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May 10, 2009

When the Rose Tinted Glasses Fall Off...
by Clive Maund

Originally published May 10th, 2009.

We are going to start this article with a premise, which is that the bond market and the dollar are much more important to the powers that be in the US than the stockmarket. Two months ago the stockmarket was plumbing new lows and the end of the world was nigh. Now, instead, you walk down Wall St and everything is smelling of roses. Unfortunately, however, there is a massive storm threatening to break that will necessitate the immediate sacrifice of the stockmarket, and especially those mugs who have been taken in by the recovery hype being doled out by the media and have been buying the market in the recent past.

The storm that is threatening to break is the combined collapse of the bond market and the dollar, which are joined at the hip. Late in April the bond market crashed important support and it dropped significantly again late last week. The dollar finally succumbed this past Friday, crashing important support. They both look set to plunge together - a scenario that will require immediate and drastic action to avert. What is the best way to rescue them? - why, to create another vicious cycle of deleveraging of course. The idea is to get the rabbits to flee out of commodities and the stockmarket and into the perceived safety of the Treasury market, just like last year, which will require them to buy dollars with which to buy Treasuries. Elite and well connected traders, who have the advantage of knowing which levers are going to be pulled and when, have made massive profits from the stockmarket ramp of recent weeks, and it is reasonable to assume that they have been reversing position in the recent past, so that they can make another killing shortly when everything goes in the other direction. How will the powers that be pull the rug from under the stockmarket? - by means of an avalanche of short selling and you had better believe that they have plenty of ammo to do it, and as we will shortly see, after the big runup of recent weeks, they have the force of gravity on their side. Once they have run the market into the ditch again they will cover their shorts and reverse position yet again, under cover of doomsday headlines in the press.

Actually, the elites may not have to work too hard to create another downblast of deleveraging, or even do any work at all. For the deleveraging, which will have its origins in the unwinding of the derivatives mountain, is quite likely to take on a life of its own, possibly becoming unstoppable. On clivemaund.com we have hypothesised that the only way that the global financial crisis can be brought under control and the vulnerable green shoots of recovery nurtured into renewed growth will be if the enormous derivatives mountain is either effectively quarantined and partitioned off or they are completely written off, but it is not known how practical this is. Unless this is successfully achieved, the green shoots are going to have a large workman's boot planted on top of them as a massive second wave of deleveraging overwhelms most everything.

Since our prediction of an imminent downdraft in the stockmarket is predicated on the precarious technical condition of both the dollar and the Treasury market, we will start by looking at charts for the dollar and the 30-year Treasury Bond.

On the 1-year chart for the dollar we can see that after dropping steadily for several weeks it suddenly plunged on Friday, crashing the support of its March low and 200-day moving average in the process. Unless something is done soon, its first downside target will be the December low in the 78 area, which it could reach quickly. Note, however, that it is already quite deeply oversold on its Full Stochastic shown at the bottom of the chart, so if they can unleash another wave of deleveraging, the dollar may reverse to the upside soon.

Although the dollar only broke down on Friday, Treasuries broke down getting on for 2 weeks ago, as we can see on the 1-year chart for the 30-year Treasury Bond, when it crashed the support at its February - March lows and its 200-day moving average. Again, if nothing drastic is done, it is on its way to the June and October lows of last year as a first stop. Like the dollar, Treasuries are oversold on their Stochastics, so another wave of deleveraging would be just the job to engineer a reversal to the upside.

Turning now to the broad stockmarket we can see that it is almost at the perfect point to have the plug pulled on it. On the 1-year chart for the S&P500 index we can see that it is within 20 points of important resistance at its January highs and its falling 200-day moving average. Looks like it could be another "sell in May and go away" vintage year. Works out perfectly for Wall St types too - they can offload their stock onto retail customers, then put their feet on the desk for a month before going on vacation. Note the RSI and Full Stochastic indicators close to critically overbought levels further indicating that the chances of imminent reversal are high. Collapsing the stockmarket soon might also be considered to be a worthy cause, as it will serve to prop up the dollar and the Treasury market.

The oil sector rose strongly on Friday and is looking decidedly toppy. On the 1-year chart for the OIX oil index we can see that after a strong rally from mid-April, it has already run into its falling 200-day moving average and is close to resistance at the January highs, and close to being critically overbought on its RSI and Full Stochastic indicators. Oil stocks can be expected to get taken down with the broad market.

What about the Precious Metals sector? Well, if you recall, it got savaged during last year's deleveraging, and there is no reason to suppose it won't suffer the same fate if we see another round of heavy deleveraging, especially as it is still laboring beneath a massive supply overhang evident on longer-term charts, which is the reason why it has only managed modest gains so far this year. On the 1-year chart for the HUI index we can see that with it approaching the upper channel return line and getting substantially overbought as shown by its RSI and Full Stochastic indicators, it is generally a good time to make a graceful exit, especially from the large index driven stocks.

Clive Maund,
CliveMaund.com

The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

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