Complacency is Vigorous

By: Bob Hoye | Fri, May 16, 2014
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The following is part of Pivotal Events that was published for our subscribers May 8, 2014.


Signs Of The Times

"Five Signs That Greece Is On The Road To Recovery"

One of them was the "incredible Greek 5-Year auction".

- Economy Watch, April 25

"The size of loans relative to property values has climbed to within five percentage points of the 2007 boom-era peak of 117.5 percent."

- Bloomberg, April 30,

About UK property speculation

"Overheating? London Sets Record With $237 million Apartment Sale" "The wall of money chasing a finite amount of property has sent luxury London prices soaring 80 percent since 2009."

- Reuters, May 2

"The disappearance of a Macau junket [something to do with gambling] figure believed to owe up to $1.3 billion is roiling the world's largest casino-market."

- Wall Street Journal, May 2

Stock Markets

It is getting excruciating out there.

SPX and DJIA are only a little off their highs of a month ago. Complacency remains vigorous.

NDX and former (very) high-flyers topped out in early March. That was shortly after the extreme readings on sentiment and momentum. The importance is that this sector provided outstanding leadership on the way up.

We noted that these readings were only recorded at cyclical peaks for the general stock market. The cycle for business activity and (as we used to say) stock certificates has run for some five years and both are becoming very mature.

In the wild world of inflationary binges in financial assets, otherwise known as a bubble, the business cycle peaks with the stock market. This was the case in 1873, 1929 and 2007.

In "normal" cycles the stock market usually leads the business cycle by around 12 months.

The current expansion began in June 2009, only a few months after the stock market concluded its panic in March of that fateful year.

Our view has been that economic numbers would be positive until the stock action peaks and then both will turn down together.

It worked for us in 2007.

The leading senior index is the NDX and the initial decline was from 3738 to 3414 in the middle of April. The rebound made it to 3612 last week. Taking out the 3425 level would confirm the downtrend. Considering the technical readings of a cyclical peak were recorded, a cyclical bear seems probable.

A "safe" call would be "inevitable", leaving out when it would start.

But there is the seasonal influence in the US election cycle whereby this year would have a high around now and a low in late September.

This seems probable and it would require the SPX and DJIA to get in line.

The key on the NDX was taking out the 50-Day ma, which is at 1860 for the SPX. It's now at 1875.

The important financial indexes BKX (banks) and XBD (broker-dealers) have been trading with the NDX. Set the highs in March and took out the 50-Day moving average in April.

At 68 the BKX is just above the 200-Day at 67. Much the same holds for the XBD.

Actually, the two financial indexes are closer to taking out support than the NDX is.

Small Caps (RUT) ran from 342 in 2009 to 1212 in early March. In three steps it had declined to take out its 200-Day at 1115. It could take a week or so to to get well below the line.

This is the important index that is leading on the way down. Taking out the February low of 1083 would set its bear.


The "Rotation" out of December's gloom in commodities has worked out.

From the low of 272 in November and December, the CRB reached the 310 to 312 level in March-April. That was with enough momentum to suggest taking some money off the table.

Within this, base metals (GYX) rallied from 330 in December to 362 in January. Action since has been desultory due to problems with Chinese "investors". Perhaps the bear that started in early 2011 is still haunting the market.

On the longer-term, the chart is showing what could be a "saucer" bottom that could take some time to resolve.

In the meantime, some commodity bugs have been expecting "inflation" to drive commodities to their "rightful" price. Unfortunately, the public chose to "inflate" financial assets. And when this "inflation" breaks it will take most commodities down with it.

Thanks to the remarkable rally in coffee, agriculturals enjoyed an outstanding rally. The GKX slumped to 341 in January and rallied to 425 at the first of the month. This drove the Weekly RSI to 76, which is the highest since the cyclical peak in 2011. As noted the swing from "oversold" to "overbought" has been impressive.

A significant correction seems possible. The drought in the western States could continue.

Crude oil ran from 91 to 105 against our target of 105.

Two weeks ago we noted the surge and that it was the second time to reach that level.

The decline was to 97.74 last week and the rebound made it to 101 yesterday.

This has likely used up the positive season, making this week's rally a test of the high.

A significant correction seems possible.

Overall, most commodities are vulnerable to credit concerns and a firming dollar.

Precious Metals

It is time to review precious metals as an instrument at the short end of the yield curve.

Cash, money and specie are some of the names.

It is not the time to use silver as an instrument to "get even" with destructive Fed policies of chronic depreciation. The latest wave of depreciation went into financial markets and not into precious metals. When it comes out it will take silver with it.

This is not based upon our imagination, but upon how gold and silver have behaved through previous financial contractions.

The basic is that credit spreads widen and signal the end of the boom and the start of the contraction. As noted above, spreads have been widening since early in the year. With this, the gold/silver ratio has increased from 60 to to 67.5 today. Rising above 66 would set the uptrend and that would signal that credit problems are developing.

Credit spreads have taken out support as the gold/silver ratio broke to new highs.

On the "Rotation" in November we thought that the rally in commodities would help the initial rally in precious metals. It did and in March the action became overbought and we advised taking money off the table.

The next phase would be later in the year when gold and gold shares would outperform most investments.

In precarious credit markets, conservative funds will flow to the most liquid items - knamely gold and US treasury bills.

Gold could move up on a steady dollar, but would decline when the dollar jumps.

"[The] 1901 [Bull market] was ...speculative demonstration based ... on the assumption that we were living in a new era; that the old rules and principles and precedent of finance were obsolete; that things could safely be done today which had been dangerous or impossible in the past. The illusion seized on the public mind in 1901 quite as firmly as it did in 1929. It differed only in the fact that there were no college professors in 1901 who preached the popular illusion as their new political economy."

- Alexander Dana Noyes (1930)

Spanish Ten-Year Note

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Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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