Signs of the Times

"Growth in loans to households and companies in the 17-nation euro area slowed in March as a cooling economy curbed demand for credit."
"Euro-region unemployment rose to a 15-year high and manufacturing contracted for the ninth month."

~ Bloomberg, May 3

"Gloom Builds for Euro Zone, United States"
"Dampened Hopes for Gradual Recovery"

~ Reuters, May 4

It is surprising that "Gloom" is being reported so soon after "Boom" was front page stuff. Understandably, "Ooops" had its moment, but really Earth-shaking gloom has yet to occur.

Perspective

Of the sectors we follow, base metal miners (SPTMN) provided the best lead to the sell-off in the senior stock indexes. We were looking for a rolling top centered around February and the SPTMN set its high in late January and failed on the test in February. Often, mining stocks lead the high in base metal prices and this was the case as metals (GYX) set their high in February.

As noted at the time, the gold sector (GDX) also set a high in early February and this year's high for gold was at the end of the month. In retrospect, it was some five weeks ago that we concluded that the "opposite" action between golds and the big board was developing. This is important for the longer term.

However, the action is somewhat oversold and a pause or bounce in most sectors seems possible.

Commodities

Gasoline had a good run to a daily RSI of 90 at the end of February with the actual high at 3.43 at the end of March. This compares to the high of 3.42 in May, a year ago, and with 3.63 in 2008.

The plunge was to 2.91 on Monday, with an RSI at 29. That's a big swing from very over bought to rather oversold, and a brief rally seems possible. The chart follows.

Seasonals have been running some weeks ahead of "normal" and it is uncertain how long the "summer driving" rally will last.

Base metals declined as well, but without the extreme swing of gasoline prices. Prices could briefly bounce, within what seems to be a cyclical bear that started in April 2011.

Soybeans and soybean meal were the last runners in the rally and, as noted last week, had accomplished an Upside Exhaustion reading. The rally for 'beans started at 1094 in December and the high was 1512 last Thursday.

Agriculturals were delayed on the probable commodity rally from October to around February. Soybean complex did the best on the late rally, but these did not participate with the cyclical peak for most commodities set in 1Q2011. A test of the high is needed before the call can be made for another cyclical peak.

Sugar, corn, cotton and wheat have declined to 52-week lows.

The CRB reached 370 on last year's excitement, which compares to this year's at 326. The really heroic high of 474 was helped by the "Peak Oil" mania of 2008.

Currencies

The Canadian dollar set its really heroic high at 110 in late 2007 and plunged to 76.6 with the crash that ended in 2009. The high with last year's excitement about commodities was 106, which compares to 102 reached this year.

It could trade in a narrow range for a number of weeks.

Action in the DX continues constructive, but it will take some time to rise through overhead resistance at the 80 level. A pause in the advance would assist most financial markets, including nominal prices for gold and silver.

Credit Markets

Generally, US spread markets remain benign while Mother Nature's assault on castles in Spain is generating headlines - again. As the nearby chart shows, prices have declined in the past few days. Because of all of the engineered mark downs and other folderol, exact comparisons to the disaster of last August-September can't be made.

But we can consider that April's price improvement is the set up to the reversal in credit markets expected in May.

We have found that if there is a party in spread products in the first part of the year (Yes!) the seasonal change in May (???) can lead to a disaster later in the year (???).

The collapse of LTCM in August-September 1998 is the classic example of reversing spreads taking out a prestigious firm.

If history continues to guide, sovereign debt markets will drift into another calamity after mid-year. Our study on the subject was written about twenty years ago and we like to use it in a timely fashion. SOVEREIGN DEBT FOLLIES is attached. The sub title is "IT HAS TAUGHT US NOTHING".

Last week's view on the long bond was that the rally against setbacks in the stock market was appropriate, but that it was getting tired. And then the future added a couple of points. The price could decline a little as the orthodox investment world of stock and commodities firms somewhat.

Greek Bond Price

Link to May 11th 'Bob and Phil Show' on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2012/05/morgan-moves-markets