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Getting Aboard the Last Stagecoach into Dodge
The following is part of Pivotal Events that was published for our subscribers February 21, 2013.
Signs of the Times
"The lone dissenting voice on the Federal Open Market Committee defended her hawkish philosophy."
"Possible risks and costs of these [easy money] policies may be exceeding their benefits."
- Dow Jones, February 12
"India's industrial output unexpectedly slid in December for a second month as demand falters in an economy expanding at the weakest pace in a decade."
- Bloomberg, February 12
"Europe's brittle economies shrank at their fastest rate since the collapse of Lehman four years ago."
- Financial Times, February 14
"Wal-Mart had the worst sales start to a month in seven years as payroll-tax increases hit shoppers."
- Bloomberg, February 15
White House strategists are probably thinking: "Good, more on food stamps and on disability compensation". The Alinsky theory of revolution has been to collapse the detestable American economy by overwhelming the welfare system.
"Bank of England Governor Outvoted in Bid to Launch Fresh QE Boost"
- The Guardian, February 20
Oooops! This could be defining a new financial term - "Recklessness Off".
Somewhere around noon yesterday, New York time, a story started the rounds about a hedge fund having some troubles with a position in commodities. In looking at what could be basing action in agriculturals, the problem is in metal prices. Mainly silver with the biggest decline (-3%), gold (-2.5%) and to a lesser degree base metals (-0.9%). Then, mid-day "they" took out crude oil (-2.2%), which could be Mr. Margin hitting whatever bids were around.
In the excitement, crude set an outside reversal, to the downside. As did the DJIA, the yen and lumber. The British pound did the reversal on Tuesday. Going the other way, the Dollar Index did the outside reversal - to the upside.
As we note, such reversals do not necessarily mark a trend change, but often indicate that the action has become excessive. Perhaps preliminary to an important change.
Over the past three weeks our theme has been that the general stock market was working on a rounding top. Within this, some sectors such as Forestry, Homebuilders and Airlines reached sentiment and momentum levels usually seen at important tops. Last week we concluded that these excesses were "providing some good trading opportunities".
The DJIA rose to a new high for the move, yesterday, and then accomplished the full outside reversal. As did the Dow Transports. The S&P also achieved a new high and reversed as well, but with Wednesday's high the same as Tuesday's. For technicians such big reversals from new highs are fascinating.
For the general stock market, the rounding top would lead to an intermediate decline.
This seems to be working out. A little more development on the change and the Chartworks can provide a downside target.
On the 13th, Bloomberg reported:
"The collapse of two junk-bond offerings in Brazil shows that Latin America's largest economy is getting hurt from the global pullback in high-yield demand."
Representing action in the high-yield sector, junk (JNK) accomplished the full reversal yesterday. The high price, with good momentum, was 41.21 in January. The initial decline was to 40.40 a couple of weeks ago and the rebound high was 40.84 yesterday. Taking out 40.40 sets the downtrend.
In September the Fed announced it was going to buy sub-prime mortgage bonds. The price rose from 56 to 61 on the news. Then it drifted down to 58 in early November and with the revival in animated spirits it jumped to 68.5 at the end of December.
Out of the gloom of the 2008 Crash the representative bond almost doubled from 38.
Perhaps the best is in.
It is worth noting that while the Fed plan has been to buy $40 billion of mortgage-backed bonds each month the price action has been sympathetic to market forces. Down into November and up into December. And then drifting down.
It seems that the Fed and European Central Bank have been anxious to get aboard the last stagecoach into Dodge City.
Long Treasuries became oversold a few weeks ago and the price has based at the 142 level. We have been looking for a rally as other assets weakened. Rising above 143.5 will set the uptrend. It's up to 144.21 today.
Following the modest concerns into early November the dollar was likely to decline into January as stocks, corporate bonds and commodities rose. The high was 81.46 in mid- November and the low was 78.92 at the first of this month.
It was a modest move, but hot action in popular assets was inspired by the 16% plunge in the yen against the euro, which reached a very oversold condition. Since last week the yen has been basing.
Last week we thought that the C$ could roll into a "modest decline". The 99 support level was taken out on Tuesday. There is another level of support at 98 and the daily RSI is down to 26, which is close limiting the decline.
The USD has jumped from 78.92 to 81 in three weeks. There is resistance at 81.5 and the daily RSI is near the level that would suggest a pause in the rise.
However, the move in the yen was "wild" and it is uncertain as to where the "wild" could next appear. We will stay with our methods of watching for trend changes and trend durations, but with an eye for "wild".
On February 15 CBS Detroit reported:
"Left in the Dark: Copper Thieves Rob Detroit Freeways of Light"
This is anecdotal evidence that copper's real price is still high. The nearby chart of copper deflated by the PPI shows that it has been unusually high for some 6 years. The last such example prevailed from 1966 until 1974 and was followed by a bear market that endured to 2001. This could be attributed to increases in productivity in finding and mining copper.
Today's high prices have been essentially due to demand from China. The reformation from Communism to the prosperity of a country enjoying less intrusive central planning has prompted a remarkable increase in demand. As with the earlier example, today's high prices has prompted a massive increase in mine capacity.
A long bear market would be natural. That the world is in another post-bubble contraction provides confirmation. This would be the case for all base metals.
Our data only goes back to 1825 and the record has been that copper's real price has declined through each post-bubble contraction. This compares to gold's real price as it generally increases. Both are characteristic of the long contractions that have run for some twenty years.
On the nearer-term, March copper was trading at 3.75 on Friday and dropped 5.4% to 3.54 today. This is a serious break and with it the base metal index (GYX) has dropped from 405 to 382, or 6%.
On the same move mining stocks (SPTMN) have dropped 8%. From the high of 1050 at the first of the year they are down 16% to 903. Mining stocks have again led what could be at least an intermediate decline for the sector.
Two weeks ago crude oil registered a Sequential Sell and the high was 98.24 on January 28. Today it's been as low as 92.63. There is minor support and this level and stronger support at 85.
Other than agriculturals, most commodities seem to have started an intermediate decline. In the latter part of the day, agricultural prices rolled over. Cotton was down 1.18%, sugar down 1.26%, corn down 1.54% and wheat plunged 2.34%.
Chart action on the index (GKX) became moderately oversold at 437 in early January and bounced to 469 a few weeks later. A test was needed and the low was 439 last week. It rose to 448 yesterday and fell to 441 today.
Recent action seemed to be preparing for an intermediate rally. However, the slump in so many other asset sectors and a firming dollar suggests this could take some time.
Agricultural prices could be vulnerable to further declines. Breaking through 439 would be the indicator.
Gold/Commodities: Our Proxy for the Real Price
Link to February 21, 2013 'Bob and Phil Show' on TalkDigitalNetwork.com: