By: Bob Hoye | Fri, Feb 15, 2013
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The following is part of Pivotal Events that was published for our subscribers February 7, 2013.


"China Alerts Local Government Defaults"

- Financial Post, January 29

China's federal government is working on a "massive rollover scheme".

"[Province of] Ontario Could Become Next Greece"

"In Worse Position Than California on Every Measure of Debt"

- National Post, January 31

"Junk-bond yields have fallen so far that the world's biggest debt investors are turning to borrowed money to juice returns."

- Bloomberg, January 29

"The European Central Bank's pledge to buy unlimited quantities of government save the euro is economically dangerous and may come under scrutiny at the nation's top courts."

- Bloomberg, January 29

"Bundesbank president said Europe's current framework for bailing out distressed nations will eventually weaken even the strongest members unless it's changed."

- Bloomberg, January 30

The massive bubble in debt markets continues and is becoming excessive enough that central bankers who are not caught in the frenzy are becoming openly critical.

Perhaps some central bankers are becoming concerned about their own reputations, and as the saying goes "It is difficult to detect the sensible man in a mob".


Money flows into stock and lower-grade bond funds continue to soar, along with technical measures of sentiment. For example, Investors Intelligence ratio of stock market bulls and bears is approaching levels seen only at important tops. Sentiment numbers describe the condition, but not the timing. The chart follows.

Similar sentiment measures for global lower-grade bonds don't exist, but the old bond trader thinks it's another "GMI!" market. This "Get-Me-In" mania has been assisted and sanctioned by policymakers - a mob of financial adventures.

"GMO!" conditions inevitably follow.

Widespread confidence is engendered by rising stock and corporate bond markets and the focus in this rests, not upon the promises of policymakers, but upon the continuance of the debt bubble.

The trigger may not be pulled by policy change but by wave-riding speculators becoming exhausted.

Credit Markets

Last week's edition noted that the hot action in junk (JNK) had driven the weekly RSI to 76 on January 15. That was the highest since May 2011 when a tradable decline followed. The recent high was 41.21 on January 28 and there has been a drop to support at the 40.50 level. Breaking below will be significant.

We have been using the Spanish Ten-Year as a proxy for Euroland debt. The low yield, not without jubilation amongst central bankers, was as low as 4.89% on January 11. The high was 7.50% last summer.

A moderate uptrend has been set with moderate corrections. At 5.40% today, there is resistance at 5.56% set in December and breaking that level would really extend the uptrend. This would likely be disquieting to the central bank policy of ramping yields down by ramping prices up.

Long treasuries have rallied with today's setback in stocks, corporate bonds and some commodities. This could continue for some weeks.


Lumber soared to the most overbought in twenty years. The high was 392 in late December and the plunge was to 344 a couple of weeks ago when we thought a "pause" was possible. But showing how thin some of these markets are, it rebounded to 387 yesterday. Slipping to 380 today suggests the big test of the big high has been completed.

An intermediate decline seems to have started and the strongest overbought condition in two decades suggests the possibility of a cyclical decline.

Typically, forestry stocks peak after lumber does and this has been the case. Representative Weyerhaeuser (WY) reached 31.74 a couple of weeks ago and slipped to 29.94. The rebound made it to 31.11 on Tuesday and today it's at 30. Taking out the 29.95 level sets an intermediate downtrend.

As with the peak in base metal mining stocks (SPTMN) in February 2011, forestry is facing the potential of a cyclical decline.

Base metals (GYX) made it to 404.5 on Monday and has shied away from resistance at 406. Last week we noted that momentum was neutral and that if it rose through 406 it could make it to 427.

Base metal miners rallied from 895 in November to 1051 at the first of the year. Momentum rose to an RSS of 70.5 which level has limited a number of rallies. The slide to today's 985 has taken out fairly good support at 1000.

This is concerning as at important tops mining stocks typically lead.

Cotton enjoyed the good times out of the November slump. The low was 69 and the high was 84 in the third week of January. This was tested at the end of the month when (on the ETF) the RSI reached 82, which makes it a rather good rush.

This week cotton's price broke down on what could be an intermediate decline.

At .18, sugar continues to make new lows from the peak of .36 in January 2011. Agricultural prices (GKX) did not join the party out of November. The decline was to 437 and a good oversold at the end of the year. Our January edition noted this and concluded an intermediate rally was possible.

The bounce was to 470 a week ago and at 452 the low is being tested.


The big action was in the euro and the yen, which this week seems to be reversing. The dollar kept testing support at 79.

By yesterday it recovered to 79.8 and today it jumped to 80.2.

This along with increasing yields for European debt could be a warning about the burst of enthusiasm seen in so many different exchanges and games.

Stock Markets

As noted above, momentum and sentiment suggest the NYSE is close to an intermediate top. There is a chart that could be timely on the turn and it follows.

What would be needed to signal the decline would be negative divergence.

Investor Intelligence Sentiment
SPX and Investor Intelligence Sentiment


Link to February 8, 2013 'Bob and Phil Show' on



Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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