The following is part of Pivotal Events that was published for our subscribers July 8, 2015.
Signs of The Times
China's transition from exuberance to gloom has been rapid.
"At a stock trading hall for investors in Shanghai, the mood is glum. The zest for market speculation goes hand-in-hand with the socialist conviction that the government can and should protect them from risk."
- Financial Times, July 1.
"Regulators [believe] that margin debt in China's stock market remains managable."
- Reuters, June 30.
"China's financial industry joined the nation's securities regulator in moving to shore up the nation's $7.7 trillion stock market."
- Bloomberg, June 30.
"China Hunts 'Manipulators' as Stocks Tumble"
"A flurry of policy moves over the past week, including an interest rate cut and a relaxation of lending rules had failed to arrest the sell-off."
- Yahoo! News, July 3.
"Fund in China Fails To Stabilize Stock Markets"
- The New York Times, July 4.
The above list chronicles the sudden discovery of a highly speculative blow-off gone suddenly bad. Such headlines could have been recorded in New York in early October 1929 or in 1873. Instead it was recorded in China at the conclusion of a truly magnificent financial mania.
On the way up, the action generated many quotations about the wonders of run-a-way speculation that peaked on June 12th. In a couple of steps the SSEC has plunged more than 30 percent. An index of new issues has crashed.
Although quick, there seems enough pattern to conclude that China's great bubble has blown out. As with historically great bubbles outside of New York it climaxed in the May-June window.
In the completing frenzy of the Nikkei Bubble at the end of 1989, there were official attempts to talk the speculation down. After some weeks of serious decline, policymakers talked about easing margin requirements. China's current easing of "lending rules" could be as effective as those offered in Tokyo in early 1990.
The plunge is much faster and steeper than the initial break in 2007. Another case of the "margin calls going out with the confirmations". Using the pattern that got us this far, once the SSEC stabilizes it could churn around into August. This could lead to heavy liquidation in the fall.
Considering the Greek problem, it seems like another test of policymakers and their peculiar theories. At speculative extremes they never have had any control over credit spreads and the action since May has been a warning. Also at such extremes they have been many months behind the changes in market rates of interest.
Ironically, the chronic application of desperate measures created a bubble which consequent contraction will not be prevented by more of the same desperate measures. This test of policymakers will likely mark their theories and practices as a massive failure.
Even worse, the public will eventually understand the failure as well. More alert politicians will pillory interventionist central bankers upon a cross of gold.
There is a saying from the old and dreadful Vancouver Stock Exchange. "So long as the stock is going up, the public will believe the most preposterous story." Once the promotion breaks, the belief is gone.
This also applies to modern central banking. So long as financial markets are rising the public, and particularly Wall Street, will believe in the preposterous story that a committee can manage the economy.
Overly inflated bond markets are deflating and overly inflated equity markets are coming under pressure.
Belief in the supernatural abilities of policymakers will likely be under serious review later in the year.
In the meantime, the venerable Dow Theory seems to have worked, once again. In February, Ross reviewed the theory and noted that the longer the non-confirmation ran, the more serious the sell-off. TRAN set its last high at the end of the year. DJI set its high in May and the non-confirmation high was set on June 22nd.
Commodities (DBC) set their bear market low at 16.71 earlier in the year.The "rotation" made it to 18.68 in May and it is now at 16.72. Under-inflated commodity prices are again deflating.
How much longer can overly-inflated equities remain inflated?
We will stay with the pattern that got us this far. Speculative peaks in May-June (✓). Speculative hit (✓). Churning around in the summer (??). And seasonal lows in October- November (??).
Motivated by ambition to save the world, policymakers will be "pulling out all of the stops". Of course, the metaphor is playing a huge organ at full volume. The irony is that they have been playing at full volume since trouble was discovered at Bear Stearns in early June 2007.
One full business and one full credit cycle ago.
Perhaps many are beginning to realize that policy ambition is now down to just trying to prove that arbitrary intrusion really works.
In the meantime, some timing patterns should be reviewed.
Last week we suggested that NYSE margin debt had spiked on the April number. This week's turmoil adds to the conclusion and the senior stock indexes usually peak some months later.
Also, Advance/Declines peaked in April and that usually leads the top by a number of months. The decline in the A/D line is now more extensive than the decline into last October.
The European STOXX could not get above the 50-Day and has now taken out the 200- Day, as well as the February low. The high was set in April and Europe often leads the NY high by some months.
On the bigger picture, the possibility of a Rounding Top in 2014 was negated by the Springboard Buy in October. Another Rounding Top pattern has been underway. This shows in the NYSE comp (NYA), which set highs at 11248 in April, at 11254 in May and at 11170 in June. The June rally was turned back by the 50-Day, which was Step One. Step Two was taking out the 200-Day. That was last week, and the bounce failed at the lower moving average.
This looks worse than going into last October.
On the positive side, Biotechs are on a good seasonal period from now and into September.
On the negative side, BKX has taken out the 50-Day. Step One.
Generally, financial conditions are becoming more precarious going into the time of year when seasonals become somewhat positive for NY senior stock indexes.
This years "rotation" for commodities worked out reasonably well. Oversold in January turned into enough of an overbought in May to call the end of the rally. The July 1st ChartWorks looked for crude to decline to around 50.
Base metals (GYX) rallied from oversold at 299 in January to overbought at 345 in early May. Now at 280, it has set a new low for the bear that began at 503 in 2011. At 23 on the Daily RSI it is near-term oversold.
Some relief recovery seems possible.
Grains (GKX) were a late bloomer in rallying from 279 in early May to 327 at the end of June. This drove the Daily RSI up to 79, which was near-term overbought. A modest correction is underway.
Essentially the problem in energy and base metals is oversupply. Our work on the rallies in base metals into 2007 was that the advance in the real price of each base metal (deflated by the PPI) was the greatest in one hundred years. This price stayed real high for an unusually long time creating more than adequate capacity.
Then there was the Great Crash and Great Recession. The bull market into 2011 ended with the signal from our Peak Momentum Forecaster.
Much the same holds for crude oil which enjoyed the Middle East risk premium for an overly long time. In the second quarter of last year our view was that the usual postbubble weakness in most commodities would eventually get crude oil prices. Within this, crude would get in line with the previous slump in natural gas prices to a new low regime.
The story about OPEC driving the global price down in order to curb the advance in US production seems fanciful. Political forces such as OPEC and the Middle East have been overwhelmed by market forces.
Deutsche Bank's commodity index is representative and under the symbol DBC the price is available during the trading day. The extremely oversold low was 16.84 in January and it became somewhat overbought at 18.68 in May. At 16.95, it is now testing the low. It could take some weeks to take it out.
At the risk of a pun, iron ore also became a late bloomer. The April number was 521 and for May it was 60.23. The June number is 63.
Thermal coal set a high at 54 in March and is now at 40.82. Renewed weakness in industrial commodities does not suggest a firming global economy.
On the Daily RSI the DX has had a big swing in momentum from the high of 100.71 in March to the low of 93.15 in the middle of May. The initial bounce made it to 97.88 and
the correction test was set at 93.31 in mid-June. At 97 now, rising above 98 would be constructive in resuming the uptrend that started in June a year ago.
At close to neutral momentum now, the breakout could take some weeks.
Overwhelmed by weakening commodities, the Canadian unit has declined from the 83 level in May to the 78 level this week.
There is support at this level and the Daily RSI is down to 29.
Some stability seems likely.
Any port in a storm comes to mind. Meaning a refuge rather than an aged port with a fine Stilton cheese. Perhaps the latter alternative would provide an appropriate haven?
Without a doubt!
As this page has been reviewing, in a financial storm the serious money goes to the most liquid items. Hopefully liquid enough that it provides a place to park funds without pushing the price.
Treasury bills in the senior currency and gold are the best such instruments. Silver is not, even as the "poor man's" gold.
Tuesday's action showed, yet again, that when the financial world is suffering forced liquidation silver will plunge relative to gold. Forced liquidation of hitherto highly inflated assets has only just begun.
The important thing lately has been to monitor the gold/silver ratio. In a way, this is the longest-running credit spread in history and when it goes down it signals a financial party.
And when it turns up it says "The party's over!".
On this year's exuberance it declined from 77 in December to 69 in the middle of May. That was from somewhat overbought to somewhat oversold. A few weeks ago we noted that breaking above 75 would mark the change to a rising trend, which would be a warning on potential speculative exhaustion. Rising above 76 would suggest financial pressures were becoming serious.
Yesterday it touched 78, which is the highest it's been since late 2008. Moreover, in that fateful year the key breakout was accomplished at 57 in early August. The rebound high for the S&P was set in May at 1440.
The breakout in the gold/silver ratio is now a strident warning on most speculations.
So, in having lunch with the "Ancient Miner" the other day an interesting story came up. It concluded with the reason to hold gold or gold coins as insurance.
As a young "Geo" in 1963, our story-teller was in Northern Greece evaluating historical mining sites for prospects that could be profitable with modern technology. One became encouraging enough that a "major" gold company optioned the property and as the work expanded "local" help went from a few to many. Over many months.
At the time, there was very little money in the local economy. Folks were spinning their own wool for home-made clothing.
As each new employee began to get his weekly wage in cash there would be a new dress for the wife and a few other essentials. And then the consumer spending would virtually stop. Brad, as we will call our young Geo, became curious and asked about where the money was going.
After gaining the confidence of the head guy, Brad was taken to the closest town and down a narrow street. At a door, the head guy knocked and after assuring the proprietor about Brad's integrity they were let in. What was not needed after basic expenses was going into gold coins. Essentially British sovereigns, which were being put in a safe place.
As the head man explained "I hope we never need the gold".
Iron Ore Spot Price
Source: Business Insider, July 8.
- The iron ore price we reviewed above is the monthly price.
- This is the daily price and the plunge has been rapid.
- Metals Bulletin noted that the 10.1% drop is the biggest one-day drop on record.
Iron Ore Price: 2010 to Date
Link to July 10 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2015/07/stock-market-crashes-stoppable/
Formerly the bastion of capitalism, Wall Street has also become overly dependent upon socialist central bankers.
Financial collapses are not due to any specific policy blunder. They are the consequence of speculation.