been waiting for the sub-prime mortgage bond to break down, Over the past two weeks it has been testing the high set in mid-August.
Fortunately, at extremes in spread markets the gold/silver ratio acts, well, like a credit spread. Lately it has been on a rush as it has plunged from 59.5 in June to 51.8. With this, the daily RSI has plunged to less than 22.
This compares to 10 accomplished in April 2011. That culminated the sharpest rally for silver relative to gold since that fateful January of 1980. It is uncertain how long this impulse may last, but it is doubtful if the extremes of last April or of 1980 will be reached.
In so many words, the exit is close.
Today's Financial Post had a good-sized headline:
"Helicopter Ben VS Super Mario"
The story was about ECB President Mario Draghi having more influence over the global economy than Chairman Ben. Well, we would guess that it's because Europe is leading on the nest phase of the post-bubble contraction.
At any rate, the ECB promise to buy all the bonds that would be needed to end the contraction has inspired a price rally. For example, Spanish bonds have declined in yield from 6.85% last week to 6.41% today.
This move will likely be short lived.
"Sequentially yours" - sounds like the salutation on an old fashioned letter, but it is a description of a reliable ending pattern for any speculative price action.
For us, the Sequential Sell kicked in on as the strong rally in wheat was topping in July. Then it worked as corn was topping in August and, more recently, for crude oil.
Now the ending pattern is developing in soybeans. As with the other signals, beans need to stay above a certain level until Friday. On the July contract this is 1450, today's price is 1580.
One could say that soybeans are following a sequence of important tops and will soon roll over. Overall, agricultural prices (GKX) recorded a surge with a good overbought on the daily RSI - and has been trending sideways. That's with the worst drought in 50 years. Chart follows.
Base metals have been working on a "saucer" bottom, centered upon the low of 346 set at the first of August. Over the past week it has jumped from 355 to 368. There is resistance at the 374 to 389 level.
It should be noted that metals have been down-trending since the cyclical high of 502 in April 2011. The recent 346 took out the low of 353 set in last year's panic about European debt.
Most commodity prices are vulnerable to further weakening of the global economy.
- The worst U.S. drought in 50 years drove the index to 533, and a high RSI.
- The high of 570 in March 2011 still stands as a cyclical peak.
- Taking out 450 would provide additional confirmation.
Link to September 10 'Bob and Phil Show' on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2012/09/ready-for-the-fall