Signs of The Times
Perspective
In July, the ChartWorks noted technical excesses in the Bond Future. We concluded
that action in the US Treasuries was the least distorted and would be the best
market to use to determine a major top. For technical analysis, the European
market is too dominated by the ECB.
The peak in Treasuries was in July and we noted that the bull market in lower-grade
stuff would likely continue. We also noted that the European government bonds
would likely turn with US Treasuries. Which they have.
We are now getting technical excesses in Junk.
The headlines above, are recording the anecdotal aspects of a speculative
blow-out in lower-grade bonds. It could be global.
The ECB wager that buying €1.5 trillion in assets would "kick-start" the
economy rests upon the unproven notion that an economy can be "kick-started".
One might just as well try to kick-start a 747.
This kind of anecdotal record can be followed by panicdotal conditions.
Stock Markets
The American popular uprising now has a dynamic executive whose pro-business
utterances have been catnip to equity traders.
We read about some big players on the wrong side of this move.
The rush to buy accomplished technical excesses in December, which we noted
could be eased by a sharp correction. Instead, a modest correction has been
followed by new highs, which have been driven by two things. Further announcements
about reductions in taxation and regulation, which reality could be many months
away. Still a positive prospect ahead.
More immediate, has been favourable action in industrial commodities, which
has been likely to run into March.
Bond buying programs by central bankers are being thwarted, repeat thwarted,
by market forces. Mother Nature has been fully engaged, Mister Margin is monitoring
the action.
Over the past year, the combination of firming industrial commodities and
narrowing spreads has been the main carrier of the uptrend. And, eventually,
could be the agent of change, which we will be watching for.
The action has been likely to be positive into March. This is being confirmed
by the Transports, which got out of their funk and are making new highs.
Central bank buying programs continue to look good. For how long?
As in 2015, we are now calling for a big Rounding Top.
Within this, the speculative surge that began in early November has been outstanding.
In many ways, including in some series the best in a couple of decades. However,
we have been wondering if the right-hand side of topping could extend beyond
March. And to use economic jargon, "on the other hand"
if crude rolls over, so does the stock market.
The "ABC" correction that the ChartWorks has been working on could start soon.
Credit Markets
The main driver for the banks (BKX) from June until mid-December was the steepening
yield curve. From over-extended then, a correction followed to last week when
the index found support at the 50-Day. That was at 92.5 and the jump to 97
suggests compulsive buying. Also, as we have been noting, there is the prospect
of getting rid of Dodd-Frank, which is called the "Wall Street Reform and Consumer
Protection Act". Designed by congress it is more intrusion than protection.
Some who have studied Dodd-Frank have said it is worse than Obamacare.
As for reforming Wall Street - it has all been done - in 1934. The main intention
of the SEC Act was to reform Wall Street so there would never be another financial
bubble. One of the sponsors boasted that "It will put a cop at the corner
of Wall and Broad Streets".
Banks have done well despite the flattening curve, indicating that repealing
D-F would be good for the sector. This has been almost discounted and the curve,
so to speak, is away below the BKX.
Canadian banks such as RY are building outstanding technicals for an important
high.
As noted last week, credit spreads as measured by JNK/TLT registered technical
excesses in momentum and pattern. This was also registered with the peak of
the Treasury action in July. The decline in the TLT has been from 143 to 117,
at its worst.
A turn to widening seems imminent and would be a negative for global banks.
JNK accomplished technical excesses and the correction will be underway when
the index takes out the 50-Day moving average.
Long Treasuries are poised for another brief bounce.
Commodities
Crude oil survived the huge and potentially negative COT numbers. Our position
has been that after a seasonal setback in January, firming could run into March.
So far, so good. A quick thrust to an overbought condition would complete the
move.
Ross has a chart that says that 12 months after a crash low, an important
high can be accomplished. Followed by an intermediate decline.
Base metals (GYX) have been expected to rally out to 332 in March. Severe
pressures ended a year ago in January at 235 and the "Rotation" carried it
to 283 in October. With the election results, it has rallied to 339, which
accomplishes somewhat more than our goal.
It is overbought enough to suggest an intermediate correction.
Grains (GKX) have been acting well. We have had a target of 308, which has
been the high-side of the trading range. A couple of weeks ago, we noted that
it could be exceeded. At 318 now, there is resistance at 325.
Overall, commodities have had some good gains out of the disaster a year ago
and are now eligible for an intermediate setback. The latest surge has been
helped by the slide in the dollar, which is preparing for another significant
rally.
Stock Leverage vs Spreads
- This measure of "Leverage" got crunched on the crisis into January 2016.
- Spreads have clocked remarkable narrowing.
- "Leverage" has eased a little but is still high.
- Spreads have reached technical excesses and are poised to reverse.
Oooops!
- Our work in July called for Treasury rates to increase.
US Drilling Rebounds
Governing Classes Need Governing
