The following is part of Pivotal Events that was published for our subscribers January 8, 2014.
Signs Of The Times
"Global bond sales from emerging markets have defied all odds to hit a record high in 2013."
- Financial Times, January 2
"Emerging-market stocks fell to a four-month low."
- Bloomberg, January 3
Looks like a big rotation from stocks to reaching for yield.
"The total debt of local governments in China has soared to nearly $3 trillion on the country's addiction to credit-fueled growth."
- The New York Times, December 30
"Faced with a mountain of maturing loans this year, China has given local governments the go-ahead to issue bonds as a way of rolling1 over their debt - to avoid default."
- Financial Times, January 2
"Another Ice Age?"
"Scientists have found indications of global cooling. There has been a noticeable expansion of the so-called circumpolar vortex."
- Time, June 24, 1974
"But not only does the cold spell not disprove climate change, it may well be that global warming could be making the occasional bout of extreme cold weather even more likely. Right now much of the U.S. is in the grip of a 'polar vortex'."
- Time, January 6, 2014
In the 1980s disaster some wag observed that "a rolling loan gathers no loss".
In 1974, Time could relate global cooling to, well, global cooling delivered to a neighborhood near you via the polar vortex. In the mid-1970s, Ibn Browning noted that lengthy cooling trends were accompanied by deeper loops in the jet stream. In 2014, Time explains that this cold spell and polar vortex is due to global warming.
In the 1600s, tortured logic and writing was needed to promote the theory that the solar system revolved around the Earth. And now with Global Warming it is still the feature of promoting government science.
During the summer months, US weather stations recorded 2899 record lows and 667 record highs.
"Excessively high temperatures are already harming public health."
- President Obama, November 1
A chart of US November to January Temperatures follows (Editor's Note: see towards end of article for chart).
Our theme has been that the "Springboard Buy" of October 9th suggested the worst of a potentially bad month was in.
Sentiment and momentum readings similar to those at cyclical peaks have been accomplished. The next step was to determine when the speculative thrust would likely complete.
Typical seasonal highs can occur with the US Thanksgiving and at the turn-of-the-year.
The S&P set a high of 1813 and a Weekly RSI of 74.3 on November 29th. The correction was to 1772 and the rebound has made it to 1849 on December 31st. The RSI reached 73.6 - a modest, but interesting negative divergence.
On the bigger picture, we have been noting that the duration of the bull markets out of the great crashes have been remarkably similar.
The rally out of the 1929 Crash ran for 249 weeks from 1932 to 1937. Investors Intelligence sentiment figures don't exist. The Weekly RSI reached 75.
The one from 2002 ran for 249 weeks and reached a Percent Bulls reading of 62.0. The Weekly RSI reached 70 in 2007.
This one (from 2009) has run for 252 weeks to January 3rd and has reached a Percent Bulls reading of 61.6. The Weekly RSI has reached 74.3.
Rather powerful mojo going on.
Within the market, we expected the base metal sector to bottom and rally. Perhaps as a rotation from high flyers to a depressed sector. This seems to be working out with MGA and NFLX rolling over. Base metals (GYX) rallied 10% from the low of 331 at the first of December to 335 last week. Mining stocks (SPTMN) rallied from 703 on December 10th to 792 last week.
The December 30th ChartWorks "Early Signs Of A Shift In Credit Markets" noted a negative divergence on the stock market - a technical alert.
More toward fundamentals, would be the action in the treasury yield curve. This served in 2007 when we noted that such a boom would run some 12 to 16 months against an inverted curve. Short rates increase faster than long rates. Early in 2007 we counted out that June would be the "Sixteenth Month" and the curve reversed in that fateful May.
This was followed in June with credit spreads reversing. At that point even the most massive stimulus was doomed.
Going into the blow-off of March 2000, we just used the record of rising long rates.
Typically the boom will run some 12 to 18 months against rising rates. Beginning in January 2000, we frequently noted that March was the "Eighteenth Month". It was, and it was the "killer".
On this credit cycle, long rates set their low in July 2011 and December is the "Eighteenth Month".
Retrospectively, this worked on the very important stock market high in January 1973.
Why was it so important - the worst bear since the 1930s followed. Charts are attached.
Any competent central banker should know this. Should know it well enough not to "fight the tape".
As the stock market rolls over so will lower-grade bonds which are in "never-never" land.
In November our theme was that most commodities could bottom and rally. This worked out with the CRB setting its low at 272 on November 19th. The rally made it to 284 a week ago. The 200-day moving average stopped the rally. That was at an RSI that has ended previous rallies.
Base metals (GYX) jumped from 331 at the first of December to 355 a week ago. That was at resistance and the index has declined with this week's slump marking a break down.
Agricultural prices (GKX) weakened through December and only managed a three-day rally to yesterday. It is down 3.4% from the intra-day high.
This is to new lows at 342 that extends the bear market that began as the drought-scare of 2012 peaked at 533. Perhaps elevated levels of CO2 are enhancing crop production around the world.
On the December rally, crude oil popped from 91.77 to 100.75. The slump to today's 91.8 is serious.
We had thought that the rebound in basic commodities would make it through January.
But one of the features of a post-bubble contraction has been chronically weak commodities and this we have.
This represents weak pricing power in most of industry and commerce.
This melancholy condition would be confirmed when the CRB takes out the November low of 272.
As part of the general party, the Dollar Index has been weak. The key high was 85 in July and the main decline was to 79 in October. The action since has been tests of support at the 80 level, with the last at the end of December.
The rise to today's 81.1 has had minor setbacks and is becoming an alert on the financial party.
The Canadian dollar became oversold at 93.39 in early December and bounced to 94.50.
Commodities have been falling all year, and this has driven the C$ down to 92.50, which really turns the chart down.
There is support at the 90 level and that was set a way back in 2008.
Our main theme has been that the precious metals sector would trade opposite to the universe of orthodox investments. Lately this has been fully committed to stocks and lower-grade bonds.
The "opposite" play became evident in September 2012 when Bernanke's decision to buy bonds was celebrated as a reason to buy gold and silver. This drove the RSI on the silver/gold ratio to 84, which we noted as a measure of "dangerous" speculation.
Orthodox favourites have soared to equally "dangerous" levels of speculation and as this fails it will set precious metals up as the "go to" sector.
The opportunity shows in the Monthly RSI, with that for the S&P at 77 and that for the HUI at 29.7. Both are at extremes.
While the sector is outstanding in prospect, the transition could be choppy.
US November To January Temperatures Are Seventh Coldest On Record (So Far)
10 Year Treasury Yield and S&P: 2014 1973
- The boom has run 18 months against rising long rates.
- The typical duration has been from 12 to 18 months.
- A number of booms ended at "Month Eighteen".
- The 1973 example is shown as it ended in January of that fateful year.
Link to January 10, 2014 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2014/01/stats-show-us-equity-market-drop-likely