Credit Markets
We have been plotting the path of US corporate credit spreads against the
pattern that set up the dislocations in 1998 (LTCM), 2007 (Bear Stearns) and
in 2008 (the crash).
A breakout to extended widening was accomplished earlier in the month. This
was on track and within the same time in the three previous examples. Early
July.
The next and more threatening breakout is scheduled for late in July.
We doubt that the Fed has this as number one on their list of bad things to
prevent. Meanwhile, the FMOC has be going on--and on--about raising the administered
rate, which has been a dangerous distraction. Hadn't thought much about this.
Perhaps it's been considered as a symbol of the advent of central bank prudence,
but market forces have not allowed them to increase the rate.
Previous Pivots included the charts for 1998 and 2007. Now it is time to include
charts for 2008 and 2015, which follow.
The main issue is that credit spreads remain in the path to serious dislocation
as exampled in 2008, 2007 and 1998. The killer reversal in spreads in 2000
was only one month from warning to the stock market peak.
We remain positive on the long bond. The initial target on the TLT has been
120. This week it has moved above the 50-Day ma at 118.22 and is at 119.45.
After the disaster ended in December, JNK enjoyed a vigorous rally from 36
to 39 in May. The latter part of the rally was seasonal and then it has accomplished
the seasonal reversal.
Junk action is not good. The last rally to 38.38 failed at the 200-Day. At
37.74 today, it has taken out the March setback. Taking out the panic low of
36 would, well, be a panic. Spreads, as plotted by JNK/TLT, are threatening
to slip below the 200-Day ma.
Today's action in credit markets is increasing the warning on the inevitable
collapse of speculation.
Precious Metals
At major tops in this sector, we use momentum on the silver/gold ratio. The
RSI on the ratio soared to 92 in 2011. The only other time it had been there
was at the fateful peak in 1980.
The last "sell" from this indicator was a weak one in May of this year. In
our November study, Caveat Venditor, we noted what was needed to determine
an important bottom. This would be gold stocks beginning to outperform the
bullion price and silver beginning to outperform gold. GDX outperforming the
S&P would also be constructive.
These had their last up in May.
Still patiently holding large numbers of junior golds, this page would welcome
a cyclical bottom and eventual recovery in the sector.
However, we have to play the hand we are dealt and it is comforting to know
that within the next phase of the post-bubble contraction there will be times
when the sector does very well.
After August, stock markets could suffer a concerning loss of liquidity, which
may further depress precious metal stocks. However in magnificently grasping
at straws, banks stocks sold off hard as the Tech-Bubble soared to the moon.
Golds are being hit hard now.
What works for gold and gold stocks at severe lows is our Downside Capitulation
model. This is registering Daily signals now and a Weekly signal would be associated
with a cyclical bottom.
"As the touchstone tryeth gold, so gold tryeth men."
US Credit Spreads: 2008 Crash
- The initial breakout was accomplished at 300 bps on June 27.
- The critical breakout was achieved at 335 bps on August 7.
2007
- The initial breakout was achieved at 124 bps on June 25.
- The critical breakout occurred at 135 bps on July 20.
2015
- The initial breakout occurred at 192 bps on June 29.
- At 199 bps now it extends the trend.
- Rising through 210 bps will be critical.
- As with previous examples, it would begin the transfer of power from central
bankers to margin clerks.
Yield Curve and Bank Stocks
- Note the reversal in the curve at close to general stock market peaks in
2007 and in 2000.
- Banks sold off during the Tech mania and then became the "go to"
item.
- In 2007, banks peaked and reversed with the change in the curve.
- The curve is not good in determining important bottoms.
