Signs of the Times
"International investors are the most bullish on stocks in 3 1/2
~ Bloomberg, January 22
"The central bankers who saved the world economy are now being
told they risk hurting it, the flood of stimulus is running into criticism at
~ Bloomberg, January 24
"The Fed is purchasing $85 billion of securities every month,
using the full force of its balance sheet to stoke economic recovery."
~ Bloomberg, January 25
"The U.S. economy posted a stunning drop of 0.1 percent in the
fourth quarter, defying expectations." - CNBC, January 30
"New York Fed Study Makes Yesterday's Collapse in Consumer Confidence
Even More Scary"
~ Business Insider, January 30
The latter had something to do with "payroll tax cuts" being
unusually positive in 2011. At any rate, the administration's propaganda
machine (main stream media) got on the bandwagon about the surprise in GDP.
It was due to the cut in defense spending, and all will be well on the next
quarter. Consumer confidence and the plunge in lumber prices are saying there
is more to it. The NY Fed paper about taxes being a plus in 2011 and now
being a negative provides more reality.
The characteristic of any sordid stock promotion is that the public
will believe even the most preposterous story - so long as the stock goes up.
And then belief crashes with the price.
Quite likely this applies to suspect policymaking. So long as credit
is expanding and asset prices are inflating the public will believe
interventionist propaganda. Like - "central bankers saving the world
As of this week, a Canadian fund manager is making the rounds with
hopes of launching a "Timber-Only" fund. One is reminded of
(shudder) uranium and molybdenum funds. The December 30th ChartWorks
"Excesses in Lumber & Housing" noted that lumber had become the
most overbought in twenty years. Subsequent Pivots commented that on cyclical
reversals, lumber prices typically lead the change in forestry companies and
this seems to be working out.
Housing stocks such as RYL also registered seriously overbought
conditions and should follow forestry stocks.
There has been a lot of excitement in another cyclical sector. Two
weeks ago we noted that one of the hot transportation stocks, CPR, had become
the most overbought since 2007. Last week it was that the Dow Transports had
accomplished a high enough RSI to suggest at least a 13% decline.
Within the sector, airline stocks performed well. Representative
Southwest Airlines (LUV) accomplished an Upside Exhaustion and is now rolling
over with signs of distribution. One of the most profitable has been West
Jet, a Canadian airline. In running from 10 at the end of 2011 to this week's
22.90, WJA has accomplished exceptional Upside Exhaustions. Wednesday's
massive reversal could be the climax of the move. One can't help but think of
Sinatra's "Fly Me to the Moon".
On the general market we noted that complacency reigned as volatility
(VIX) declined to the lowest number since 2007.
The January 15th ChartWorks reviewed that
important highs can be set as a rolling top that takes some time to work out.
And then there is the parabolic top with a dynamic thrust to exhaustion. The
sectors reviewed are completing the dynamic thrust as the S&P is working
on a rolling top.
Either way, it seems that an intermediate decline for the general
stock market is possible with a greater percentage decline suffered by the
"To the moon!" prevailed in lower-grade bond markets with
junk "soaring" to record low yields. The following chart on US
corporate high-yield shows a wild trip over the past ten years.
From around 7 percent in 2004, the yield increased to 25 percent in
the 2008 Crash. The decline since has been driven by low short-term rates
that has been the feature of the post-bubble condition. The first business
expansion out of the Crash has been favourable for
corporate bonds and the latest rush is an outstanding example of
"reaching for yield".
Or as we used to call it "reaching for the extra 1/8th". The
yield has declined to 5.81% at the end of last week.
As we have mentioned the Fed has been remarkably reckless, but it has
little control over what the markets will choose to speculate in. Also, it
has no control when the action becomes, itself, highly speculative. And as we
have seen it has no control when speculation climaxes and liquidity
Lower-grade bonds have become yet another bubble in the world of
serial bubbles. So let's look for an exit.
The action in JNK accomplished a weekly RSI of 76 on January 15. This
level was last reached in May 2011 just before lower-grade bonds sold off
into that summer when concerns about credit worthiness briefly hit the
By this measure riskier corporates are again at technical risk.
Representing Eurozone yields, the Spanish ten-year plunged to 4.89% on
January 11 and has increased in a couple of steps to 5.18%. In the mini-panic
about European insolvencies and bankruptcies the yield reached 7.28% last
That disaster was anticipated by the seasonal turn to widening spreads
and in retrospect a tool that we have recently reviewed. The Citi Surprise
Index, which chart and description follows, has plunged below the zero level.
The last time was in April last year. The low yield on the Spanish note was
4.83% in late March, from where it jumped to 7.28% in that fateful summer.
Sovereign bonds again look vulnerable.
Agricultural prices (GKX) did not rally with other commodities, which
were likely to rally from November into January. Instead, they stair-stepped
down to 437 three weeks ago. The action continues to improve on a possible
Base metals (GYX) have rallied from 358 in early November to the 400
level where there is some resistance. Rising through 406 would suggest that
last year's high (in February) of 427 could be reached. Momentum is neutral.
Two weeks ago we thought crude oil had reached an RSI that indicated
overbought. After a pause this has jumped to almost 77, which level has
attended a number of important highs over the past ten years.
The big action started in early November as the euro rallied relative
to the dollar and the yen sold off. The yen has accomplished outstanding
momentum with the weekly RSI at 15, which is the lowest on a chart back to
2000. The euro is moderately overbought.
It is interesting that when a significant turn is pending - in this
case in lower-grade bonds - other series get in place for change as well.
The Dollar Index was likely to decline on the fun out of November. The
high was 81.46 and at 79.18 today it continues to test the 79 level.
High Yield Corporates
CITI Surprise Collapse - GDP pushed the Citigroup
U.S. Economic Surprise Index to its biggest one-day tumble since June 2011.
The index -- which measures the degree to which economists' consensus
estimates have been too optimistic or pessimistic about data releases - fell
to negative 30.8, from negative 7.0 a day earlier -
Last year, Citi's surprise index fell below zero for the first time on
April 25. Over the ensuing month and a half, the Dow fell almost 8%.
Link to February 1, 2013 'Bob and Phil Show' on
This is part of Pivotal Events that was
published for our subscribers January 31, 2013.