The following is part of Pivotal Events that was published for our subscribers December 19, 2013.
Signs Of The Times
"China's company debt, twice the size of Ireland's economy, will come due in 2014, spurring concern the nation is on the cusp of its first corporate bond default."
- Bloomberg, December 9
"Sales of investment-grade corporate bonds reached an all-time high for a second straight year as issuers took advantage of borrowing costs that reached record lows to offer deals of unprecedented size."
- Bloomberg, December 10
"Barbara Walters on Obama: 'We Thought That He Was Going To Be The Next Messiah'"
"People Are Very Disappointed"
- NewsBusters, December 17
Ms. Walters is too quick to judgment. Upon winning the nomination in 2008 Obama boasted that he would end global warming and the rise in sea levels.
A few weeks ago, on December 4th, Real Clear Politics headlined:
"Obama's Become The Very Danger The Constitution Was Designed To Avoid"
The key force in the stock market has been the "Spring Board Buy" of October 9th. Effectively, that said that the worst of the potentially bad month was in.
The next force has been the rapid transition to a speculative surge that has replicated the conclusion of the 2007 and 1937 bull markets. Overall, the common feature has been that these were bull markets out of an historical crash. The next common feature has been the run of some 249 months to sentiment and momentum numbers seen only at important tops.
Within this, the A/Ds within the S&P had been positive until November 15th when that high for the index was supported by a fresh high in the A/Ds. Not the case since, which is a negative but not with immediate effect.
And then there has been the couple of hundred stocks that became "High Flyers". This has been similar to most of the action in the 2000 Tech Bubble and after hitting a brick wall some have faltered. TLSA is a good example.
On the old industrial side, the November 12th ChartWorks, "High Flying Car Parts", noted that Magna's (MGA) zoom had become vulnerable. The spike high was set at 88.42 on November 7th. It is now trading at 80. Of interest, is that the "Parts" breakdown led the breakdown in the "Assembled" by three weeks. Ford (F) hit a huge pothole yesterday and weakness continues today.
Government Motors (GM) rallied up to Monday and hit a smaller pothole yesterday. The other part of this model is to look to seasonal strong points for the potential high. One was the US Thanksgiving Weekend and the other was with the potential rally from mid-December to the end of the year.
There seems to be an additional seasonal item and that is the FOMC meeting-thing. The latest, as with others, seems intended to squeeze the shorts in stock and bond markets. This week's included the new step about reducing the "Taper". The next scheduled one is for January 28-29.
There has been some improvement in prices. Crude was the first to rally from an oversold low of 91.77 at the end of November. The rebound was strong, making it to 98.75 two weeks ago. Most of the gain was made in the first three days and the 98 level provides resistance. The pause seems to be setting the market up for another gain.
Natural gas was "natural" for a rally on unusually cold weather. From an RSI of only 25 and at 3.13 the rally made it to an RSI of 82 and a price of 4.44. The low was set with a cooler than normal summer and the strength of the rally has been prompted by the discovery of a cooler than normal start to the winter.
The high of 4.44 matches that set in April, and there is considerable resistance at the 4.90 level. It can get a lot colder, but natgas may have discounted much of this.
Another group we have been hopeful about, the grains (GKX), have broken to new lows. The cyclical high was 570 set in March 2011, the "drought-scare" of 2012 drove it to 533. This week's level is 353 and that takes out support at the 358 low in November.
Base metals (GYX) dropped to 331 at the first of the month with an RSI of 31, Now its at 348 and not as overbought as with the last rally. There is resistance at the 355 to 360 level.
We have been looking for base metal mining stocks to recover as well. The SPTMN has been oversold on the Daily RSI for a few weeks. The low for the index was 711 on Tuesday and it has popped to 735. Once turned and tested the rally could run into February.
Last week, we noted that the DX had drifted down to support at 80 and would firm up.
The 80 level held until yesterday when the great man's deliberations forced a trading range from 79.8 to 80.3. One has to remind one's self that one of the goals of central banking has been to provide stability to the financial markets.
What seems to be the culminating phase of the bull market for stocks and lower-grade bonds has been associated with the weakening dollar.
As this completes, the DX should begin to rise.
The Canadian dollar became very oversold, bounced and is testing the low. A brief rally with base metals has been possible.
Perhaps some of the less reckless at the Fed are aware that it "owns" some one-third of the US treasury market. This may explain the reduction in the bond-buying program. We have not seen a number on the amount of the dreadful sub-prime mortgage bonds it owns.
However, the seasonal whack to the bond markets last May-June was on schedule, but shocking to the establishment. The sub-prime chart from our June 20th edition follows and it was learned that the Fed had bought some $65 billion of these at the "shoulder" of the chart. Buying then showed a naïve attempt to support prices.
Then as explained, the rise in rates prompted Bernanke to talk "taper" in order to look in charge. The usual rise in rates turned into a mini-panic and then Bernanke had to assure the street that the taper was deferred.
It is uncertain if the Fed follows seasonal forces. Likely not, as the Fed believes it sets rates and was hammered on its May purchases.
Bond prices are on a seasonal rally into early January. The Fed will then become vulnerable to market forces.
Representative Sub-Prime Mortgage Bond
(June 20, 2013 Pivotal Events)
- Note that the price peaked in early May.
- The high was 76.15 and the decline has been to 68.8, a new low for the move.
- Our guess is that the Fed was consistent in its program to buy some $84 billion each month.
- Off 7 points on the latest purchases.
- The low with the 2008 Crash was 28.75.
- This provides a target.
- Our advice to the Fed would be not to try to corner the market.
- In Canada we have seen a couple of small firms go under in a vain attempt to corner a particular bond issue.
Fed Leverage Ratio
- The chart is worth 10,000 words.
- Looking toppy.
- Note the "mini panic" in June.
- Favourable seasonal forces could end in January.