Mother Of All Rotations
The following is part of Pivotal Events that was published for our subscribers July 31, 2014.
Signs Of The Times
"Trading in U.S. government bonds has dropped 25% in the past few weeks from the comparable period last year. Investment-grade and junk-bond trading have plunged 17% and 8.6%, respectively."
- Bloomberg, July 22
"Banana Republic Trots Out 'Startup Guy' Look."
- Wolf Street, July 23. "Startups" refers to the guys doing the hot new issues, otherwise known as IPOs.
"It's dictated complacency."
- Bloomberg, July 25.
"Some 25 companies are scheduled to make their public debuts this week, which will mark the busiest week for IPOs since August 2000."
- Business Insider, July 18
We understand that the "Startup Guy Look" is an improvement over jeans and a hoodie. Definitely not the "Full Cleveland" and quite likely it is a long way from the cut of the Gray Flannel Suit of Madison Avenue in the 1950s.
Oh well, the problem is that the "suits" in central banking have turned what would have been a cyclical bull market into another financial monster. With theories bereft of practical market knowledge the "suits" are empty.
When will the "suits" appear to most participants as empty?
When the bubble bursts.
Considering that the action encompasses stocks and bonds there should be no doubts that it is now the biggest financial bubble in history.
The numbers representing valuation, dividend and coupon yield are no longer a guide to decision making.
Since political conflict and ambition have been dominating this year's headlines, we have advised that outbreaks of hostilities will not materially affect the bull market. It will run until it gets overdone.
On the stock market there is one benchmark that has been positive. The Advance/Decline line on the S&P 500 continued up and set a high for the bull market on July 3rd. The index, itself, made a new high last week.
However on the credit side, junk has suffered the most distinctive setback since June a year ago. This has been over the past five weeks and has been accompanied by widening spreads.
Last week, we noted that widening was not dramatic. Today's collapse in HYG and JNK is dramatic.
The treasury yield curve has been flattening, becoming a little overbought and any change would be an alert.
Generally, commodities are not the key to the action now, but if the decline in agricultural prices continues it will end the bubble in farmland values.
Our comments on Stocks and Commodities can be reviewed upon inquiry.
HYG Leads the S&P
The "Sequential Sell" shown in the above chart is critical. A strong overbought was registered last year in May and the junk yield rapidly went from 5% to 6%. At the equivalent oversold in that June the market rebounded.
Europe had suffered a severe hit in 2012 and was relatively immune to the hit in US corporate bonds.
Now the world has become fully enamoured with bonds. At unprecedented yields and with outstanding technical action debt markets are even more precarious than in May-June 2007.
More than likely, this is setting a secular low. Previous such lows of around 2.5% only occurred at the end of a Great Depression when the senior currency was backed by gold. This prevented the imposition of reckless central banking by financial adventurers.
We are preparing a thorough study and global credit markets are close to suffering a significant contraction. Possibly as severe as prevailed from June 2007 to March 2009.
The reason would be the very overbought conditions now are at five years after the panic ended in March 2009.
Last week's page noted that around 140 on the bond future was possible. This would be on the "flight" as equities weakened. This still could still happen but looming problems in most other bonds could limit any rallies in long-dated treasuries.
Investors could be shortening term in treasuries and getting out of all other bonds.
We have been bullish on the dollar Index since the oversold at 78.9 in May. In looking back it registered a Sequential Buy as well.
Last week, we noted that rising through 80.9 would be constructive and with that our target became 85.
The action took out the 80.9 on Monday, and at 81.5 now our target of 85 seems possible. This would be accomplished within the early stages of the next credit contraction, which will soon become apparent.
The direction for the Canadian dollar is down.
Last week we were looking for the "Mother of all Rotations".
This would be the end of the cyclical bull market in orthodox investments and the beginning of a cyclical bull market for the Precious Metals Sector.
Tying the two together is gold's real price.
Our Gold/Commodities Index is a proxy for the real price and it set what seemed to be a cyclical low in early June. Within three weeks this had advanced enough to say that the trend had changed. In which case the bull market for stocks and lower-grade bonds would end some weeks later.
The real price soared to over 500 in February 2009 and it turned up some four weeks before the panic ended in that fateful March.
So as an indicator, it works both ways.
Gold's real price has worked this way for hundreds of years and as this uptrend extends it will enhance gold mining profitability. This has always been the background for the lengthy bull market in gold stocks during each post-bubble contraction.
The magnificent run in the stock markets suggests that the S&P had "nine lives". This week's action seems to be coughing up a huge hairball.
Unfortunately, until this clears there could be pressure on many gold stocks.
Also unfortunately, the onset of contraction would prompt a rally in the dollar. This along with weaker base metal and crude prices is helping gold's decline in dollar terms.
Additional confirmation of the contraction would be provided by the gold/silver ratio turning up.
On the "Rotation" out of December, the rally drove the Daily RSI on the silver/gold ratio to 84. We noted that this indicated that the speculation had reached the "danger" level and advised taking money off the table.
A new cyclical bull market for the sector is developing and we are watching for the opportunity in the sector.
Castles In Spain?
- Compulsive behaviour by central banks and investors has driven European yields to exceptional lows.
- This is a record for a ten-year note when the country is not on a gold standard.
- Using the Spanish note, recent action registered six consecutive Downside Capitulations. This is on Weekly numbers and records impetuous buying.
- The monthly number (above) has registered a "13", which is a bottoming pattern, not necessarily related to momentum.
- We have called this pattern a Sequential Buy and it has been reliable.
- Essentially, this has been a massive and arbitrary allocation of capital by reckless central bankers.
- Most Euro bonds are vulnerable.
Margin Debt and Stock Market Peaks
- Rising off of support has worked on the way up.
- The spike and rollover is the alert.
- Taking out "support" on the Margin confirms trouble.
- As of July's action, the June rebound will have likely failed.