It amazes me that the most successful managers could be so bullish at a time like this (way overvalued, way overbought, rising Treasury yields, stalled earnings growth), but of course stocks are most loved at the least desirable prices.
Source: Barrons.com
The global economy is clearly on the downswing, with the US likely having entered a recession this summer (watch for revisions in GDP and employment data in the coming months). However, as in Sept-Oct 2007, the equity market has bounced from a brief oversold interlude to a new high.
Here is the NAAIM survey. This is a relatively new dataset, but it has proved high-correlated with proven sentiment indicators like DSI and Rydex fund activity). The survey is updated each Thursday with data from Wednesday.
Sentiment has been elevated for a month, which is sufficient for a significant decline, though the likelihood of a setback and the expected magnitude thereof grows with each week that it remains elevated. This, coupled with sideways price action for few weeks (we don’t have this yet) and a declining trend in daily RSI (possibly developing) would virtually lock in the case for an intermediate-term top.
EDIT: To clarify, this is not a screaming short-term sell yet, since the market has had a habit of creaping slightly higher over a few weeks from conditions like this. However, things can reverse at any time, and it is highly likely that any further gains will be quickly erased once the turn comes.
The macro picture of deteriorating economic data bolsters the case that a bull market top is near, so if this is an intermediate-term top it could prove to be the final top prior to a bear market. This cyclical bull is now 3.5 years old. This is long in comparison to the cyclical bulls of the 1910s and 1970s secular bear markets (18-36 months was typical), but short in comparison to the last cyclical bull (spring 2003 – fall 2007, 4.5 years).
As the financial media obsess over data like this morning’s payroll numbers, it’s interesting to observe trends in the direction and degree of “surprises” about the data.
Here is the Citigroup Economic Surprise Index for the US:
This chart (courtesy of Mish), shows that contrary to hype, retail has not recovered to anywhere near pre-crash levels, though the consumer culture is still very much alive.
This is Nigel Farage, a UK delegate to the European Parlaiment, saying that all Europe really needs is free trade and some basic standards for regulation, not the whole mess of regulation and loss of sovereignty offered by Brussels today. (I totally agree about free trade, but where do you draw the line with labor and environmental regulation – so many of the EU’s silly laws today are in those spheres – better to just say, “Tarriffs, quotas and bans are hereby abolished within the EU. Fin.”).
It seems as though opinion within every EU nation is turning against the institution. This is good, but also dangerous, as it would be a shame to see Europe return to the mess of trade and travel restrictions that existed a few decades ago. The lack of such restrictions was a great contributor to the flourishing of civilization on that continent in the 19th century, and their reinstitution in the early 20th brought war. “When goods don’t gross borders, armies will.” –Frederic Bastiat
Cheney just loves 911 gifts and festivities, but he wants us to remember what it’s really all about.
“Sometimes, in all the hustle and bustle of the season, it’s easy to forget the true meaning of Sept. 11,” Cheney said. “Sept. 11 is not about fancy 9/11 parades, or big 9/11 office parties. In fact, it’s not even just about two buildings crumbling to the ground and leaving thousands of innocent people dead.”
“No,” Cheney continued. “No, 9/11 is about the warm feeling you get when you help an elderly woman cross the street and then whisper to her that the terrorists can strike at any moment. 9/11 is about the satisfaction of telling people to do things and then them doing it—not because they want to, but because they are afraid to do otherwise. 9/11 is about removing Saddam Hussein from power. But most of all, 9/11 is about love.”
Cheney said he plans to spend a quiet Sept. 11 at home this year, during which he will exchange gifts with loved ones and watch his taped VHS footage of the old 9/11 TV specials while he smiles and laughs.
“I have a feeling this is going to be the best Sept. 11 ever,” Cheney said with a grin. “I just dread the day I have to tell my kids that 9/11 isn’t real.”
I’ve lived on both continents, and poor people in the US have what middle-class europeans do, but they eat more and on average are far dumber. What this video makes clear is that most of their fundamental problems do not arise from a lack of purchasing power.
There is a huge range of performance among European bourses since the 2008-2009 crash. In the previous boom, all markets went up together, but these charts show that investors are now much more discriminating, and that there is a huge range of optimism among these countries. Here is a series of 5-year charts from Bloomberg (you can browse lots more charts here):
Greece:
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Iceland (I’ve never seen a stock index that looks like this – it’s more like the aftermath of a penny stock pump-and-dump):
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Ireland:
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Italy:
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Portugal:
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France:
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Luxembourg:
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Switzerland:(I’m surprised that this is not higher, since the economy here is strong, but the Swiss are very conservative and becoming more so, preferring cash and gold to stocks):
Denmark:
Germany (DAX):
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United Kingdom (FTSE 100):
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The FTSE and DAX typically trade like the S&P500, shown below for reference:
These higher-quality markets are now very expensive and technically weak, and if they enter into another bear market the lower-quality markets should follow, quickly breaking their 2009 lows. Bottom feeding value investors may then be able to find a few odds and ends in the rubble.
Hi guys.
Sorry for being so quiet on the blog lately. I’ve been busy trying to take my mining site out of beta among other things, and not following the day-to-day action much.
In response to comments about Elliott Wave and EWI, I actually don’t read EWI anymore except for Prechter’s monthly essays. I don’t see that the short-term stuff offers much of an edge over just following basic technical and sentiment indicators. Trying to force the market into fitting a specific pattern has just not been a good way to go, but the intermediate-term technical indicators have been doing quite well.
For instance, put:call, vix and weakening RSI have nailed the tops in November, January and March-April. The last was just screaming SELL as loud as the market ever does, and we got the follow through we deserved.
Short-term oversold conditions in late May and July were marked by the VIX and weakening selling as indicated by RSI. Constantly anticipating a hard 1930-style P3 is just a bad way to play. Of course you don’t want to be caught long without protection at any point in this environment, credit crunch and depression that it is, but there is a tremendous degree of speculative enthusiasm and stubborn optimism among traders that is making this a long slog down.
Of course I think this is a secular bear market that won’t end until there is real value restored in stocks and real estate, which means solid after-tax yields high enough to compensate scared investors for the risk of further capital losses. But there is no reason why we have to get there in 3-4 years — this could go more like ’66-’82 in the US or post-’89 in Japan.
That said, we have not had full-on recognition of the extent of the economic problems within the financial community, with most analysts and economists clinging to the hope of Keynesianism. Trading horizons are so short-term among the big players that these considerations hardly matter. The technicals are all that drive the machines and guys like Paul Jones, Cohen, etc.
This is a deflation though, no doubt at all. Credit is contracting hard, and prices of everything not directly traded as futures or set by the government are falling. This includes private sector wages, groceries, capital goods, etc. In this environment we do not have the same set-up as for the rolling sideways market of ’66-’82 (only in nominal terms was that a sideways market – in real terms it was a 75% loss). The ’30s and Japan are still the corollaries to watch.
Also remember that the public sector has gotten itself into huge trouble, which is just starting to take effect with austerity measures in Europe and pending bankruptcies in US municipalities. US states are also broke and will have to finally deal with their union problems. Shrinking government worker salaries, if not payrolls, will put further pressure on demand for goods and leave banks with more bad loans. None of this is inflationary. Remember, in the ’70s private debt was low and growing, and companies were increasing their revenues and profits so that by ’82 Dow 1000 was a bargain. Now we’re in a generational de-leveraging, frugality-restoring mode, Kondratieff winter for lack of a better term.
The last couple of years should give deflationists confidence that we’re able to correctly assess the situation. Where is that dollar crash? What about $200 oil? What, in 2010 China still owns trillions in treasuries? Bernanke has tripled the US base money supply but a dozen eggs is still $1.50 and the long bond yields 4%? Obama spent how much, and unemployment is 17% ?
We make it way too hard on ourselves trying to get every squiggle right. Stocks and real estate are expensive and cash is still the way to go. Gold is still increasing in purchasing power. This is not bizarro world, it’s so far just a very big dead cat bounce after a 60% crash. US stocks are about where they were 12 months ago, and other markets are much lower, so clearly momentum is broken and bears should be confident so long as they’re not over-levered.
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PS- In response to Roger, upon first glance VXX looks like a fine vehicle for trading volatility. It seems to have tracked the VIX without much error since launch. Of course VIX futures and long-term OTM puts are also fine for going long vol.
Glancing around at the commodity and global stock markets, it looks like the bounce from last month’s lows has been adequate to reset psychology for another decline. This is not to say things have to drop this week, but if prices fail to push higher gravity could take over, as the general climate appears to be shifting back to de-risking and deflating (credit downgrades, budget cuts, poor housing sales, lack of hiring, treasury bond strength, etc).
China is the perfect proxy for risk appetite, as it had the biggest stock bubble and action there is linked to gobal consumer demand and industrial commodity prices. Here’s a long-term view of FXI, the ETF of largecap Hong Kong-listed Chinese shares. The big bounce ran out of steam last October, after which prices have made a series of lower lows and lower highs, the definition of a downtrend. Daily RSI and MACD suggest that short-term upside momentum may be stalling:
TD Ameritrade
Taking a look at a 4-hour chart of SPX futures (ES), I wouldn’t necessarily expect stocks to keep dropping this week. In fact, it would be somewhat clearer if we got one of those rollercoaster topping patterns over the coming days, where stocks rally and fall by 2-3% for a few times to bleed off the momentum, such as they have done at the last three intermediate-term tops in October, January and April.
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If SPX sticks to that topping pattern, it could fill the box I’ve drawn below on the daily chart, meaning another try or two at 1130:
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Sovereign Speculator 