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Shanghai Needs Another Upside Exhaustion Reading

The following is part of Pivotal Events that was published for our subscribers June 4, 2015.


Signs of The Times

"California Dreaming: Record $500 Million Tag on L.A. Home"

- Reported by Bloomberg on May 25th - it is a spec house under construction by a contractor!

"It's Ugly in the Midwest"

"Chicago PMI Plunged By 4.2% in May"

- Business Insider, May 29.

The numbers were interesting. It was 53.3 in April and the consensus for May was 53, which compares to the actual at 46.2.

They did not get the direction right.

"US Deal-making Hit an All Time Monthly Record In May"

- Financial Times, June 1.

The report included that the number at 2436, compared to 2266 in May 2007 and 2136 in January 2000.

Also some $100 billion of corporate bond issues have been placed each month, for the past 4 months.

"The Big Three Automakers All Beat Sales Estimates for May"

- Bloomberg, June 2.

With this, the average purchase price continued to increase. And the average new loan in May was out to 67.9 months - a new record.

Bernanke is blogging and Monday's posts included:

"Monetary policy, if properly managed, promotes greater economic stability and prosperity for the economy as a whole, by mitigating the effects of recessions on the labor market and keeping inflation low and stable."

"Arguably, the Fed's actions have not led to increases in stock prices, but instead have returned them to trend."


Bernanke's blog indicates that he really still believes the textbook stuff.

Interventionist economics started with certain premises and with logic set out to prevent the financial setbacks that many thought caused recessions. The pitch included that government could make contra-cyclical fiscal moves that would be stimulative during slow period and booms would be constrained by slowing government activity.


Since the invention of government, bureaucratic ambition has always been to project influence and expand expenditures. That such an implacable force could time the economy was a very naïve concept and, thankfully, is little discussed these days.

Over-discussed these days are the abilities of the Federal Reserve System to time, yes, the market. What's more, fund managers around the world fully expect the next change in the administered rate will be perfectly timed. It doesn't matter whether it is up or down, it will be brilliant.

But the endless discussion of when and how much over the last few quarters has been futile. Relentless financial engineering has been part of this remarkable world of serial bubbles. And the record of rate changes by the senior central bank in and around bubbles is instructive. Particularly when compared to changes in market rates of interest.

The main point is that short-dated market rates of interest decline during a contraction. The notion that the Fed will lower rates to keep a boom going seems based upon intuition. Definitely not on financial history.

So what happens now when short rates are at zero?

Anyone's guess, but we are staying with the history that it is the change in the curve and credit spreads that signals the contraction. This seems close, but not without irony.

The street used to stay long because the Fed would make the perfectly-timed cut in administered rates. But T-bill rates plunge in a bust anyway.

Now the reason to remain long is that the central bankers will continue to drive long rates down. This one is now hors de combat.

When will this impressive turn in interest rates be noticed by the stock market?

Stock Markets

Our big theme has been that the senior US stock indexes would rally out to "around May" and this is where we are. This view includes that both stocks and the economy will roll over, virtually, together. Since earlier in the year "Macro" numbers have seriously declined, which could be cyclical. And as we have been noting, the stock rally has been seasonal. The seasonal window within which big rallies can complete will soon close.

There has been six classic stock bubbles and the record is worth reviewing.

The South Sea Bubble completed in June 1720. The examples of 1772, 1825,1873 and 1929 all peaked in London and Europe in May. The new pattern was set with the 1873 and 1929 examples when the action in New York peaked in September. The 2007 example peaked in October. The Tech bubble of 2000, in not including strong commodities and real estate, was not a classic bubble. It peaked in March.

Each of these recorded forced liquidation in the fall.

How is this to be applied to now?

The speculative surge in Hong Kong and China has been outstanding. Shanghai and the ChiNext (like Nasdaq) continue to soar. The May 25th ChartWorks updated the SSEC. The key is that the action is similar to the blow-off in 2007. Strong rallies that register Upside Exhaustions, a pause and another zoom - until the concluding one.

Essentially, there were three sets of Exhaustions to the ultimate peak on October 16, 2007.

This rush to blow-off has had two rallies strong enough to register Upside Exhaustions. Will it take one, or two more to complete the overall move?

Nomenclature is important. Will the next one be the penultimate, or the ultimate rally? Seriously, this is sensational stuff and one of the biggest players Hanergy plunged 50% in less than a New York day. Outlying stock exchanges are in full zoom at the most positive season of the year. Cracks are appearing and it is worth reminding ourselves that when lesser exchanges fail it eventually visits senior exchanges.

In the meantime the S&P is working on some "heads-up" patterns. One related to the VIX and the other to junk bonds. The charts follow.

Technically, the NYSE has been deteriorating. The Advance/Decline line for the S&P 500 has been a big positive until it made its last high in late February. The decline since has been an alert.

The overall line is NYAD and it set its high on April 20th and with a couple of swings was close to failing yesterday. Today it has taken out the low of early May. Also an alert.

On the "venerable" Dow Theory, the pattern would become a warning when the DJIA slipped below the 50-Day ma. We have called this Step One and it has happened today.

Warnings all over the place!

Credit Markets

In a three-letter word, Wow!

At a press conference yesterday, Draghi advised "We should get used to periods of higher volatility". We noticed no such comment when the Bund yield was plunging to 0.059%. That was set on April 17th and with a couple of corrections it has soared to 0.954%. When the reversal started in April it reminded of 1992 when big traders took on the Bank of England's defense of the pound - and won - big time.

Mother Nature always defeats arbitrary policies.

We had expected that the reversal in US Treasuries would be followed by the same reversal in Eurobonds. Our focus was two-fold. One was that the call would work and the other was that central bankers had become fanatical in pursuit of absurd policy and deserved massive failure. This seems well underway.

The full instruction in establishment folly has yet to be completed.

Credit spreads had been expected to narrow into "around May". The worst was 213 bps in January and the best was reached at 177 bps on May 19. The reversal to widening was accomplished by breaking above 179 bps on Friday.

That was at 183 bps and above 186 bps would extend the trend. Given the degree of financial speculation it should be followed by a severe dislocation. Hitting the "wides" reached with the panic that ended in January seems highly likely. Considering that, one way or another, that central bankers are massively long the trade liquidation will be interesting.

It is convenient to use the TLT to monitor the long bond.

Our January 20th "Ending Action" study expected a significant high to be followed by a long bear market. The high was 137 at the end of January and by stages it slumped to 118 two weeks ago. This took out both the 50-Day and 200-Day moving averages. The swing from overbought to oversold was impressive and the bounce made it to the 200-Day at 123. It has declined to 117.19 and is not oversold.

It is close to breaking down, but before that melancholy prospect there could be one more run with the flight to "quality" trade.

The Municipal market is interesting.

MUB set its high at 111 at the end of January and declined to 108 two weeks ago. This took out both the 50-Day and 200-Day. The rebound to 108.68 failed at the 200-Day. At 107.91 it is at a new low for the move and it looks like a long way down.

Particularly when looking at the fundamentals. Many Democrat-run cities and counties could default. Detroit, the example, is now being followed by Chicago with Burlington recently falling into the trap.

There never has been any fiscal discipline and union workers have been granted impossible pensions. Like the Post Office, municipalities mainly exist to benefit its employees and administrative staff. Providing services to the rate-payers is just the sales pitch.


Some international players could be selling the big NYSE stocks and taking the money home. After becoming oversold, the DX jumped from 93 to 98 and has been drifting down. It could not hold above the 50-Day and now could find support at 93.

Financial forces seem to be setting up for some serious concerns in the credit markets. This could end the remarkable flood of new bond issues and the play could swing over to servicing debt. The majority of the debt is due and payable in US dollars into New York.

The dollar could churn around for some weeks, but the chart pattern is within a major bull market.

The Canadian enjoyed a good run from very oversold to overbought. The quote jumped from 78 to 83.9 as most commodities did the "rotation". Essentially the action is tied to commodities and the trend will be down.

That will be the case until the markets and the public instruct the Bank of Canada that there is no such thing as a national economy. So there is no point in trying to "manage" it. The next step would be to understand that there is no advantage to have the Canadian unit trade at less than the US. A currency board should be established with the instruction to keep it a par.

Precious Metals

The main thing in this sector is that silver is declining relative to gold, which is a sign of problems in the financial markets.

The gold/silver ratio has been volatile which has been an alert to change. It set its recent low at 69 in March and again in May. This was against speculation in stocks and bonds.

Last week we noted that if the ratio rose above 73 it would set a rising trend. It is there today, which is above both the 50 and 200-Day moving averages. The trend is up and it is a warning on the failure of speculation in orthodox investments. Also noted last week was that getting above 77 would be a warning on serious dislocations in the credit markets.

This is not an environment that will be friendly to any equity sectors, including precious metals. There can times when the golds can move opposite to the big board but this is not likely over the next couple of months.

Our November special study was looking for a bottom and advised buying some stocks on weakness. We did not get fully invested. On the second rally of the year GDXJ stalled at the 50-Day ma and we advised taking some money off the table. The same advice was offered on the rally into the middle of May.

So effectively we are not long gold or silver stocks.

We would own some gold as insurance against any old thing. But positioning gold or silver with hopes of making money is just a currency trade.

Silver's low was 15.04 set in November and the best level was 18.50 set in late January. This was right at the declining 200-Day ma. The May pop took silver up to 17.78, which was above that moving average. At 16.48 today it is below both the 50-Day and 200-Day moving averages and is not looking good. Breaking below the 15.25 level would tarnish the lustrous metal.

Actually it would be a serious failure and this is possible.

US Auto and Light Truck Sales Historical Chart | Macro Trends

US Auto and Light Truck Sales Historical Chart | Macro Trends

  • Car sales have recorded big cyclical swings.
  • More recently they peaked with stock speculation in April 2000.
  • The key reversal in spreads occurred in February 2000.
  • Note the break down when the credit spreads and the yield curve reversed in June 2007.
  • Car sales peaked in April 1929.

ChiNext ETF

ChiNext ETF

  • The ETF started the year at 1.44.
  • The low on the April correction was 2.37.
  • The current post is 3.57.
  • The index is equivalent to the NASDAQ.
  • The speculative zoom is becoming outstanding. As with previous examples the big setback and failed test will define the end.

NASDAQ into 2000 top

NASDAQ into 2000 top

Nikkei into 1989 top

Nikkei into 1989 top


GDP 1930-2015

  • The collapse of velocity in 1930 was the public's choice to hoard cash. It was very distressful to policymakers.
  • It prompted Keynes to invent a "new" theory of forced inflation.
  • Forced inflation has been "on" ever since.
  • This one is GDP/Monetary Base, with data back to 1929.
  • The big change was made in 1980, close to the all-time high in commodities.
  • For those who still think that Volker personally ended CPI inflation, he is to blame for collapsing velocity.
  • For those interested in real financial history, this measure of velocity is plunging at the greatest rate since 1930.
  • Velocity increased with the 1932 to 1937 bull market
  • This has not been the case with the bull market that began in 2009. Will the recent collapse prompt a new policymaking theory?

Stock Market and Volatility

S&P500 and VIX Daily Chart

  • This model is close to providing a signal.
  • This is a "heads-up".

Stock Market and Junk

HYG and SPX Charts

  • Action in the junk and high-yield is showing negative diversion.
  • A "heads-up".


Link to June 5, 2015 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2015/06/european-bonds-go-for-scarey-ride/


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