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Theatre of the Absurd

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Published : January 26th, 2013
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Category : Editorials

The following is the Pivotal Events that was published for our subscribers January 17, 2013.

Signs of the Times

Last July, ECB chief Mario Draghi stated the he would "do whatever it takes to preserve the euro". Quite likely this meant boosting the economy by boosting credit, which means depreciation. And that sounds like the only way they can preserve the euro is by trashing it. Sounds like fixing villages back in "Nam".

An outstanding contrast continues. The European economy remains weak and there has been an international party in stock markets.

"German exports declined more than economists forecast...down 3.4%. It's the steepest decline in more than a year."

~ Bloomberg, January 9

"Emerging equity funds recorded their biggest-ever weekly inflows."

~ Bloomberg, January 11

"Industrial output in Spain dropped for a 15th straight month in November - twice the rate forecast."

~ Bloomberg, January 11

"Investors coming back to stocks after withdrawing cash for the past six years. Global equity mutual fund sales are the second-highest on data back to 1996."

~ Bloomberg, January 11

And then there is US policy:

"You never want a serious crisis to go to waste."

~ Rahm Emanuel, February 9, 2009

"The whole aim of practical politics is to keep the populace alarmed (and hence clamoring to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary."

~ H. L. Mencken, sometime in the 1930s

"Welcome to the Permanent Fiscal Emergency"

~ Slate, January 5

"Obama Warns of Crisis Unless Debt Ceiling is Raised"

~ The Examiner, January 15


Perspective

Well, the debt ceiling number has always been there, but it is often changed, when it is expedient. Never down and always up, and lately, with some drama. However, it does provide a chance for a voice of sobriety. The attached chart by Ron Griess shows that the debt level already exceeds the "limit".

The political drama could more specifically be called "Theatre of the Absurd". Only popular with the participants; the public and the markets could soon say "Enough!".

While we can hardly restrain our anticipation of such a revulsion, it would be prudent to watch the charts.


Stock Markets

Of interest, recently, are the excesses being accomplished in housing, forest products and lumber. Three weeks ago, the latter zoomed up to register an Upside Exhaustion. It was the most overbought in 20 years. Of importance is that typically at important highs, the product (lumber) leads equities. And this could be the case now.

Lumber's high was 392 on December 26, and the cyclical low was 138 in early 2009. Leading forestry stocks are still climbing. Even Canfor (CFP.TO) is into the zoom zone. Enough to generate a rare "Trifecta", with Upside Exhaustions on daily, weekly and monthly. The first break in price or momentum provides the "Sell". Today's high is 18.50 and the 2009 low was 4.38.

This sector has always been cyclical, and all the signs of a cyclical peak are building now.

The last cyclical peak identified was in base metal prices in May 2011, on our Momentum Peak Forecaster. It is curious that metals peaked then and it could be due to the global market. Whereas, lumber and forestry seems to be mainly a North American market.

Another important cyclical company, Canadian Pacific Railway (CP) is becoming the most overbought since 2007 - a fateful year. Ross is working on a more detailed review.

Out of the setback into early November stocks, lower-grade bonds and commodities were likely to rally into January.

This has been working out and, for example, the S&P could make into the 1490s, and then become tired.

New York seems to be working on an important top. One indication is complacency with the VIX declining to 13.16 earlier today. This is the lowest since 2007. Also, over the past two weeks the RSI recorded a huge swing from overbought to oversold. Complacency seems ready for a trend change.

Moreover, a number of exchanges around the world are at levels of extreme confidence. This was covered in Tuesday's ChartWorks.


Currencies

Along with the fun, the US dollar was expected to decline into January, and so far the move has been modest. The high in November was 81.46 and this month's low has been 79.35, which seems to be testing the 79 level set in December.

There is a lot of support at the 79 level and the action remains in a longer-term pattern that leads to an intermediate rally.

The Canadian dollar started its rally at 99.43 in November and the first move took it to 101.8 four weeks ago. Then it reached 101.9 a week ago. It could reach resistance in the 102s.


Commodities

Lumber has been the feature on a possible rally for most commodities into January. In setting a spike lumber became very overbought at 392. The initial low was 371.5 and the bounce has been to 382. Today's close at 369 sets the downtrend and ends the bull move that started at 225 in June 2011.

Base metals (GYX) accomplished a rally from 359 in November to 403 at the beginning of the year. There is resistance at the 404 level and much more at 425.

It is likely that base metals will be vulnerable to weakening lumber prices.

Agricultural prices (GKX) did not participate in the good times. The index became extremely overbought with the drought in July. The high was 533 and the low at 437 a week ago. This drove the daily RSI down to 24. This is enough for the action to stabilize. In preparation for an intermediate rally.

Crude has enjoyed a rally from 84 in November to 96 today. This is now overbought and eligible for a significant correction.


Precious Metals

The action is still dominated by the "dangerous" overbought accomplished in September. The daily RSI on the silver/gold ratio soared to 84. Anything above the high 70s has been associated with important tops.

Going the other way, when the RSI gets below 30 it suggests accumulation. The low was 28 in late December. Continue to accumulate.

In dollar terms, gold was likely to find support at the 1650 level. More support was possible at 1600. The base was mainly at 1650 with one spike down to 1626. The initial move made it to 1695 earlier today. This seems due for a rest.

We keep track of the real price via our Gold/Commodities Index. In November it got up to 468 and with the "good times" declined to the 375 level and has been setting a base. A rally would confirm that all the recent hot stuff is rolling over.


Debt "Ceiling" Has Been Exceeded


Larger Image - Image Courtesy of TheChartStore

  • "Welcome to the permanent fiscal emergency."
  • ~ Slate, January 5, 2013

  • "You never want a serious crisis to go to waste."
  • ~ Rahm Emanuel, February 9, 2009

  • "Ben Bernanke: Get rid of the debt ceiling."
  • ~The Examiner, January 14, 2013

  • "Obama warns of crisis unless debt ceiling is raised."
  • ~The Examiner, January 15, 2013


FED Holdings of Treasury Issues

24hGold - Theatre of the Absur...
Larger Image - Image courtesy of TheChartStore

  • Note the peak in 1975.

  • Then the long decline in relative holdings.

  • Was the Fed de-leveraging?


Gold/Commodities Index


Larger Image

Link to January 19, 2013 'Bob and Phil Show' on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2013/01/market-tops-vix-dips

Companies Mentionned : Metals X |
Data and Statistics for these countries : Spain | All
Gold and Silver Prices for these countries : Spain | All
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Bob Hoye is the chief financial strategist of Institutional Advisers
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