The following is part of Pivotal Events that was published for our subscribers March 29, 2012.
Signs Of The Times
Considering the degree of confidence in financial markets and the economy, there is potential for another "Oooops!". However, headlines continued bullish:
"Risk Rally Sparks 'Dash for Cash'."
~ Financial Times, March 23
"Institutions Buying Stocks"
~ Financial Post, March 27
"Gas Price to Rise Into July"
~ Chairman Bernanke, On ABC News, March 27
Last Year:
"Greek Crisis Is Over, Rest of Region Safe"
~ Bloomberg, March 10, 2011
A triumphant boast by European Commission President, Prodi.
"End of Greek Crisis Lifts Commodities"
~ Financial Post, March 30, 2011
"Hedge Funds Get Their Mojo Back: Huge Paydays"
~ Financial Post, April 3, 2011
Perspective
Stock markets continue to work on an important top. Momentum and sentiment readings reached levels only seen at significant highs. Usually somewhat before the final rally. Insider selling has also reached warning levels.
Of more immediate significance is that the long decline in the VIX reached the lowest since - well - last April.
The NASDAQ continues to soar, but the overall market is poised to reverse.
However, mining stocks (SPTMN) set their high in the third week of February. This week's drop seriously extends the downtrend. This sector is very cyclical and led the highs last April.
Credit Markets
As mentioned a couple of weeks ago, short and long-dated spreads stopped narrowing. This provided an alert to end of the good times.
Over the past two weeks, there has been some widening, but not enough to say the trend has reversed. The sub-prime mortgage bond rallied from 38 in October to 52 in February. It has been in a narrow range since and breaking below 50 will set the downtrend. The reversal to positive last October was one of the signals for recovering financial markets.
Another positive signal was provided by the gold/silver ratio becoming volatile and then turning down. At the end of February there was a big bar and the ratio has increased a little, which is a warning on a potential trend change in the financial markets.
Rising through 52 would signal that credit concerns are returning. Today the ratio is at 51.5 and rising from the low of 48.1 at the first of the month.
Our Gold/Commodities Index reached 499 with the troubles in September. The low was 419 in the middle of March and typically when this turns up financial markets turn down a couple of weeks later. This counts out to around now.
It also works going the other way when it turned down a couple of weeks before the panic ended in March 2009.
ETFs for junk and high yield are turning down following a rally. This has been a test of recent highs and with a modest price decline spreads have started to widen.
Over in municipal-bond-land, the action has been dramatic. The MUB set its high of 113.69 in mid-February and slumped to 107.25 a couple of weeks ago. The rebound made it to 109.70 yesterday, which represents serious resistance.
Many municipalities have been dominated by monopolistic unions that have become the latest version of "Robber Barons". Unfortunately, the only way the powers of such unions can be ended is though municipal bankruptcy, and it will happen. Taxpayers cannot afford their bounteous rip offs. Bondholders will take the big hit. Think of it as another Greek tragedy.
Currencies
Appropriately, the Dollar Index set its low at 72.70 in April 2011, which was with the speculative surge likely to complete in that March-April. The long-term low was 71.33 in 2008 when the CRB soared to 474.
Today's 79.3 makes that level seem a long time ago, and the action is still within a pattern that leads to a strong rally. Possibly into the low 90s.
This will not be the result of the Fed willingly abandoning its reckless ways. The post-bubble contraction is about to resume and this will forcefully deny the Fed's ability to depreciate the dollar. Eventually, a new wave of young economists will discover a "new" theory to support responsible central bank behaviour.
Commodities
The Fed has only one tool and that has been currency depreciation. With that anyone would expect that prices would describe a parabolic growth curve since the doors were opened in 1914. Instead, prices have become cyclically overbought and have sold off - many times. This has been decided by market forces beyond central bank control. What's more - while the Fed's behaviour has been constant - markets have decided what will be speculated in and what will not become speculative.
Until 1920 the action was mainly in tangible assets such as commodities. Following the horrendous crash of 1921 the Fed's policy was to ease to prevent commodities from weakening. Markets ran with the easy money and brewed up another classic bubble in financial assets that completed in September 1929.
Then, despite continuing ease by the Fed the markets went to hoarding cash, which is typical of the post-bubble condition.
The next huge inflation in commodities and consumer prices soared up to a climax in 1980. Prices and interest rates in the senior currency reached unprecedented levels. Being unsustainable, speculation collapsed and Chairman Volker had nothing (repeat nothing) to do with it.
As the turn in interest rates was being accomplished in 1981 our conclusion, which was based upon history not imagination, was "No matter how much the Fed prints, stocks will outperform commodities". Fund managers, academics and inflation bugs found this controversial.
Even today, interventionist economists still have a problem understanding the danger of inflation in financial assets. Mother Nature could soon provide another lesson.
This could be another example of the spreading inclination to hoard cash that has been one of the features of a post-bubble contraction.
History provides the conclusion that no matter how much the Fed tries to print, most asset prices will be flat to declining.
Crude Oil
We have been discussing the favourable season for crude oil that usually runs into May. The price has dropped below the recent sideways trend and is prompting a review.
Crude set its low of 76.25 as the general panic concluded at the end of September. The rally made it to the 110 level late in February. The RSI reached a lofty 79, which was somewhat higher than reached on the crude rally to April last year. That high was 114.83, which compares to the "Peak Oil" promotion to 147 in 2008.
There is considerable discussion and concerns about gasoline prices, which are still within a favourable seasonal move. England is almost hysterical about shortages with a threatened strike by lorry-drivers. The link below provides an interesting report on political turmoil.
Oil stocks (XOI) reached their high at 1351 in late February and have been in modest decline. However, the drop over the past few days is concerning. If the oil patch index breaks the 1250 level the downtrend would be extended, providing a negative outlook for crude.
Unlike base metal mining stocks, oil stocks don't often lead significant reversals in product prices.
Crude has also plunged this week. At the 102 level, breaking below this would set the downtrend.
Link to March 30 'Bob and Phil Show' on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2012/03/close-to-the-top
