Dancing Central Bankers

By: Bob Hoye | Fri, Sep 5, 2014
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The following is part of Pivotal Events that was published for our subscribers August 27, 2014.



Signs Of The Times

"We have more leverage and more derivatives risk than we've ever had."

- Financial Times, August 20

"New-home prices [in China] fell last month. In Wenzhoa, about 56% of the homes were abandoned due to falling values and most were high-end apartments."

- Bloomberg, August 20

"Eight-Year Loans Fuel Car Sales as Debt Warnings Ignored"

"On a 96-month loan it takes 80-plus months before you are back in the money."

- Financial Post [Toronto], August 21

"75% of American Adults are concerned about inflation."

- Rasmussen, August 24

"I kind of hope that N. America gets its ass kicked this hurricane season. It would motivate us on climate action @ Michael E Mann"

- Warmist Greg Blanchette to Eric Holtays, August 20


 

Stock Markets

Global warmers are not the only ones to resort to hope when dearly-held theories are seen not to be working. No matter the cost to society, they need some violent weather to advance their political persuasions. This will be in lieu of actual warming.

Over in policyland, in order to prove their theories they would dearly like a real increase in employment and wages. The following chart shows that the growth in wages is zilch when ZIRP was expected to prompt theory-proving growth.

Instead the Fed has inadvertently created a perpetual-motion machine for stocks and low grade bonds - again.

And as we have been noting, stock market enthusiasms have reached excesses only seen at cyclical peaks. Such peaks are, of course, a process.

Within which, the latest events have been the Springboard and Sequential Buys registered by the S&P in the first week of the month. The rebound is strong enough now to register the opposite condition. The Inverted Springboard has registered and the Sequential Sell pattern is developing.

Considering the five years of party and the season, risk is the greatest since this time in 2007 and in 2000. This is confirmed by the Monthly Upside Exhaustion reading set this week by the S&P. This is rare and reviewed in the chart on Page 10.

Needless to say, but until it's over it is difficult to determine if this is the Ultimate Rally, or the Penultimate Rally. Or maybe even the Post-Penultimate?

While we are watching for the Sequential Sell, we should look at Europe.

Peaking in June, the STOXX took out the key 50-Day and 200-Day moving averages.

The latter is about the same as the 30-Week exponential moving average. This provided support on the dips to the cyclical peaks in 2000 and in 2007. It supported all the dips since late 2012. As a game-changer, this was taken out in the third week of July as the index dropped from 3325 to 2977.

STOXX is enjoying a relief rally towards resistance at the 3150 level.

US business and economic reports have been expected to be positive so long as the NYSE was rising. The Advance/Decline line on the S&P continues to rise.

Very few of the dancers have their eyes on the exit and we will see what September brings. And as the poet Yeats asked "How can we know the dancer from the dance"? Especially when central bankers are the most enthusiastic on the floor.


Currencies

Last week's note on the dollar was that it was becoming overbought, but if the run continued it would become a warning on the financial bubble.

It has continued and at 82.5 setting new highs. The Weekly RSI has increased from 69 to. 69.5. This level has stopped rallies in 2012 and in 2013 to the 84 level.

Who really knows who has been buying the US dollar. Maybe some of it is due to buying US stocks and bonds. However, it is not yet the "deflation" bid for the DX and it is eligible for a correction.

The Canadian dollar soared to an overbought at 94.17 in early July. The drop to 91 in early August accomplished enough oversold to end the decline. The initial bounce made it to 92 and the 91 level is being tested now. There is quite a bit of support here and the C$ could recover to the 92 level and hold it for a while.


Credit Markets

From time to time, we have mentioned that the action in credit spreads seemed to be following the pattern described in 2000 and in 2007.

The following set of charts updates the pattern. Further widening spreads would be an alert to the end of the party. Noted on the charts is the key low in the spread and then the key "breakout" to significant widening.

The bond future has been on a good run. Our target on the last oversold was the 140 level. A couple of weeks ago we noted that the action was not yet overbought. It is now at 141.3 and a tradable decline seems likely.

The treasury yield curve is becoming interesting. The action in the 2's to 10's (UST2Y/TNX) has become the most overbought in over six years. That's on the Weekly reading and it could be marking the best on flattening. The last key reversal from flattening to steepening was accomplished in May-June 2007.


Precious Metals

Near Term:

The silver/gold ratio reached an RSI of 84 in early July and the selloff drove the RSI down to 27. This was enough of an oversold to prompt a rally in the sector. GDXJ has recovered from 40.24 on Monday to 41 today. Silver Wheaton (SLW) set its low at 24.37 on Monday and it closed up a little today. A rebound could run for a few weeks.

Longer Term:

Gold and silver will likely continue their role as a financial indicator. When the gold/silver ratio goes up it can anticipate a turn to financial troubles. The ratio has been volatile. Rising through 67 would be interesting and through 69 would set the uptrend, which could be associated with widening credit spreads.

Gold's real price, as represented by our Gold/Commodities Index, set what seems to be a cyclical low in June. Rising above 3.90 would be a key breakout. It is worth noting that the Index set a cyclical low in May 2007, leading the start of that contraction by a month or so.

This page stays with our theme that as this financial bubble fails the investment demand for gold will increase significantly. This will drive the real price up and this will improve operating margins - as occurred during previous post-bubble contractions.

The discovery of a financial storm this fall could depress precious metal equities, providing a cyclical buying opportunity.


Credit Spreads Are Reversing

Credit Spreads Are Reversing


Spread Reversal: Summer 2007

Spread Reversal: Summer 2007


Spread Reversal: Spring 2000

Spread Reversal: Spring 2000


ZIRP Has Accomplished Zilch

Weakest Post-War Wage Growth


Lumber Peak?

Lumber Peak?


Exhausted S&P

Exhausted S&P

 


Link to August 29 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2014/08/where-to-go-when-the-markets-bounce/

 


 

Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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