While I would appreciate a market dump (puts still held) as much as the next guy and the anticipation that TLT is going to turn up at the trend line, the HYG-TLT ratio (bottom panel) is alive and well and showing no hidden ‘risk off’ behavior beneath the surface.
Excerpted from NFTRH 250 (August 4, 2013)
- the quantity of motion of a moving body, measured as a product of its mass and velocity.
- the impetus and driving force gained by the development of a process or course of events.
People trying to manage trend changes are by definition fighting momentum, which feeds on an established trend with powerful force. A premium service I use and otherwise depend upon for analysis of conventional US stocks and sectors (i.e. non-precious metals, non-resources, non-global), [XYZ Premium, name omitted due to wider publication], provided a chart yesterday showing the S&P 500’s breakout to all time highs noting “And to think there are still people calling this a cyclical bull within a long-term secular bear market!”
What [XYZ] forgot to mention is that there was an equal and roughly opposite breakout to fresh lows in 2009, that took the S&P back to 1996 levels. And to think there are still some people calling this a secular bull after an 11-year sideways consolidation of the previous secular bull!
Equal and opposite; that has been a theme lately and we will keep it front and center.
I was somewhat disappointed to see them write that sentence. That is because I pay them a sum of money not to feed me contrary indicators and signs of hubris. But a bigger point is that the surety with which [XYZ] made its trend following statement shows how strong the backdrop is for the regular stock market and against the bear case for one, and the precious metals (firmly an anti-market now) for another.
So here once again is a chart that adds some definition to the picture. Yes the S&P 500 is at all-time highs and this trend should not be fought without ongoing risk management in light of the old saying that “a market can remain irrational for longer than you can remain solvent.” The market makes the rules, not the individual.
The chart shows the 2009 lower low and a nice upside breakout to all time highs today. So what? Here I once again pull out one of my biggest errors, which was the targeting of 888 on the HUI gold miner index based on a similar upside ATH breakout in 2010. I don’t make grand statements of surety like the one quoted from [XYZ] above, but I thought it was a valid target and it was not. Period.
The chart also shows the rising monetary base in lockstep with the current momentum-fueled stock rally. BASE was launched through TARP, ZIRP, QE’s 1, 2 & 3 and ongoing Fed policy. As noted last week, stock market bulls are living in a dream and living large I might add. But it is a creation of policy.
The S&P is plotted along with the personal savings rate of the average US consumer. Savings naturally tend to spike during market liquidations and the plucky consumer dusts himself off and goes all in during bull markets. He is currently at 3.2 down from 8+ during the 2008/2009 liquidation and 8- during the Euro crisis and associated dislocations. It’s a new secular bull market after all!
To make sure we do not cherry pick our information let’s view the S&P 500 as it rises, rightfully, in lockstep with corporate profits. So on a conventional valuation basis, the stock market is simply following its ultimate fundamental data point higher.
A point I have been trying to make all along is that the stock market is fine and the bulls are right. But that is only if you are willing to sleep soundly in the notion that money is going to continue to be manufactured with the express mission of keeping the fundamentals on their upward momentum trajectory (chart 1).
The bulls have it all and there is no reason to fight this momentum when operating by conventional metrics. But there is nothing organic or natural about the bull market unless you consider the manipulation of debt and associated rates of interest to be natural. If so, have at it. Have a ball.
As you know, I have slowly accumulated some ‘regular’ stock positions [ed: against a few long-dated put positions] on buying opportunities over the last few months. But the bull view should always be subject to the macro view because one day policy will not be there to support stocks if bond market supply/demand dynamics overwhelm the Fed’s interest rate manipulation schemes.
We will have much more on the macro big picture going forward and with the aid of Highcharts.com by way of SlopeCharts/Slope+ http://is.gd/Aq76DX (another premium service I use) we have more tools than ever to illustrate macro relationships and events going forward.
248 starts out talking about why this precious metals decline is different from 2008 and why I am not able to label it a ‘no brainer’ buy yet, as in Q4 ’08. Nervous Nellie? Yes, I guess. Contrary indicator? Maybe.
But discipline is my main tool and certain indicators tell me to have discipline despite a rising bullish potential on the precious metals. It’s just the way it is. There are a few early signals that look good, but there other negative signals that may not yet have completed their negativity.
248 also covers commodities, bonds, currencies, global markets as well as a once again negative contrary sentiment backdrop developing for the US market. Sleep nice and comfy little bulls… there is not a worry in the world.
NFTRH 248, all 30 pages of it, out now.
(e) = external link
The Gold Mining Sector Breaks a Record Steve Saville 7.2.13 (pdf)
Bad to Worse w/ the Federal Reserve Greg Canavan 7.2.13
Uninsurable Risks Doug Noland 7.2.13
Gold is Following in Stock Market’s 2009 Footsteps Tom McClellan 7.2.13
We Are the Pea James Howard Kunstler 7.2.13
Just When You Think it Can’t Get Any Worse tBP 7.2.13 (e)
Feldstein: QE is Not ‘Printing Money’ BI 7.2.13 (e)
Risk is OFF
[ed: 'Risk Off' might seem obvious this morning, but NFTRH has been highlighting acute risk in the US stock market since leading indicators – including a sentiment extreme exactly opposite to the contrarian bullish extreme of 1 year ago – flashed warning signals weeks ago. From NFTRH 244′s opening segment…
I don’t know how to put it any more clearly than that. One year ago we were wrapping up a phase of ‘risk OFF’ and anticipating a return to a bullish market due to technical support, election year dynamics and most importantly a brutally unsustainable negative sentiment backdrop in the wake of the Greek/Euro meltdown theatrics.
Fast forward to today; we have been anticipating a change to bearish in US markets as technicals became very over bought, leading markets declined and sentiment came to the exact opposite (over bullish) extreme to one year ago.
Last year the wild card element to a bullish picture was the election year cycle and in particular, a sitting Democrat election year cycle. This year the wild card is something more powerful; the unwinding of US and global credit markets in a massive repudiation of debt by the withdrawal of its feeder, credit. In a leveraged global economic structure it is credit that fuels the machine.
It’s an ‘organic economy’ or it’s ‘organic growth’ you say? As credit continues to be withdrawn we’ll see how organic it is. Really, this is the single silliest thing I have ever seen in print in the financial blogosphere. The economy has been sprayed with myriad toxic elements to try to get it to grow. The system is mutating, and the Fed is the Monsanto of the financial world. Consumer spending is like genetically engineered corn; it’ll feed you but it is part nature and part laboratory (Read: a consumerist experiment).
Of course, this space is also promoting the viability of the ‘Taper to Carry’ (or T2C, the latest in a line of NFTRHisms – some prescient and some ill-conceived – in the tradition of Armageddon ’08, Hope ’09, i2K12, etc.) thesis.
This would theoretically see an attempt to revive the economy with a built-in profit motive for the banks providing the thrust, as they borrow ZIRP-manipulated funds for free and lend out at higher interest rates – compliments of the now rebelling US Treasury bond market – to the public and business enterprises.
10-year US Treasury yields are well into breakout mode now and the Banks continue with their breakout as measured in S&P 500 units. So far so good.
Before ‘T2C’ takes effect however, rising interest rates (bond market declines) across the board could signal that the game is changing; and in my opinion it is changing for the better. That is because linear thinkers and followers of convention will not be able to hide in bonds this time, as if it is just as easy as ‘risk off?… buy bonds’. Lazy thinking is going to be punished.
Stock bulls should learn about the pitfalls of following convention as well, because with the funding mechanism (credit, debt… bonds) under stress, the media creation known as the Great Rotation (from bonds to stocks) is not likely to work out in the short-term.
What makes this environment interesting is that even gold is being liquidated (whether forcibly through mass margin calls or of free will) and there seems to be nowhere to hide. A dishonest system is coming apart at the seams. What better environment for honest money to be taken to the woodshed for the first slaughter of its bull market?
Gold should be watched first and foremost for signs of what may be ahead. The liquidation of the gold bugs, when we strip out all of the emotion and excuses, is in the final analysis an indicator on the macro and on other markets. In this case, gold seems to be indicating that inflation bulls have been wrong. If there is to one day be a new inflation that actually takes (born of T2C for instance?), gold should indicate as much. Otherwise, get ready for increasing deflationary pressure.
So we will watch for either a real deflation as the system attempts to service exponential levels of debt or a new phase of the ongoing inflation attempt, which would be our T2C plan. In this scenario, monetary inflation (via ZIRP and QE) would transition to cost and price inflation as the funds are sent out into the economy.
Deflationists are all about the velocity of money, which has been stuck in the mud. A theoretical ‘carry trade’ by the banks would be an attempt to relieve this issue.
It is debatable that T2C would work, or that it would work to desired outcomes (like economic benefit as opposed to stock, commodity, precious metals and/or other asset price increases), but an attempt may well be made in some form close to what we are projecting with the ‘taper to carry’ thesis. Meanwhile, risk is OFF.