The following is part of Pivotal Events that was published for our subscribers
February 21, 2013.
Signs of the Times
"The lone dissenting voice on the Federal Open Market Committee defended
her hawkish philosophy."
"Possible risks and costs of these [easy money] policies may be exceeding
their benefits."
- Dow Jones, February 12
"India's industrial output unexpectedly slid in December for a second
month as demand falters in an economy expanding at the weakest pace in
a decade."
- Bloomberg, February 12
"Europe's brittle economies shrank at their fastest rate since the
collapse of Lehman four years ago."
- Financial Times, February 14
"Wal-Mart had the worst sales start to a month in seven years as payroll-tax
increases hit shoppers."
- Bloomberg, February 15
White House strategists are probably thinking: "Good, more on food stamps
and on disability compensation". The Alinsky theory of revolution has been
to collapse the detestable American economy by overwhelming the welfare system.
"Bank of England Governor Outvoted in Bid to Launch Fresh QE Boost"
- The Guardian, February 20
Oooops! This could be defining a new financial term - "Recklessness Off".
Perspective
Somewhere around noon yesterday, New York time, a story started the rounds
about a hedge fund having some troubles with a position in commodities. In
looking at what could be basing action in agriculturals, the problem is in
metal prices. Mainly silver with the biggest decline (-3%), gold (-2.5%) and
to a lesser degree base metals (-0.9%). Then, mid-day "they" took out crude
oil (-2.2%), which could be Mr. Margin hitting whatever bids were around.
In the excitement, crude set an outside reversal, to the downside. As did
the DJIA, the yen and lumber. The British pound did the reversal on Tuesday.
Going the other way, the Dollar Index did the outside reversal - to the upside.
As we note, such reversals do not necessarily mark a trend change, but often
indicate that the action has become excessive. Perhaps preliminary to an important
change.
Stock Markets
Over the past three weeks our theme has been that the general stock market
was working on a rounding top. Within this, some sectors such as Forestry,
Homebuilders and Airlines reached sentiment and momentum levels usually seen
at important tops. Last week we concluded that these excesses were "providing
some good trading opportunities".
The DJIA rose to a new high for the move, yesterday, and then accomplished
the full outside reversal. As did the Dow Transports. The S&P also achieved
a new high and reversed as well, but with Wednesday's high the same as Tuesday's.
For technicians such big reversals from new highs are fascinating.
For the general stock market, the rounding top would lead to an intermediate
decline.
This seems to be working out. A little more development on the change and
the Chartworks can provide a downside target.
Credit Markets
On the 13th, Bloomberg reported:
"The collapse of two junk-bond offerings in Brazil shows that Latin America's
largest economy is getting hurt from the global pullback in high-yield demand."
Representing action in the high-yield sector, junk (JNK) accomplished the
full reversal yesterday. The high price, with good momentum, was 41.21 in January.
The initial decline was to 40.40 a couple of weeks ago and the rebound high
was 40.84 yesterday. Taking out 40.40 sets the downtrend.
In September the Fed announced it was going to buy sub-prime mortgage bonds.
The price rose from 56 to 61 on the news. Then it drifted down to 58 in early
November and with the revival in animated spirits it jumped to 68.5 at the
end of December.
Out of the gloom of the 2008 Crash the representative bond almost doubled
from 38.
Perhaps the best is in.
It is worth noting that while the Fed plan has been to buy $40 billion of
mortgage-backed bonds each month the price action has been sympathetic to market
forces. Down into November and up into December. And then drifting down.
It seems that the Fed and European Central Bank have been anxious to get aboard
the last stagecoach into Dodge City.
Long Treasuries became oversold a few weeks ago and the price has based at
the 142 level. We have been looking for a rally as other assets weakened. Rising
above 143.5 will set the uptrend. It's up to 144.21 today.
Currencies
Following the modest concerns into early November the dollar was likely to
decline into January as stocks, corporate bonds and commodities rose. The high
was 81.46 in mid- November and the low was 78.92 at the first of this month.
It was a modest move, but hot action in popular assets was inspired by the
16% plunge in the yen against the euro, which reached a very oversold condition.
Since last week the yen has been basing.
Last week we thought that the C$ could roll into a "modest decline". The 99
support level was taken out on Tuesday. There is another level of support at
98 and the daily RSI is down to 26, which is close limiting the decline.
The USD has jumped from 78.92 to 81 in three weeks. There is resistance at
81.5 and the daily RSI is near the level that would suggest a pause in the
rise.
However, the move in the yen was "wild" and it is uncertain as to where the "wild" could
next appear. We will stay with our methods of watching for trend changes and
trend durations, but with an eye for "wild".
Commodities
On February 15 CBS Detroit reported:
"Left in the Dark: Copper Thieves Rob Detroit Freeways of Light"
This is anecdotal evidence that copper's real price is still high. The nearby
chart of copper deflated by the PPI shows that it has been unusually high for
some 6 years. The last such example prevailed from 1966 until 1974 and was
followed by a bear market that endured to 2001. This could be attributed to
increases in productivity in finding and mining copper.
Today's high prices have been essentially due to demand from China. The reformation
from Communism to the prosperity of a country enjoying less intrusive central
planning has prompted a remarkable increase in demand. As with the earlier
example, today's high prices has prompted a massive increase in mine capacity.
A long bear market would be natural. That the world is in another post-bubble
contraction provides confirmation. This would be the case for all base metals.
Our data only goes back to 1825 and the record has been that copper's real
price has declined through each post-bubble contraction. This compares to gold's
real price as it generally increases. Both are characteristic of the long contractions
that have run for some twenty years.
On the nearer-term, March copper was trading at 3.75 on Friday and dropped
5.4% to 3.54 today. This is a serious break and with it the base metal index
(GYX) has dropped from 405 to 382, or 6%.
On the same move mining stocks (SPTMN) have dropped 8%. From the high of 1050
at the first of the year they are down 16% to 903. Mining stocks have again
led what could be at least an intermediate decline for the sector.
Two weeks ago crude oil registered a Sequential Sell and the high was 98.24
on January 28. Today it's been as low as 92.63. There is minor support and
this level and stronger support at 85.
Other than agriculturals, most commodities seem to have started an intermediate
decline. In the latter part of the day, agricultural prices rolled over. Cotton
was down 1.18%, sugar down 1.26%, corn down 1.54% and wheat plunged 2.34%.
Chart action on the index (GKX) became moderately oversold at 437 in early
January and bounced to 469 a few weeks later. A test was needed and the low
was 439 last week. It rose to 448 yesterday and fell to 441 today.
Recent action seemed to be preparing for an intermediate rally. However, the
slump in so many other asset sectors and a firming dollar suggests this could
take some time.
Agricultural prices could be vulnerable to further declines. Breaking through
439 would be the indicator.
Gold/Commodities: Our Proxy for the Real Price
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Link to February 21, 2013 'Bob and Phil Show' on TalkDigitalNetwork.com:
http://talkdigitalnetwork.com/2013/02/a-week-of-reversals
