Senior Currency .... Chronically Strong

By: Bob Hoye | Fri, Sep 6, 2013
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Signs Of The Times

"A five-bedroom house in Las Vegas sold in mid-July for $499,000, double the price it went for three months ago".

- Bloomberg, August 20

"Hacker Reveals How Devastating a Cyberattack On The Stock Market Could Be"

- Business Insider, August 21

They said that about the end of fixed commissions as well.

"Short-sellers are facing their worst losses in at least a decade."

- Wall Street Journal, August 21

"The largest [Muni ETF} tracking the $3.7 trillion municipal-bond market is selling for less than the value of its holdings for a record stretch."

- Bloomberg, August 22

Stock Markets

The big Rounded Top pattern has encompassed the senior stock indexes, as the last part of the play. After the appropriate momentum and sentiment figures, all that was needed was a week with a lower low than the week before. This step was accomplished two weeks ago. Monday's rollover late in the day and Tuesday's hit has taken out last week's low. More damage.

The last hot sector, Small Caps (RUT) soared to a strong overbought at the end of July.

The stair-step down is close to an important failure level.

Yes, there is disturbing reports from the Middle-East, which is the ostensible story for the setback. But the news showed the vulnerability of the stock market.

One of the distinguishing things about the climax of a great bubble is that the economy turns down virtually with the stock market. The stock market peaked in October 2007 and the recession started in that fateful December.

The more normal lead from stock market peak to the start of the recession of some 12 months does not prevail at the end of a bubble.

The US stock market turned up in March 2009 and the economy was deemed to have begun the recovery in that June. That was a relatively close link.

We now watch for an end to the recent surge in positive economic numbers.

Our policy has been to sell the rallies.

Some seasonal "sunshine" is possible next week, and it is worth reminding that overspeculated markets can discover dismay in the fall.

Commodities And Currencies

One of the features of the post-bubble world has been that "The senior currency becomes chronically strong relative to most commodities and currencies - for most of the time."

The low in the Dollar Index was the 71 level set in April-May 2008. This was as financial history fell into the worst calamity since the 1930s. As the contraction progressed, the DX soared to 89.11 when the Crash ended in March 2009.

Essentially, dollar depreciation became more aggressive with the failure of Bear Stearns in June 2007. And under different labels and rationalizations depreciation through excessive credit issuance has never relented.

With the cyclical bull market in commodities the DX declined from 89.11 in 2009 to 72.70 in April 2011; just as the CRB was setting a peak. As this was with our Momentum Peak Forecaster, we pointed out that it was potentially a cyclical peak.

It was for base metals, as the GYX confirmed the cyclical bear at 346 in July 2012. After the rally to 400 in February the plunge to 323 in June extended the bear. In looking for a rebound then, we noted that long-term measures were not oversold enough to declare the bear was over.

Seeming to be defying the Fed and its PH.D Standard, the dollar has increased from 72.11 in April 2011 to the 85 level in July.

It has retreated to the 81 level, but the main thing is that it has increased so much since 1Q2011. Breaking above 85 would resume the uptrend. Above 89 would take out the high set with the end of the panic in 2009, and at that point "chronic" would come to mind.

Crude oil's market is disturbed by issues in the Middle East becoming acute, and with neutral momentum there is little comment to be made.

Our August 19 Special noted that base metals and mining stocks had reached enough of an overbought to be vulnerable. Perhaps to some credit problems late in September.

The high for the mining stock index (SPTMN) was 817 last week and it has declined to 775. There is minor support at 730, and violation would take it back to the June low of 662.

The metals index rebounded from 323 in June to 360 on August 19th and it has slipped to 345 today. Within this, copper rallied from 2.98 to 3.39 on Monday. The two-week trading plateau looks precarious and we should recall that its real price reached unusually high levels that prevailed for a long time.

Should the lows of June be taken out, "chronic" would also come to mind.

Credit Markets

Credit conditions indicate the health of all of the financial games and the tone is not good. This is becoming concerning and for some relief let's look around for some plusses.

Is the full effect of all of the "stimulus" yet to be seen?

There is an economyth that Fed policy changes, at any time, have an effect some two years later.

Our view is that the Fed needs borrowers to expand its portion of credit growth. The ancient "pushing on a string" phenomenon has yet to make it into the textbooks. Instead of credit going into plant and equipment a fabulous speculation in lower-grade bonds accommodated the Fed's ambition to juice the economy. This was made worse by the Fed's blunder in buying Sub-Prime Mortgage bonds.

And lower-grade bonds accomplished a speculative surge to very overbought in April.

Then on the seasonal schedule reversed in May, the reversal turned into a "Mini-Panic".

After the rebound, prices were likely to deteriorate and they have.

Sunshine for the stock markets into next week should help lower-grade bonds, briefly.

The Bond Future became unusually oversold a couple of weeks ago and rallied from 128.4 to 132.1 yesterday. The nice rally is taking a little rest and could resume next week.

Over in Europe, the Spanish Ten-Year increased to 5.13% yield in June. As part of the revival out of the "Mini-Panic" in US lower-grade bonds the yield declined to 4.35% a couple of weeks ago. This was driven by a surge in positive attitudes about the European economy and shows in the following chart as an oversold.

The initial increase was to 4.53% and the decline was to 4.45% on Friday. It is now up to 4.53% and rising above this would set the uptrend in this bell weather bond.

Excesses In Precious Metals

Excesses in Precious Metals - $SILVER:$GOLD Chart
Larger Image

Mister Margin in Watching

NYSE Margin Debt and the S&P 500
Larger Image - Source: Streetalk Advisors



Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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