How Concerning is an “Overbought” Reading on Weekly RSI?

By Chris Ciovacco

Stocks Are “Overbought” In 2017

On February 17th the S&P 500’s weekly RSI reading closed above 70, which may appear to be a red flag for the stock market based on common terms associated with RSI. From stockcharts.com:

“Developed J. Welles Wilder, the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30.”

Stocks Were “Overbought” In 2014

We can find numerous examples in history when the S&P 500 struggled after weekly RSI approaches 69-to-70 (overbought), including the 2014-2016 example below.

In this post, we will address one question and one question only:

“Is it in the realm of historical possibility for overbought markets to remain overbought for long periods of time while posting impressive gains and avoiding significant pullbacks?”

Is An “Overbought” Reading A Showstopper?

There are numerous examples from history when positive trends in stocks were not derailed after weekly RSI approached 69-to-70. The early 1980s were marked by strong bullish trends. When trends are strong, the S&P 500 can continue to rise for some time after weekly RSI nears “overbought” status. As shown in the chart below, after high weekly RSI readings in 1982, the S&P 500 gained an additional 27% before experiencing a significant pullback.

Continue reading How Concerning is an “Overbought” Reading on Weekly RSI?

Don’t Short This Dog

By Keith Weiner of Monetary Metals

This week, the prices of the metals mostly moved sideways. There was a rise on Thursday but it corrected back to basically unchanged on Friday.

This will again be a brief Report, as yesterday was a holiday in the US.

Below, we will show the only true picture of the gold and silver supply and demand fundamentals. But first, the price and ratio charts.

The Prices of Gold and Silver
gold and silver prices

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It moved sideways this week.

The Ratio of the Gold Price to the Silver Price
gold-silver ratio

For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

Here is the gold graph.

The Gold Basis and Cobasis and the Dollar Price
gold and the us dollar

The price was unchanged, but the basis is up slightly and cobasis is down (i.e. gold became slightly more abundant). This is not the news dollar shorters (i.e. those betting on the gold price) want to see.

Our calculated fundamental price is all but unchanged around $1,360.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price
silver and the us dollar

In silver, the basis is basically unchanged but the cobasis went up a bit. The silver market got just a bit tighter, and our calculated fundamental price is up more than 30 cents to about a quarter above the market price. Not exactly “bet the farm with leverage territory”, but definitely not “short this dog” either.

Watch this space. We have some exciting data science to reveal soon.

Trump Will Not Really Cut Taxes

By Steve Saville

As the financial world waits with bated breath for details of Donald Trump’s “phenomenal” tax plan, it’s important to understand that regardless of what Trump announces on the tax front there will be no genuine tax cut. The reason is that for a tax cut to be genuine it must be funded by reduced government spending.

Tax cuts are unequivocally beneficial to the economy if they are genuine, but if a tax cut isn’t funded by reduced government spending, that is, by the government consuming less resources, then one way or another it will have to be funded by the private sector. It will just be another Keynesian stimulus program, and like all Keynesian stimulus programs it will potentially boost economic activity in the short-term at the cost of slower long-term progress.

It should be obvious that the private sector cannot benefit from a tax cut that it will have to pay for, but apparently it isn’t obvious because most people seem to believe that the government can consume more resources and at the same time the private sector can end up with more resources. This is an example of believing the impossible. Unfortunately, it’s not the only such example in the world of economics, in that many aspects of Keynesian theory involve belief in the impossible.

The cost of government is determined by what the government spends, not how much it collects in taxes. And we can be sure that during the next four years there is going to be a large rise in the cost of the US federal government, meaning that with or without a so-called tax cut the private sector (as a whole) is destined to end up with reduced resources under the Trump regime. We can also be sure that it would have ended up with reduced resources under a Clinton regime.

The reason, as explained in the article posted at http://crfb.org/papers/lame-duck-president-2017, is that spending increases in excess of revenue increases were ‘baked into the cake’ prior to the November-2016 Presidential election thanks to budgets dictated by previous presidents and Congresses. Getting a little more specific, the linked article points out that 150 percent of new revenue a decade from now is pre-committed to spending growth scheduled under laws that were in place prior to the 2016 election. Moreover, this should be viewed as an unrealistically-optimistic forecast because it assumes steady inflation-adjusted revenue growth. A more realistic forecast would account for the sizable decline in inflation-adjusted revenue that will be caused by a recession within the next few years.

The bottom line is that any cuts in the rates of US individual and corporate income taxes announced/implemented over the coming 12 months will be ‘smoke and mirrors’, because government spending is going to increase. It will essentially be a money-shuffling exercise to temporarily create the illusion that the burden of government is shrinking at the same time as it is growing.

China Credit and Global Inflationary Dynamics

By Doug Noland

Credit Bubble Bulletin: China Credit and Global Inflationary Dynamics

February 14 – Bloomberg: “China added more credit last month than the equivalent of Swedish or Polish economic output, revving up growth and supporting prices but also fueling concerns about the sustainability of such a spree. Aggregate financing, the broadest measure of new credit, climbed to a record 3.74 trillion yuan ($545bn) in January… New yuan loans rose to a one-year high of 2.03 trillion yuan, less than the 2.44 trillion yuan estimate. The credit surge highlights the challenges facing Chinese policy makers as they seek to balance ensuring steady growth with curbing excess leverage in the financial system.”

Like so many things in The World of Finance, we’re all numb to Chinese Credit data: Broad Credit growth expanded a record $545 billion in the month of January, about a quarter above estimates. Amazingly, last month’s Chinese Credit bonanza exceeded even January 2016’s epic Credit onslaught by 8%. Moreover, as Bloomberg noted, “The main categories of shadow finance all increased significantly. Bankers acceptances — a bank-backed guarantee for future payment — soared to 613.1 billion yuan from 158.9 billion yuan the prior month.”

February 14 – Bloomberg: “China’s shadow banking is back in full swing. Off-balance sheet lending surged by a record 1.2 trillion yuan ($175bn) last month… Efforts by the People’s Bank of China to curb fresh lending may have prompted banks to book some loan transactions as shadow credit, according to Sanford C. Bernstein.”

Yet this was no one-month wonder. China’s aggregate Credit (excluding the government sector) expanded a record $1.05 TN over the past three months, led by a resurgence in “shadow” lending. According to Bloomberg data, China’s shadow finance expanded $350 over the past three months (Nov. through Jan.), up three-fold from the comparable year ago period.

Friday from Bloomberg: “White House Chaos Doesn’t Bother the Stock Market.” Many are confounded by stock market resilience in the face of Washington discord. Perhaps it’s because global liquidity and price dynamics are currently dictated by China, the BOJ and the ECB – rather than Washington and New York. Eurozone and Japanese QE operations continue to add about $150bn of new liquidity each month. Meanwhile, Chinese Credit growth has accelerated from last year’s record $3.0 TN (plus) annual expansion.

February 14 – Bloomberg (Malcolm Scott and Christopher Anstey): “Forget about Donald Trump. The global reflation trade may have another driver that proves to be more durable: China’s rebounding factory prices. The producer price index has staged a 10 percentage-point turnaround in the past 10 months, posting for January a 6.9% jump from a year earlier. Though much of that reflects a rebound in commodity prices including iron ore and oil, China’s economic stabilization and its efforts to shutter surplus capacity are also having an impact.”

China’s January PPI index posted a stronger-than-expected 6.9% y-o-y increase. A year ago – back in January 2016 – y-o-y producer price inflation was a negative 5.3%.  It’s worth noting that China’s y-o-y PPI bottomed in December 2015 at negative 5.9%, the greatest downward price pressure since 2009. In contrast, last month’s y-o-y PPI jump was the strongest since August 2011 (7.3%). China’s remarkable one-year inflationary turnaround was not isolated in producer prices. China’s 2.5% January (y-o-y) CPI increase was up from the year ago 1.8%, matching the peak in 2014.

There are two contrasting analyses of China’s record January Credit growth. The consensus view holds that Chinese officials basically control Credit growth, and a big January confirms that Beijing will ensure/tolerate the ongoing rapid Credit expansion required to meet its 6.5% 2017 growth target (and hold Bubble collapse at bay). This is viewed as constructive for the global reflation view, constructive for global growth and constructive for global risk markets. Chinese tightening measures remain the timid “lean against the wind” variety, measures that at this point pose minimal overall risk to Chinese financial and economic booms.

An opposing view, one I adhere to, questions whether Chinese officials are really on top of extraordinary happenings throughout Chinese finance, let alone in control of system Credit expansion. Years of explosive growth in Credit, institutions and myriad types of instruments and financial intermediation have created what I suspect is a regulatory nightmare. I seriously doubt that PBOC officials take comfort from $1.0 TN of non-government Credit growth over just the past three months.

Continue reading China Credit and Global Inflationary Dynamics

Roses Are Red and so’s Been EURUSD’s Trend

By Elliott Wave International

Learn what indicator foresaw the euro’s recent reversal to a one-month low

According to mainstream financial wisdom, market trends are driven by news events much in the same way a lover’s heart is controlled by Cupid’s arrow. A “shot” of positive news lifts prices; a “shot” of negative news hurts them.

Simple, right?

Not exactly. See, we believe the main force driving market trends is that of investor psychology, which unfolds as Elliott wave patterns directly on the market’s price chart. These patterns are not beholden to the current news cycle, and therefore, often run counter in nature to the mainstream outlook for future price action.

Take, for instance, the euro’s recent performance. On January 31, the euro was on cloud nine, having started the month at a 14-year low only to end it at a two-month high.

“Why the Euro is a Buy?” asked one January 31 news source.

And, according to the mainstream experts, the answer included a raft of positive economic data released on January 31, such as:

  • Eurozone inflation soared to its highest level since February 2013
  • Euro area’s GDP rose at a faster pace than the U.S. for the first time since 2008
  • Euro area registered its lowest unemployment rate in 7 years
  • The U.S. dollar suffered its worst January in 30 years

Also in the euro’s favor was supportive political rhetoric expressed on February 1 by U.S. President Trump’s top trade advisor, who on that day called the euro “an implicit Deutsche mark that is grossly undervalued.”

Everything was coming up red roses in the euro’s fundamental backdrop.

But, according to the analysis our Currency Pro Service posted on February 2, a major bearish development was underway in the EURUSD’s technical backdrop — namely, the end of an Elliott second wave, and start of a powerful wave 3 decline.

“EURUSD poked to a new recovery high before closing lower when compared to Wednesday. The possible reversal day might signal the second wave recovery is finally at an end. An impulsive decline would bolster that idea…

“A decline beneath 1.0620 would signal the turn might have occurred.”

So, what happened next?

Well, despite the rosy fundamental backdrop, the EURUSD indeed turned down (falling euro, rising dollar), plunging rapidly to a one-month low on February 14. Here, the next chart captures the dramatic decline:

Now, the February 14 Currency Pro Service reveals whether ample evidence is in place of a bottom — none of which, by the way, comes from the day’s news.


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This article was syndicated by Elliott Wave International and was originally published under the headline Roses Are Red… and So’s Been EURUSD’s Trend. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

VIX Futures Traders Finally Getting Complacent

By Tom McClellan

Highest priced VIX futures contract
February 17, 2017

The recent story about low readings for the spot VIX Index is well-reported.  What has escaped the attention of many is that prices are now finally coming down for VIX futures at the long end of the maturity spectrum.

The spot VIX has been below 15 for most of the time since July 2016, except for a brief spike up to 22.51 on the Friday before the November 8, 2016 federal elections.  Despite the spot VIX remaining low, the highest priced VIX futures contracts have been fairly steadily above 20. Usually the highest priced contracts are the farthest out expiration month contracts. Just recently, they started creeping lower, down into the 19s, then the 18s.

Something different is happening now.  The current far-month contract is Oct. 2017, which closed on Feb. 15 at 17.675. That is the lowest number for the highest VIX futures contract since August 2015, just before the China-fueled mini-crash.

This week’s chart shows a plot depicting the value of the highest priced VIX futures contract over time. The prices are inverted to better align with the price action.  Instances with the highest priced VIX futures contract being below 18 are pretty rare, and usually associated with meaningful tops.  That “rule” did not work during QE3, but it is fair to say that a lot of things did not work then.  The rule started working again after QE3 was ended.

You have probably heard of the several VIX related ETNs that are available now. Some folks do not know that those products are not actually tied to the spot VIX, but rather they own VIX futures, either long or short depending on the type of ETN.  A big winner this year is XIV, the short VIX futures ETN, which has more than doubled since the November elections.  XIV goes short the two VIX futures contracts nearest to expiration.  It has a nice upward bias because of the natural time-decay of VIX futures pricing.

Here is what that term structure looks like as of Feb. 16, 2017:

VIX futures curve

Continue reading VIX Futures Traders Finally Getting Complacent

An Age-Old Relationship Between Interest Rates and Prices

By Steve Saville

When money is sound, interest rates don’t drive prices and prices don’t drive interest rates

The chart displayed near the end of this discussion is effectively a pictorial representation of what Keynesian economists call a paradox* (“Gibson’s Paradox”) and Austrian economists call a natural and perfectly understandable relationship.

Gibson’s Paradox was the name given by JM Keynes to the observation that interest rates during the gold standard were highly correlated to wholesale prices but had little correlation to the rate of “inflation”, that is, that interest rate movements were connected to the level of prices and not the rate of change in prices. It was viewed as a paradox because most economists couldn’t explain it. According to conventional wisdom, interest rates should have been positively correlated with the rate of “price inflation”.

The problem is that most economists did not — and still do not — understand what interest rates are.

First and foremost, interest rates are the price of time. They reflect the fact that, all else being equal, humans place a higher value on getting something now than on getting exactly the same thing at some future time. Interest rates transcend money, because they exist even when money does not. With or without money and all else being equal, getting something now will always be worth more than getting the same thing in the future**. This is called time preference.

Time preference is the root of interest rates and the natural interest rate is a measure of societal time preference. That is, the natural interest rate is a measure of the general urgency to consume in the present or the amount that would have to be paid, on average, to make saving (the postponement of consumption) worthwhile. For example, the average 7-year-old child has a very high time preference, in that if you give the kid a choice between getting a desirable toy today or getting something more in 3 months’ time, the “something more” option won’t be chosen unless it is a LOT more, whereas a middle-aged adult with substantial savings is likely to have low time preference.

When interest rates are properly understood it becomes clear that the paradox named after Gibson is no paradox at all. The reason is that if the money is sound, as it mostly was under the Gold Standard, both interest rates and prices will move in the same direction in response to changes in societal time preference.

To further explain, during a period of rising time preference, that is, during a period when there is an increasing desire to consume in the present, the prices of goods will rise (on average) due to increasing demand and it will take a higher interest rate to encourage people to delay their spending. During a period of falling time preference, that is, during a period when there is an increasing desire to save, the prices of goods will fall (on average) and people will generally accept a lesser incentive (interest rate) to delay their spending.

In a nutshell, there is no paradox because, when the money is sound, interest rates don’t drive prices and prices don’t drive interest rates; instead, on an economy-wide basis*** both prices and interest rates are driven by changes in societal time preference.

Continue reading An Age-Old Relationship Between Interest Rates and Prices

Fed Up: Culture Shock

By Danielle DiMartino Booth

“If it were possible to take interest rates into negative territory, I would be voting for that.”

— Janet Yellen, February 2010

Photo Credit: Howie Le

As her fame has grown, Janet Yellen is recognized in restaurants and airports around the world. But her world has narrowed. Because the Fed chairman can so easily move markets with a few casual words, Yellen can’t get together regularly and shoot the breeze with businesspeople or analysts who follow the Fed for a living. She must rely on her instincts, her Keynesian training, and the MIT Mafia.

“You can’t think about what is happening in the economy constructively, from a policy standpoint, unless you have some theoretical paradigm in mind,” Yellen had told Lemann of the New Yorker in 2014.

One of Lemann’s final observations: “The Fed, not the Treasury or the White House or Congress, is now the primary economic policymaker in the United States, and therefore the world.”

But what if Yellen’s theoretical paradigm is dead wrong?

The woman who “did not see and did not appreciate what the risks were with securitization, the credit rating agencies, the shadow banking system, the SIVs . . . until it happened” has led us straight into an abyss.

It’s time to climb out. The Federal Reserve’s leadership must come to grips with its role in creating the extraordinary circumstances in which it now finds itself. It must embrace reforms to regain its credibility.

Even Fedwire finally admitted in August 2016 that the Federal Reserve had lost its mojo, with a story headlined “Years of Fed Missteps Fueled Disillusion with the Economy and Washington.” In an effort to explain rising extremism in American politics in a series called “The Great Unraveling,” Jon Hilsenrath described a Fed confronting “hardened public skepticism and growing self- doubt.”

Mistakes by the Fed included missing the housing bubble and financial crisis, being “blinded” to the slowdown in the growth of worker productivity, and failing to anticipate how inflation behaved in regard to the job market. The Fed’s economic projections of GDP and how fast the economy would grow were wrong time and again.

Continue reading Fed Up: Culture Shock

Post-CPI

By Michael Ashton

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…buy my book about money and inflation, published in March 2016. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • The timing of Yellen’s testimony was useful for her. Given base effects, y/y CPI may drop to 2.1% from 2.2% today. So y’day she >>>
  • >>>could sound hawkish, having a sense that today she’d get a decent CPI. It’s base effects that could drop CPI – but that’s optics.
  • Last Jan, core CPI printed 0.293%. Anything less than 0.23% will cause y/y to tick downward. Feb is also a tough hurdle.
  • But these MAY be tough hurdles because of tricky seasonals. Certainly Jan’s number could be. But this is why we look at y/y.
  • Actually, the BLS revised some of that…core was 0.293% in Jan originally but now comparison is a trifle easier at 0.266%.
  • So revising my prior tweet: anything less than 0.20% will cause y/y to tick downward. Feb’s hurdle will be 0.25%.
  • Well howdy doo. Core CPI +0.31% m/m, far above consensus and pushing y/y to 2.3% (actually 2.26%) when it was expected to fall to 2.1%.
  • That’s a whoops.
  • That’s the highest m/m core in a decade. At least, after revisions have lowered some peaks.

bfmcedd

  • Housing y/y 3.12% from 3.04%, Apparel +1.0% from -0.04%. Medical Care 3.86% vs 4.07%.
  • Last 12 m/m figures from CPI. At least the last 5 look like a kinda scary trend. Probably illusory.

last12 Continue reading Post-CPI

Global Asset Allocation Update

By Joseph Calhoun of Alhambra

There hasn’t been a lot of change in our indicators since the last update and therefore, despite my discomfort with the altitude of this stock market, there are no changes to the Global Asset Allocation this month. For the moderate risk investor, the allocation between risk assets and bonds is unchanged at 50/50.

Bond markets moved around some during the last month but are today almost exactly where they finished at the last update. Other markets have moved to indicate a still ravenous appetite for risk but growth and inflation expectations are essentially unchanged. Stock and junk bond – I refuse to call them “high yield” with HYG yielding just a bit over 5% – investors seem quite a bit more sure of the outcome of the developing policy debate than the more sober Treasury participants. Commodities also moved a bit higher since the last update but the best performer was gold, not exactly a growth investment. It was very tempting to just move some out of stocks and into cash simply because valuations have gone completely off the reservation but our process requires something more than gut reaction to make a change. Momentum continues to favor stocks – US stocks mostly – and that has to be respected. Our allocation to stocks has already been reduced due to high valuations and absent more information I can’t justify moving the allocation even lower. I have decided though that I will consider making an intra-month move if I think it is necessary. That isn’t something I would normally do as I think one of the most common mistakes investors make is doing too much. But I think this market is so far beyond what is “normal” that one must make concessions to reality.

Indicator Review

  • Credit Spreads:   Junk spreads continued to narrow, down another 7 basis points since the last update. They are still about 60 basis points from the lows of this cycle and nearly 150 from the lows of the last cycle. There is still plenty of room for improvement and there is no indication right now that spreads are about to reverse. The most likely culprit, if last year is a template, would be a fall in oil prices. While inventory would argue that might indeed be in the offing, momentum argues for the opposite. And as we’ve seen in the past, oil market moves owe a lot to the direction of the dollar which has recently found upside hard to come by.

Continue reading Global Asset Allocation Update