The following is part of Pivotal Events that was published for our subscribers April 3, 2014.
Signs Of The Times
"Runs on rural Chinese banks as rules ease"
"Regulators more tolerant of defaults"
- Financial Post, March 26
"In one corner of the U.S. equity market, investor enthusiasm is exceeding the frenzy of the Internet Bubble. Small-cap shares [Russell 2000] have rallied for seven straight quarters, the longest stretch ever."
- Bloomberg, March 24
"Too much volatility for emerging-market currencies - and not enough in the developed world - is stinging traders - wiping out profits in the carry trade."
- Bloomberg, March 25
"Investors just can't get enough of exchange-traded funds that buy junk-rated bonds."
- Bloomberg, March 27
"Is Michael Milken the buyer of $100-million Westside estate?"
- Los Angeles Times, March 31
It is worth looking at the pictures.
Like civilizations, bull markets are born stoic and die epicurean.
The above line on bull markets is a modification of an observation by the historian Will Durant, who had many acerbic quips. And as anybody knows there is a great need for acerbic these days.
Janet Yellen has no special abilities to determine the level of interest rates. But a couple of weeks ago she mused about increasing rates some six months from now.
Markets had a one-day hit.
Then on Monday she mused about keeping the booze flowing. Being assured of continued official recklessness, risk again has become fashionable. There is an Italian proverb about what happens to the flock when the shepherd goes mad?
OK, we have had a target of S&P 1885, "or thereabouts".
Last week's view was that it could go further, but as it did the action would become more precarious.
Equity markets are now entering the "sweet spot" on the calendar year; more specifically with the US Mid-term Election Cycle. This calls for a tradable high in April and an equally tradable low in late September.
This is based upon the DJIA from 1888 to 2010, and is a refinement on the old "Sell in May" routine.
Of course, the distinction is that at this time of year "silly season" events are possible.
And these are only possible because of "animated spirits". Such spirits have reached levels only seen at cyclical peaks and were not a factor in the last two springs.
Very good "May" trades were evident in 2010 and 2011, well before the advent of today's one-way-market.
The big leader on the way up has been the NDX and the zoom has generated the highest Monthly RSI since the mania that completed in March 2000. On the next bull market, the low was 1019 in March 2009 and the high was 3738 in early March. The first hit was to 3543 last week and the bounce made it to 3676 at yesterday's open. It up-ticked to 3676 at today's opening and slipped to 3637 at the close.
Taking out the 50-Day ma at 3620 would be interesting and taking out the last low at 3543 would turn the action down.
Within this Biotechs (IBB) have been fabulous. The high was 275 set in late February and the initial low was 229 last week and the rebound made it to 245 yesterday. Today's close was 234.
There is support at the last low at 229 and taking this out would be a major breakdown.
And as we have been mentioning, hot action in credit spreads at this time of year has a tendency to reverse.
Crude oil can rally into May, but it will need to stay above the 50-Day ma.
Agriculturals (GKX) enjoyed and outstanding rally, reaching a Weekly RSI of 72, which we took as enough to end the move.
ETF's we have been using are JO and DBA.
Coffee (JO) did the huge blow-off to 42. The initial decline was to 33 and the bounce was to 36 last week. Taking out 33 resumes the downtrend and it is not oversold.
DBA soared from 24 in January to 30 two weeks ago. The Weekly RSI reached 82. This matched the big drought rally of 2012.
The initial break was to 27.82 and the rebound was to 28.58. Now at 27.80 any slip would resume the decline. There is support at the 50-Day ma, which is around 27.
In November this was very depressed and we thought it had the best chance for a rally.
Commodity bulls who know the Fed is evil, but think inflation only occurs in commodities, climbed aboard. As if it was the second coming.
On the CRB, sentiment became the most bullish in two years, and the COT numbers became the most bullish - ever. That was after the very low numbers set last summer.
The overall rally became fully expressed and is correcting.
Our view is that history is in another post-bubble contraction which will be a chronic depressant to most commodity prices. The bubble in lower-grade bonds and bull market in stocks has been the "inflation" in response to Fed excess. Actually it's more the other way around. Speculation in financial assets has assisted the Fed's recklessness.
When the bond bubble collapses will the baton of "inflation" be picked up by commodities and other tangible assets?
In the meantime, copper's long bear market is getting interesting.
The latest washout to 2.88 was associated with unwinding of unusual Chinese "investments". We should look beyond this.
Copper's cyclical high was set at 4.65 in early 2011. This was in conjunction with our Momentum Peak Forecaster, which does not register all that often. But when it does a big speculation is close to ending. In that example it was in base and precious metals. In 2006 it was the housing boom.
This model does not have a built in signal for a major bottom, so we use other tools.
With the recovery in commodities copper increased from the low of 3.14 in November to 3.45 in late December. Then it weakened until it plunged in March from 3.20 to 2.88 in the middle of March.
As noted, this drove the Weekly RSI down to only 29. A rebound became possible and the price has recovered to 3.05. If it gets through this then 3.25 is possible.
With this, base metals (GYX) have recovered from the three-year low of 322 to 336.
How far can it go?
Back to where it failed at 340 seems possible, but not much more.
Financial history is close to the end of the first business expansion in a post-bubble deflation.
Link to April 4, 2014 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2014/04/beware-nasdaq-loses-steam