Don’t Be a “Killjoy”, Richard

By Heisenberg

Top-calling is all the rage nowadays.

On Friday we got Citi’s Matt King essentially telling you to get the f*ck out of Dodge. And on Sunday we got an updated presentation from Goldman that contained the following table showing pretty much everything is trading in the 80-to-90-something-th percentile relative to 10 years of history:

walter white

Well on Monday morning, one former FX trader doesn’t want to be “a killjoy”, but he’s afraid he might soon have no choice.

Via Bloomberg’s Richard Breslow

I feel like a bit of a killjoy. I can’t quite bring myself to try to play the hero and call the end of recent moves. But I’m close. And would certainly advocate concentrating more on my stops than worrying over objectives. They’ll take care of themselves.

  • I realize there was a big element of taking some profit on Friday. Buying risk during the week and letting some go for the weekend, lest something untoward happens, has been a good strategy. And, naturally, there’s was an understandable urge to buy the rumor, sell the fact following Chair Yellen’s speech. But I wasn’t impressed with how things ended last week. I’ll believe that all I’m suffering from is Monday blahs if the latest trends pick-up again, and quickly
  • I’ve been a big believer in the stock market move, because momentum has been so strong and the technicals have refused to suggest they’ve done anything wrong. But other than deregulation and tax cuts, the story has been less than compelling. And I’ve taken comfort for the broader market by keeping close track of the S&P financials index
  • But that index at 420 looks to my naked eye to have the same sort of blow-off top as the SPX has at 2400. Neither has backed off much, but they need to get back through them. Not asking a lot. If this market is still good
  • These indices can correct a long way and still be in an uptrend. I just wouldn’t want to stick around to prove it
  • The Dollar Index is allowed a sloppy Friday. It’s what makes it so lovable. But back below 101 would be a problem. And I want to see it above last week’s high quickly. And EUR/USD to prove it has any appetite to sustain below 1.05
  • Gold had a tough time last week. If global things are good, it needs to get back below $1210
  • I confess to remaining a bond bear, but we’ve seen these prices before. It’s time for a proper assault on the big trend-line or we risk just slopping back into the familiar range
  • Whether it’s European risk, global reflation or the American administration getting its sea legs, there was an awful lot of mission accomplished pronouncements as the March hike was finally priced in. Makes me cautious

Get This Through Your Damn ‘Brain’ard

By Heisenberg

So basically, the message is that unless the S&P were to suddenly collapse, the Fed is going to hike.

They’re really pushing the envelope on the messaging and if you buy into the whole reflexivity argument, then you have to think they want to move – and soon. Put differently, if this is all about stocks and the dollar (“the market”) then the light is green. Like blindingly green. I talked a bit about this earlier this week. If it’s financial conditions that are the determinant, well then we are ready to go.

In case there were lingering questions – which there apparently were as the dollar faded on Wednesday afternoon, they were answered last night at 6 EST when Lael Brainard dropped a few tape bombs via prepared remarks for a speech at Harvard. To wit:

  • “Assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path”
  • “We are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing, and risks to the outlook are as close to balanced as they have been in some time”
  • “The past few months have seen continued progress in the labor market”
  • “Inflation has moved up lately as the effect of past increases in the dollar and declines in energy prices have faded”
  • “Recent months have seen an increase in the upside risks to domestic demand,”
  • “Near-term risks to the United States from abroad appear to have diminished”
  • “As the federal funds rate continues to move higher toward its expected longer-run level, a transition in balance sheet policy will also be warranted,”
  • “There are good reasons to expect a normalized balance sheet to be considerably smaller than its current size but larger than its pre-crisis level”

Any questions?

You’re reminded that Brainard isn’t exactly known for being hawkish, so this represented a notable reversal and that change in tone was promptly reflected in USDJPY:


That gave the all clear for the reflation narrative to remain firmly in place during the overnight session. Panning out a bit, you can get a sense of things:

Continue reading Get This Through Your Damn ‘Brain’ard

Holy Dow!

By Tim Knight

Equities are an absolute runaway train at this point. Fear Of Missing Out (FOMO) has clenched the throats of the trading public, and a money-losing Internet company whose principal product is a disappearing-dick-pics app is about to enjoy one of the most sensational IPOs of the decade tomorrow. Here below we see the Dow 30 blowing past 21,000 in another multi-hundred point move:


And the Transports, which looked briefly like they were weakening, joining the party, keeping Dow Theory buffs smiling:


I’m speechless for the moment.

A Short Remark About an Ominous Count

By Michael Ashton

This will be a very short remark, partly because I am certain that someone else must have observed this already.

The Dow Jones Industrial Average declined on Tuesday after having risen in each of the preceding 12 days. I was curious, and the DJIA has data going back more than a century (unlike, for example, the S&P 500, the Russell, or other indices), so I checked to see how often that has happened before.

It turns out that only three times before in history has the Dow advanced in 12 consecutive sessions. The dates of those occurrences are (listed is the last day of advance before the first decline):

July 8, 1929

December 7, 1970

January 20, 1987

The latter of these three was actually a 13-day advance, and the longest in history.

Now, the 1970 occurrence seems to be nothing special. It occurred five years into a 15-year period that saw the Dow go nowhere in nominal terms, but there was nothing special about 1971. However, anyone who invests in the stock market ought to know the significance of 1929 and 1987. It also bears noting that current market valuations are higher (in terms of the Cyclically-Adjusted PE ratio) than on any of those three days – quite a bit higher, in fact.

None of which is to say that we won’t have another 10, 20, or 30-day streak ahead of us. I suspect the bulls will say “see? This same occurrence in 1929 and 1987 happened months before the denouement. We still have time to party!” And they may be right. This isn’t predictive. But it, especially when compared to valuation levels second only to those seen at the peak of the “Internet Bubble,” is ominous. This is a party I wouldn’t mind missing.

Bank Deregulation is Less Important Than Bank Credit

By Steve Saville

Asset prices, most notably stock prices, are now supported by nothing other than the creation of credit and money out of ‘thin air’

In response to the 2007-2009 financial crisis, policy-makers in the US who had absolutely no idea what caused the crisis enacted legislation that would supposedly prevent such a crisis from re-occurring. The legislation is called “The Wall Street Reform and Consumer Protection Act”, although it is better known as “Dodd-Frank”. Unsurprisingly, considering its origins, the Dodd-Frank legislation has done nothing to reduce financial-crisis risk but has made the US economy less efficient. Quite rightly, therefore, the Trump Administration is intent on repealing all or parts of it. What are the likely consequences?

If Dodd-Frank were scaled back in a meaningful way it could make interactions between customers and their banks more efficient, but without knowing exactly which parts of the legislation are going and which parts are staying it isn’t possible to quantify the consequences. For example, a part of the legislation that will probably go is the requirement for banks to retain at least 5% of any loans they securitise. Eliminating this requirement would be slightly helpful to banks, but would make very little difference to the overall economy.

What we can say is that the efficiency-related benefits of meaningfully scaling back Dodd-Frank would be long-term, meaning that they probably wouldn’t have a noticeable effect over the ensuing year.

As an aside, it’s worth mentioning that there is a risk associated with eliminating parts of the economy-hampering legislation known as Dodd-Frank. The risk is that de-regulation will get the blame when the next crisis occurs, and the Federal Reserve, the primary agent of economic instability, will again get away unscathed.

With regard to economic performance over the next 12 months, changes in the pace at which US banks collectively expand credit will likely be of far greater importance than changes in how the US banking industry is regulated. From a practical investing/speculating standpoint it therefore makes more sense to focus on the following chart than on the latest Dodd-Frank news.

The chart shows that after oscillating in the 7%-8% range for about 2 years, the year-over-year (YOY) rate of credit growth in the US banking industry has slowed markedly of late. As recently as late-October it was above 8%, but it’s now around 5.4%.


The steep decline in the rate of bank credit growth during 2013 didn’t have any dramatic economic consequences, but that’s only because the Fed was rapidly expanding credit via its QE program at the time. With the Fed no longer directly adding credit and money to the financial system, keeping the credit-fueled boom alive depends on the commercial banks. In particular, there’s little doubt that a further significant decline in the rate of commercial-bank credit growth would have a noticeable effect on the economy.

On a long-term basis the effect of a further decline in the pace of credit expansion would actually be positive, but on an intermediate-term basis it would be very negative because many activities and asset prices, most notably stock prices, are now supported by nothing other than the creation of credit and money out of ‘thin air’.

Rare Signal Says Stock Rally is the Real Deal

By Chris Ciovacco

Only Three Other Occurrences Since 2002

The True Strength Index (TSI) is a momentum oscillator based on a double smoothing of price changes. As shown in the monthly S&P 500 graph below, a positive momentum crossover (black moves above red) has only occurred four times since 2002. In the three previous cases, the S&P 500 rallied for a long period of time after the crossover; the average gain was 52%.

Indicators Speak To Probabilities

Since no indicator can predict an uncertain future, the bullish crossover that recently occurred helps us with the probability of goods things happening relative to the probability of bad things happening over the coming months and years. Signals on monthly charts tell us little about the next few hours, days, and weeks. From

As with MACD, a signal line can be applied to identify upturns and downturns…TSI is somewhat unique because it tracks the underlying price quite well. In other words, the oscillator can capture a sustained move in one direction or the other. The peaks and troughs in the oscillator often match the peaks and troughs in price.

Do Other Long-Term Indicators Align With TSI?

The True Strength Index tells us long-term momentum has improved in a bullish manner. This week’s video looks at other ways to monitor the strength of the current rally by comparing 2017 to major bullish and bearish turns since 1996.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.Video


Bullish Cross Came After Election

Markets move based on an almost infinite number of factors, including anticipated regulation and fiscal policy. The True Strength Index had a much more concerning look prior to the U.S. Election. In the figure below, monthly TSI for the S&P 500 as of October 31, 2016, is shown on the left. The same indicator is shown as of February 27, 2017, on the right.

President To Address Congress

Markets will be looking for new information on tariffs, taxes, regulation, and infrastructure when President Trump speaks to a joint session of Congress Tuesday. From NPR:

This week the White House has hinted at a different mood, using words such as “sunny” and evoking the memories of President Reagan’s often heart-tugging rhetoric in his speeches to Congress and the nation. We can expect to hear more about what’s going right in America.

Risk On/Risk Off Face-Off

By Doug Noland

Credit Bubble Bulletin: Risk On/Risk Off Face-Off

The DJIA rose 11 straight sessions (“longest streak since the Reagan administration”) to end the week at a record 20,822. The S&P500 gained 0.7% this week (up 5.7% y-t-d), its fifth consecutive weekly gain. The Morgan Stanley High Tech Index’s 0.5% rise increased y-t-d gains to 11.5%. Already this year the Nasdaq Composite has gained 8.6%. The Nasdaq100/NDX added 0.3% this week (up 9.9%). Bullish analysts continue to point to strong market momentum.

It’s an unusual backdrop where “Risk On” powers a U.S. equities markets melt-up, while safe haven assets trade as if “Risk Off” is lurking right around the corner. Ten-year Treasury yields declined 10 bps this week (to 2.31%) to the lowest level since November 29th. UK yields sank 14 bps (to 1.08%) to lows since October. Gold added $22 this week to $1,257, trading to the high since the election. Silver jumped 2.0% to $18.41, increasing y-t-d gains to 15%. The yen gained 0.6% this week, increasing y-t-d gains versus the dollar to 4.3% (and near a key technical level).

Elsewhere, it appears some favored trades are performing poorly – with popular longs lagging and popular shorts outperforming. The financials continue to lag, while the out-of-favor Utilities surged 4.1% this week. Defensive stocks outperformed this week, while “Trump reflation” wagers underperformed. Low beta outperformed high beta. The small caps underperformed again this week. Meanwhile, the Treasury bond bears are running for cover. All in all, it would appear Market Dynamics continue to frustrate many hedge fund strategies.

At this point, Europe remains at the epicenter of The “Risk On”/“Risk Off” Face-off. Major European equities indices reversed lower into this week’s close. After trading to the highest level since 2015, Germany’s DAX index dropped 1.6% during Thursday’s and Friday’s sessions. Italian equities fell 2.2% this week, and Spanish and French equities posted modest declines. The European Bank Stock Index (STOXX 600) dropped 3.2% this week, trading to the lowest level since early-December. Notably, Italian banks sank 5.8% this week, boosting y-t-d losses to 10.4%.

Through the eyes of the global bond market, something just doesn’t look right. And while this week’s Treasury and gilt yield declines were curious developments, the real action continues to unfold in Europe. German bund yields declined a notable 12 bps this week to 0.18%, the low since December 29th. Even more intriguing, German two-year sovereign yields sank 14 bps this week to a record low negative 0.96%.

Continue reading Risk On/Risk Off Face-Off

Crude Oil Foretold the Trump Rally 10 Years Ago

By Tom McClellan

Crude oil leading indication for DJIA
February 24, 2017

President Trump is being given credit for the post-election rally, based on analysts’ understandings of investors’ assumptions about what potential policy changes might mean.  And someday, I am pretty sure Mr. Trump is going to be blamed for a stock market selloff he similarly had nothing to do with.  Such is the nature of the media.

The uptrend still underway was foretold by crude oil prices 10 years ago, as this week’s chart illustrates.  This leading indication is one of the most fun insights I have uncovered in 22 years of newsletter writing.  I like to get the answers ahead of time, and often those answers are imperfect.  But it is still a compelling insight about the stock market.

I first noticed this when looking at a long-term chart of crude oil prices, using data compiled by the Foundation for the Study of Cycles.  I noticed that the chart pattern looked familiar, and it resembled that of the stock market.  Putting them together on one chart revealed that my observation was correct, but that the movements of crude oil prices seemed to be leading those of the DJIA.  A bit of tinkering showed that a 10-year leading indication made for the best fit.

That insight deserves a moment of contemplation.  The chart reveals that crude oil prices seem to know 10 years in advance what the DJIA is going to do.  The correlation is not perfect, but it is darned good.  How could the crude oil market know in advance what the stock market is going to do?

That is a fascinating but irrelevant question.  At some point, where there is enough data, one can let go of the “why” and start accepting the “is”.  The leading indication from crude oil prices has only been “working” for the entire history of both the DJIA and crude oil prices.  It has not worked perfectly, but it has still worked.  For most rational people, 120+ years of data should be seen as enough to validate an hypothesis, although I recognize that for others, this is not enough.  Perhaps they need 125+ years.

Here is a chart showing the same relationship, zoomed in on the last few decades:

Crude oil leading indication for DJIA

It lets us see more easily that the uptrend since the 2009 low is just the echo of a similar run-up in oil prices a decade earlier.  Oil peaked in June 2008, and so adding 10 years to that date gives us June 2018, plus or minus a few months.  When we get to the 10-year echo point of crude oil’s June 2008 top, the stock market should start to see a serious downturn.  I have no doubt that President Trump will earn the blame for that downturn, just as he has been getting the credit for the post-election rally.  Neither instance of credit/blame is deserved, but that does not stop the media from applying them.

The message from crude oil prices is that the stock market should continue to run upward into mid-2018, and then fall hard.  The risk in this hypothesis is that the 2008 commodity bubble collapse might be another exogenous event, like the 1990 Iraq War, or the 1979 Iranian revolution, and that the stock market will ignore this message.  If so, then the magnitude of such a stock market price response may be less than indicated.  But if oil’s 2008 top was a real market event, then we have some excitement ahead, just before the mid-term elections in November 2018.  The stock market should recover nicely from whatever excitement that might be, but that won’t stop the financial media and most investors from blaming President Trump for whatever happens.

Subscribe to Tom McClellan’s free weekly Chart In Focus email.

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Chart In Focus Archive

When it’s Time to Leave the Party

By Jared Dillian

My good friend Michael Martin, author of The Inner Voice of Trading, once told me his surefire recipe for staying out of trouble in college. He would leave a party the first time a beer bottle was thrown against the wall. He would be halfway down the street by the time the cops showed up, lights flashing.


Source: @modestproposal1


Source: @zerohedge

Throw down one more shot for good measure, seen from a Toronto subway:

That’s the Toronto Real Estate Wealth Expo, where you can get advice on how to get rich, rich, rich from Tony Robbins… and Pitbull.

Now, you’ve probably noticed that I am not one of these harebrained idiots trying to short the market on every uptick. I haven’t really been cheerleading it either. I simply acknowledge that the trend is higher.

Not that I have anything against CNBC. Or Jay Z. CNBC has been dumb and right before. And Jay Z could be a genius for all I know. But usually when musicians and celebrities start getting involved in markets, all hell breaks loose. Like the time when was named Chief Creative Officer of 3D Systems.

Continue reading When it’s Time to Leave the Party