Da Basics

By Tim Knight

We’re four days into the trading week. For me, Monday was a “2”, Tuesday was a “3”, Wednesday was a “6”, and Thursday was a “7”. So……….progress. A week that started off vomit-inducing is getting better. I’d appreciate Friday being a 10, thank you very much.

The charts don’t necessarily point to that, however. The ES only needs to slip above that red line to give the already power-mad bulls another shot of elixir to create another phalanx of lifetime highs.


Even more fearful is the NASDAQ, whose NQ is shown below. AMZN and GOOGL are absolutely blowing the doors off in after-hours tonight. Interestingly, fellow tech giants MSFT and INTC are stinking up the place. As I mentioned in my tweet, it seems the newer web-based tech is practically printing money, whereas the kingpins of the 1980s and 1990s are lagging.


For me, just about the most important chart remains the USD/JPY. If the triangle pattern below does what it’s supposed to do, the dollar will tumble away, dragging equities down with it.


For myself, I am mildly-aggressively positioned on the short side, with 43 positions in all. I was crazy-short last Friday, which caused my balls to get kicked it Monday morning, so I’m still nursing my wounds.

Incidentally, I’m getting more and more inquiries about ProphetCharts lately. I’ll have some very important news on this front in the near future. Indeed, I have a lot to say. All will be revealed.

High-Yield Bond A-D Line

By Tom McClellan

High-Yield Bond A-D Line
April 27, 2017

Junk bonds are the canaries in the stock market’s coal mine.

If you want to know ahead of time that trouble is coming for the stock market, then one of the best places to look is the high-yield (or junk) bond market.  The movements of prices among these bonds correlates much more closely to the stock market than to T-Bonds.  More importantly, when liquidity gets tight, the junk bonds are the first to be sold by traders wanting to lessen their portfolio risk.

We can see the importance of this message in this week’s chart, which features A-D data from FINRA TRACE.  For those who like the full spelling of acronyms, that means “Financial INdustry Regulatory Authority Trade Reporting and Compliance Engine”.  FINRA tracks the price changes on a total of 7876 individual bonds, and breaks down the Advance-Decline statistics into categories of Investment Grade, High Yield, and Convertible bonds.  The chart above features the A-D data for the High Yield bonds.

This A-D Line arguably does a better job than the composite NYSE A-D Line at doing what we want an A-D Line to do, which is to show us divergences at important times.  That is the whole reason behind ever looking at breadth data of any type.  We want it to give us an answer which is different from what prices are saying, but only at the right moments.

A lot of analysts mistakenly assert that if one is interested in the stock market, then one should only look at A-D data from the stock market.  And to take that point further, they assert that one should filter out all of the contaminants such as preferred stocks, rights, warrants, bond closed end funds, and other detritus which together are making the stock market less pure.  I debunked that point in a March 24, 2017 article.

Just recently, the overall NYSE A-D Line moved to a new all-time high, saying that liquidity is plentiful and it should lift the overall stock market.  The same message comes from this High Yield Bond A-D Line, which has also pushed ahead to a new all-time high.  The message is that liquidity is so plentiful that even junk bonds can go higher.  And history shows that such plentiful liquidity is also beneficial for the overall stock market.

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Related Charts

Sep 14, 2016

McClellan Oscillator for High Yield Bond A-D Data
Mar 24, 2017

Why Don’t We Use Just Common-Only A-D Numbers?
Dec 01, 2016

McClellan Oscillator for Corporate Bonds

Chart In Focus Archive

The ECB is Getting Really Good at Leaking Shit to Reuters

By Heisenberg

As we learned in March, the ECB is getting pretty adept at leaking market-moving information about possible policy turns to Reuters.

You’ll recall that late last month, Reuters reported – citing unnamed sources – the following:

  • ECB policy makers wary of changing their message before June, Reuters reports citing unnamed officials.
  • One ECB person said to say message of March 9 press conference was over-interpreted

So that was really convenient because, when combined with Fed messaging designed to walk back the dovish nature of the March hike, it created a return to the policy divergence theme that had underpinned the dollar prior to March 15.

On Tuesday, Reuters is back, this time with 3 unnamed sources delivering this message:

European Central Bank policymakers are breathing a sigh of relief after the first round of France’s presidential vote put a pro-euro centrist in pole position, but they are not likely to change their policy stance until June.

Three sources on and close to the bank’s Governing Council told Reuters that with the threat of a run-off between two eurosceptic candidates in France averted, and with the economy on its best run in years, many ratesetters see scope for sending a small signal in June towards reducing monetary stimulus.

There is, however, little appetite to change at this Thursday’s meeting the pledge to buy bonds at least until the end of the year and to keep rates at rock bottom until well after that.

A move in June, however, might mean changing the wording of the ECB’s opening statement to reflect improved prospects for the economy.

Some or all the references to prevailing downside risks to the outlook, to the possibility of further rate cuts or to larger asset purchases may be taken out, the sources said.

“The discussion will be on removing some of the easing biases,” one of the sources said. “I can’t say how quickly it will happen because that depends on the data.”

You can probably guess what happened next. Here’s Bloomberg:

  • EUR/USD rose to a fresh high at 1.0925 while gaining to a one-month high versus the yen as model-driven demand for the cross continues to push through markets ahead of Thursday’s ECB meeting.
  • EUR gains accelerated after a Reuters report that French election result may prompt a change in the ECB’s language in June
  • Market continues to speculate on whether ECB will use more upbeat language to describe the economic outlook; to be sure, Draghi on Friday reiterated that the inflation pick-up remains unconvincing and risks for euro-area growth “remain tilted to the downside”
    • At same time, EUR and JPY continue to see unwind of haven trades set before French vote, muddying the FX picture
    • EUR filled offers at 1.0900/05, faces further supply around the Monday high at 1.0937, traders said



This is particularly amusing because now, instead of anonymous Reuters leakers trying to walk back a perceived hawkish message, you’ve got unnamed Reuters leakers apparently attempting to telegraph a hawkish shift in June. Last month, policy meeting preceded Reuters leak. This month, Reuters leak precedes policy meeting. All kinds of fucked up forward and backward (mis)guidance.

Continue reading The ECB is Getting Really Good at Leaking Shit to Reuters

Volatility Crash

By Tim Knight

Everywhere you look – – green, green, green, lifetime highs, soaring charts, with one notable exception. Volatility, of course! The fear index $VIX has, in just 1.5 years, collapsed from 53.29 to almost the single digits. Indeed, there is only ONE time in the past decade it’s been even a little bit lower, and that was back on January 27th. This is about as low as it goes, folks.


Long-Term Price Targets Are Meaningless

By Steve Saville

Many commentators like to speculate on where the dollar-denominated gold price is ultimately headed. Some claim that it is destined to reach $3,000/oz, others claim that it won’t top until it hits at least $5,000/oz, and some even forecast an eventual rise to as high as $50,000/oz. All of these forecasts are meaningless.

Long-term dollar-denominated price targets are meaningless because a) they fail to account for — and cannot possibly account for, since it is unknowable — the future change in the dollar’s purchasing power, and b) the only reason a rational person invests is to preserve or increase purchasing power. To further explain by way of a hypothetical example, assume that five years from now a US dollar buys only 20% of the everyday goods and services that it buys today. In this case, the US$ gold price will have to be around $6,500/oz just to maintain its current value in purchasing power terms. To put it another way, in my example a person who buys gold at around $1300/oz today and holds it will suffer a loss, in real terms (the only terms that matter), unless the gold price is above $6,000/oz in April-2022. Considering a non-hypothetical example to make the same point, in 2007-2009 a resident of Zimbabwe who owned a small amount of gold and not much else would have become a trillionaire in Zimbabwe dollars and would also have remained poor.

The purchasing power issue is why the only long-term forecasts of gold’s value that I ever make are expressed in non-monetary terms. For example, throughout the first decade of this century I maintained that gold’s long-term bull market would continue until the Dow/gold ratio had fallen to at least 5 and would potentially continue until Dow/gold fell to 1.

The 2011 low of 5.7 in the Dow/gold ratio wasn’t far from the top of my expected bottoming range, although I doubt that the long-term downward trend is over. In any case, none of the buying/selling I do this year will be based on the realistic possibility that the Dow/gold ratio will eventually drop to 1. Such long-term forecasts are of academic interest only, or at least they should be.

If I were forced to state a very long-term target for the US$ gold price, it would be infinity. The US$ will eventually become worthless, at which point gold will have infinite value in US$ terms. But then, so will everything else that people want to own.

Mind the “Le Spread” Eurphoria

By Heisenberg

Earlier today we noted the “big league” compression in the all-important OAT-bund spread, the market’s preferred gauge of French political risk and thus, a go-to measure of EMU breakup risk.

Here’s the 10Y spread:


And the 2Y spread:


Finally, here’s Bloomberg’s technical analyst Sejul Gokal on why this matters:

OAT Futures and ‘Le Spread’ Euphoria May Risk Fading at 200-DMA

Notable moves in OAT market have sent futures and France-Germany 10-year yield spread near key equilibrium levels that may drive tactical reversal in post-French vote reaction, Bloomberg technical analyst Sejul Gokal writes.

  • OAT1 topside gap and high at 149.90 close to the YTD high and 200-DMA at 150.08-12; levels could still come into play in a last gasp move before potential accumulation of overbought reversal sessions
    • 9-day RSI tests multi-mo. highs at ~81
  • OAT-Bund spread narrowed to 48bps vs. 64bps Fri. close
    • 200-DMA at 45bps could limit further spread compression as oversold conditions warrant corrective unwind
  • As a risk factor, watch out for any consecutive daily breaks of the longer-term average line which should indicate strong behavioral change in OATs; such development should override current overbought market warnings

Liquidity Supernova and the Big Ugly Flaw

By Doug Noland

Credit Bubble Bulletin: Liquidity Supernova and the Big Ugly Flaw

April 21 – Reuters (Vikram Subhedar): “The $1 trillion of financial assets that central banks in Europe and Japan have bought so far this year is the best explanation for the gains seen in global stocks and bonds despite lingering political risks, Bank of America Merrill Lynch said on Friday. If the current pace of central bank buying, dubbed the ‘liquidity supernova’ by BAML, continues through the year, 2017 would record their largest financial asset purchases in a decade…”

From the report authored by BofA Merrill’s chief investment strategist Michael Hartnett: “The $1 trillion flow that conquers all… One flow that matters… $1 trillion of financial assets that central banks (European Central Banks & Bank of Japan) have bought year-to-date (= $3.6tn annualized = largest CB buying in past 10 years); ongoing Liquidity Supernova best explanation why global stocks & bonds both annualizing double-digit gains YTD despite Trump, Le Pen, China, macro.”

A strong case can be made that Q1 2017 experienced the most egregious monetary stimulus yet. No financial or economic crisis – and none for years now. Consumer inflation trends have turned upward on a global basis. Stock prices worldwide have surged higher, with U.S. and other indices running to record highs. At the same time, global bond yields remained just off historic lows. Home prices in many key global markets have spiked upward. Meanwhile, central bank balance sheets expanded at a $3.6 TN annualized pace (from BofA) over the past four months.

With U.S. bond yields reversing lower of late, there’s been a fixation on weaker-than-expected Q1 U.S. GDP. Meanwhile, recent data have been stronger-than-expected in China, Europe and Japan. EM has been buoyed by strong financial inflows and a resulting loosening of financial conditions. Thus far, Fed baby-step normalization efforts have been overpowered by the “liquidity supernova”.

April 21 – Reuters (Balazs Koranyi): “Global growth and trade appear to be picking up strength but risks for the euro zone economy remain tilted to the downside, so ‘very substantial’ accommodation is still necessary, European Central Bank President Mario Draghi said on Friday. In a statement largely reflecting the bank’s March policy statement, Draghi said that while the risk of deflation has largely disappeared, underlying inflation has shown no convincing upward trend.”

April 20 – Reuters (Leika Kihara): “Japan has benefitted from global tailwinds that boosted exports and factory output, [Bank of Japan Governor Haruhiko] Kuroda said, describing its economy as ‘expanding steadily as a trend’ – a more upbeat view than last month. But he offered a bleaker view on Japan’s inflation, saying it lacked momentum with no clear sign yet it was shifting up. ‘That’s why the BOJ will continue its ultra-easy monetary policy to achieve its 2% inflation target at the earliest date possible,’ he said.”

Continue reading Liquidity Supernova and the Big Ugly Flaw

Look! More Crazy ETF Charts

By Heisenberg

It’s not entirely clear when the “enough is enough” moment will come in terms of highlighting charts that illustrate the epochal (and increasingly dangerous) shift to passive versus active management, but I don’t think we’re there yet.

It may just be me, but it certainly seems as though ETFs are getting a lot more attention over the past several months and that’s saying something because they’ve been a hot topic for years.

We – and a lot of other folks – have tried our best to stay abreast of the latest in what’s becoming a vociferous debate. Here are some recent posts for anyone who might have missed them:

Well admittedly, we’re going to milk this topic for all it’s worth and not because we necessarily think you need to see anymore charts, but rather because given the rampant proliferation of these vehicles and the associated danger they pose to markets, this is a topic that quite literally can’t get enough attention.

Via BofAML

Below we update our report from July. The trend of flows shifting to passive investments has been impacting equities for over a decade (Figure 8, Figure 9). For fixed income the shift accelerated following the Taper Tantrum rise in interest rates in 2013, and re-accelerated again in November of last year (Figure 10, Figure 11, Figure 12, Figure 13). In high yield, on the other hand, the share of passive funds and ETFs remains relatively low (Figure 14, Figure 15).



Is Iron Ore Weighing Down Stock Market?

By Tom McClellan

Iron ore prices versus SP500
April 20, 2017

Some U.S. stock market investors are getting worried about the price of iron ore in China.  This week’s chart helps to show why.

One analyst who noticed this relationship was Alastair Williamson of Stock Board Asset, who published this Tweet on April 18, 2017:

StockBoardAsset tweet

It is definitely an intriguing chart, and a relationship I had not explored before.  I have come across a large number of interesting intermarket relationships like this one, and it is always fun to find (or be shown) a new one.  But not all of them have merit.  So what I’d like to do is use this one to show you how I typically like to contemplate a new relationship that I encounter.

So my first question is about whether the relationship is a durable one.  The answer, it turns out in this case, is no.  The two have only recently fallen into this apparent correlation.  Here is a longer term look:

Continue reading Is Iron Ore Weighing Down Stock Market?