Signs of The Times
Perspective
This week's harvest of headlines records a lot of hope in the crude oil markets
as well as remarkably reckless borrowing. Matched, of course, by the equivalent
in lending.
All without a regard for how the debt will be serviced. Financial history
is at the point where the real power shifts from the Federal Reserve System
to Mister Margin. It has many times since 1913 and since the advent of reckless
central banking the roles of each side have become very distinct.
The Fed's ambition is to get the accounts fully leveraged or "out of line".
This has been impressive. Mr. Margin's job description is to get the accounts "in
line" and that will be done.
It could take until November.
Stock Markets
Market dynamics have been outstanding. Outstanding in setting a series of
important tops, perhaps adding up to "Peak" for the senior indexes and a big "Rounding
Rebound"
for the broad market.
Our case has been is that central bank equity buying had to focus upon the
big stocks— the "Nifty 500".
With so many central banks buying the popular trades, Long Term Capital Management
(LTCM) comes to mind. It was in 1998 and LTCM had an outstanding reputation
in theoretical pricing of options. So outstanding, that senior central banks
made direct loans to the highly leveraged fund. The Bank of Italy did this
and took an equity position as well.
The wager was that with the European Union, credit spreads would narrow. That
was the theory. We pointed out that even with the serious discipline of a gold
standard spreads did not narrow to a common level.
On a natural turn to widening that summer LTCM was suddenly and irrevocably
offside. It lost $4.6 billion in less than four months.
The fund collapsed to effectively less than zero and the distress amongst
the central banking community was palpable. This added to the overall panic.
Now there are many central banks that are very long, as we note, the popular
trades, including equities.
"Come on in – all the lemmings are doing it!"
In 2000 and 2007, the Street stayed long because the Fed would "cut rates".
This is not an option now, so the equivalent mojo is that central banks will "buy
more assets".
Rather an interesting evolution of the "Greater Fool" theory.
As with previous market peaks, credit strains are becoming visible and are
forcing stock markets down.
How far?
It will take a cyclical bear to clear the financial excesses.
The hot leading sectors accomplished speculative excesses that were noted
as they occurred.
The action in Utilities (XLU) climaxed in early July. Base and Precious Metal
Miners (XME and HUI) at the end of July. All three are breaking down.
Over in the financials, last week we noted that the action in XLF has registered
an Upside Exhaustion as well as a Sequential Sell. Enough technical excess
to call for another "Widows & Orphans Short". The last one was in July
last year and mainly based upon the action in Wells Fargo.
BKX fell from 80 to 53 in February and has rallied up to 72. The recent technical
readings are more comprehensive than last year's.
Transports did not confirm the Dow high and have slipped below the 50-Day
moving average at 7854. Now at 7771, through the 200-Day at 7624 would turn
the chart down. On the broad market, the NYA did not set new highs and we have
been watching the 20- Week ema. This is at 10568 and with the index at 10505
today, the break is significant. The equity wager now is not on a "Fed cut",
but that central bank promises to buy assets will be effective.
Currencies
Once again it is time to review the theory that currency depreciation is the
mojo for economic growth. And when that theory is faltering depreciation becomes
the preventer of bad things.
Of course, veteran traders have never really gone along with this.
The most glaring thing out there is that the theory has never worked. Now
it is becoming more apparent.
The question has always been. When do the Federales learn to doubt?
The next dollar rally may instruct.
Since the first of August, the DX has been in a trading range between 94 and
96.25. The last low was last week at 94.39. At 95.50 now, there is resistance
at the 96 level which is between the 50 and 200-Day moving averages.
Technically, the DX needs to get above the 20-Week ema to start the rise.
This would be similar to the "launch" in July 2014.
It got slightly above last week and the ema is at 95.61.
Ampersand
Been reading an interesting diary from the late 1700s.
A Country Parson
James Woodforde's Diary 1759-1802
Hazards of country life:
September 21, 1786:
"My Brother John indifferent to day being merry last Night and very near
killed last Night going home from Ansford Inn to his own House on horseback
and falling off – his face is cut but little however...."
On Travel:
October 11, 1786:
"Whilst we were at Newmarket and changing Coaches and Luggage, found that
a small red Trunk of my Nieces was left behind in London, in which were all
her principal Matters – It vexed her at first very much – but on my assuring
her that I saw it safely lodged in the Warehouse, she was more composed.
I would not pay the remaining part of our fare or for our Luggage till the
Trunk was forthcoming...."
Hedge Fund Redemptions
International Treasury Bond Index
- Sequential Sells were generated going into the top.
- That was on the 9 and 13-Week readings.
- The 20-Week ema governed the corrections on the way down into late 2015.
- The same ema governed on the way up.
- Taking it out will formally turn the global treasury market down.
