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The following is part of Pivotal Events that was published for our subscribers September 13, 2012.
SIGNS OF THE TIMES:
"Organic Food Not Healthier Than Non-Organic: Study"
- Yahoo News, September 3
It's about time, and we are looking forward to a study from high places that a gold standard is very much healthier than fiat money.
"China Iron Ore Prices Dropped 24% last month...to the lowest since October 2009."
- Bloomberg, September 4
"Honduras Signs Deal to Create Private Cities"
- AP, September 5
"Investors face an 'Age of Inflation', which typically provides a headwind, not a tailwind, to securities prices - both in stocks and bonds."
- Bill Gross, Bloomberg, September 5
Apparently, the term "Financial Asset Inflation" has yet to make to be fully understood by the chattering classes.
"French Unemployment Rose to a 13-Year High"
- Bloomberg, September 6
Now let's think about the in-your-face announcement that the ECB is going to aggressively buy bonds out of the market. And then today's Fed announcement to buy mortgage bonds added to the prospects of salvation through inflation. How will a deliberate short squeeze improve the condition of insolvent European countries?
But, it did take the dollar index down to 79.2 earlier today. This is below our target of 80.2 and is adding to the oversold. This has prompted rallies in a number of markets that are likely to be brief.
It's that time of year and the action has become very compulsive.
First of all, the big drought-driven grain rally is over. For the season and likely for this business cycle. Last week's "Sequentially yours" theme noted that wheat was the first to complete its topping pattern. That was in July and the next was corn in August and then last week soybeans needed to hold a certain price to record another "Sequential Sell" pattern. It did and the next step will be taking out 1700.
The overall index (GKX) set its price-high at 533 and this compares to 570 reached with our Momentum Peak Forecaster in March 2011. The Forecaster signal suggested most commodities were then setting a cyclical high.
Recently, the momentum-high was accomplished at 82 on the RSI in the middle of July. This was at the level that had ended a number of rallies over the past decade.
At 512, the index was up only 3 points today. Taking out 495 would turn the drought-rally into a downtrend.
Base metals (GYX) set their cyclical high at 502 in the spring of 2011. This was confirmed earlier this year when last fall's panic low of 350 was taken out on the way to 346 in August.
Last week, we noted the "saucer" bottom and thought that the rebound could find resistance at as high as 389. So far the high has been today's 393. Possibly important - the RSI reached 79 which has turned back all the rallies of the past two years.
Late in August, crude oil's action completed a Sequential Sell and as Ross noted on August 30 the run could extend for a few more bars. This has been the case, and we are looking at some heavy crude oil action.
The couple of "more bars" has helped the CRB in reaching a good overbought at 74. This is close to the level that can end the move.
It is interesting that different commodity sectors are becoming overbought at the same time as the USD is becoming oversold.
The ECB policy short squeeze was given extra thrust by a court approval - and is being called the "Bazooka". The term has been used in financial context for a while, but with the German court's approval the term should be "Panzerfaust", resulting in a jump in "wolatility".
But it is volatility in the direction the market wanted to go, and now with the Fed's announcement extended enough for a reversal. The USD slipped to 79.2 and to an RSI low of 23, which is close to the limiting level. But, when looking at the RSI 82 reached on the rally the action has accomplished a huge transit from overbought to oversold. In so many words, the Fed's "elastic" currency is being stretched to the limit.
Going the other way, the Canadian dollar popped to today's 103. This is a few "bars" beyond overhead resistance at 102 and the action is eligible for reversal.
Last week, we reviewed the negative divergence of declining A/Ds against the uptrend in the S&P. Mainly it records that fewer and fewer individual stocks are capable of keeping up to the leaders, which is typical of an important top.
The following chart shows that the timing is becoming somewhat late for the top in the index. The secondary high on the A/D was set on August 17 and has not been surpassed. Continuing negative divergence suggests the ultimate high on the S&P is pending.
Ross's work on the VIX also shows a negative divergence typical of an important top. This indicator has yet to complete the signal.
Last week's review noted that more of a spike up would fit the pattern, and thanks to today's Fed announcement this is happening. The promise to buy $40 billion of mortgage-backed securities (MBS) a month reminds of central bank pledges to sell so many tons of gold per year into the lengthy bear market for bullion. That pathetic policy ended at 253 in July and August of 1999.
It is interesting that the sub-prime mortgage bond rallied to new high for the move this week before the news.
It is uncertain how long the speculative spike will last, but often such spikes are brief.
Bernanke's remarks included the boast that Fed policy had created stable inflation over the past decade. That would mean CPI inflation, which calculation has been suspect since the Clinton revision. But financial asset inflation and volatility has become dangerous.
This cannot work out well, despite the belief that massive stimulus will revive the failing global economy. The 24 percent plunge the price of China's iron ore price is a voice of opposition to Fed and ECB wishful thinking.
We can't help but wonder about Romney's statement that as president he would retire Bernanke from the Fed. Perhaps the MBS buying program is an attempt to help Obama, which would likely insure that Bernanke's career as the great inflator continues.
"[The] 1901 [Bull market] was . . . speculative demonstration based . . . on the assumption that we were living in a new era; that the old rules and principles and precedent of finance were obsolete; that things could safely be done today which had been dangerous or impossible in the past. The illusion seized on the public mind in 1901 quite as firmly as it did in 1929. It differed only in the fact that there were no college professors in 1901 who preached the popular illusion as their new political economy."
- Alexander Dana Noyes (1930)
Stock Market Negative Divergence
- This model worked well going into the top of 2007.
- It will likely be effective in seeing through current excitement.
Link to September 14, 2012 'Bob and Phil Show' on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2012/09/a-world-of-easing/