Monday July 23 2012
We urge you to read the following article. This disparity is exactly what we have been discussing. Yes the sell off in the Euro has gone on longer than I expected, and the sentiment has gotten to an extreme benefiting such an occasion.
The gap between consumer confidence and stock market valuations is the widest it has been since 1995 according to this Bloomberg report. This is why the eventual snap back will be so dramatic. This one article summarizes much of what we have been saying.
Consumer confidence Sinks World Wide Here are other examples of consumer confidence fading world wide.
The sell off was dramatic but was ending by the time the European markets closed here at 10:30 AM CST.
Tuesday July 24 2012 5:45 AM CST
A Rush to the Exits
AS the price of TLT has gone higher nad higher there is less and less money flowing into the funds. That is the message of the Chakin Money Flow Indicator in the back ground. What is going on here, if the price is going up should there not be more and more investors crowding in to the room?
What is going on is that the market is running of of investors that are not already in the room. For every buyer there is a seller, indeed. Here is a simple example to put this, as we say in our title, in Perspective.
We are on the proverbial desert island. There are ten of us who survived the shipwreck of the Minnow, think Gilligan's Island Two. There are only two commodities on the island, bananas and coconuts. For whatever reason, the rumor begins to spread that there will be a banner crop of bananas but few coconuts with their precious milk inside. And so the islanders begin trading bananas for coconuts. Eventually two of us hold most all the bananas, the other eight hold coconuts. But the feared coconut shortage and conversely the banana bonanza does not develop. Finally one of the eight gets nervous, and offers to sell coconuts for a few bananas, after all it is a lot easier to peel a banana than open a coconut. What is the response? Well we near all the bananas but the coconuts are held in four times as many hands. So we holding bananas know there will eventually be a flood tide of coconuts on the market wanting to return to bananas. The result is a huge imbalance in price as we price our bananas much higher than the last low trade, and offer much less for coconuts than the last high trade.
And that boys and girls is about all you really need to know about how market work. The crowded trade means that too many folks are holding the same thing. When they want to exit, the prices reverse violently.
The chart of TLT shows this same banana coconut exchange is happening now, but on a larger scale.
1. TLT is violating the old rule that markets will return to their mean. TLT has not touched the 200 day MA since April Fool's day.
2. As mentioned this weekend, MACD is showing a negative divergence, it is lower while price has risen.
3. This is the typical breakout pattern, a new high on lower momentum, that causes quant computer programs to buy the breakout, even when there are fewer traders left to continue buying.
4. The rate on the ten year note at 1.4% is an absurdly low return, we have noted that bond prices now exceed what we saw during the worst of the 2008 sell off, again what a divergence.
5.. The markets are not going to reward this kind of advance get in the tornado shelter, stay in the Safe Harbor thinking. As the first article states, we are back to 17 years ago thinking in terms of sentiment.
6. Gold has advanced for the last eleven years. There is no Western Democracy that is going to retire its debt. As we have said, they are all pre bankrupt GM now. The idea that holding 1.4% paper from a country that owes trillions and even now plans more deficit spending is an extreme that will not be rewarded now.
So far the sell off looks corrective as we suggested this weekend. The parabolic PAR SAR is still on abuy signal. Note on the last two corrections it had to briefly reverse, causing the late comers to go short and sell out their positions before the market climbed higher.
Internal Indicator - Is this a Carnage
One reader wrote for my reaction on the media description of yesterday morning as a Carnage. More a correction I would say, correction not carnage. 150 day Indicator reached down to its 50 day MA. The RSI continues to test its uptrend line in the bottom panel. A move above the zero line will keep us going here. These quiet higher lows are in sharp contrast to the Carnage Comments that drove the last few investors into low yielding Treasuries.
The Smart Money XES Energy Service
Crude oil has dropped about five bucks the last two days. It remains above its 50 day MA. One might have thought XES would really drop but no, the thirty minute chart shows buyers coming in on the sell off, a nice pattern of higher lows on all pullbacks since the June low.
One More Thing - The Mid East Tinderbox
On Fox News last night, Charles Krauthammer noted that the israeli Amabassador on Meet the Press this past Sunday made their position clear. With the apparent impending fall of Syria, Israel suspects the chemical weapons would be handed to Hezbollah. This would be a direct threat to Israel, on top of the nuclear ambitions of Iran. The Ambassador made it clear Israel was ready to go it alone if the USA continues to do nothing. The Administration is into fund raising, not diplomacy.
This is the wild card before the election. Israel is not going to wait until after the election if it deems action necessary. The timidity of the US has emboldened Syria, then Iran, then China and Russia to believe we will do nothing, as that is what we have done. This is just the sort of situation that leads to unexpected consequences. While it is impossible to gauge fundamental events as to time and place, even a brief attack would skyrocket the oil price. We have two aircraft carriers in the region but would we use them in any way? We simply mention this as something to add to the mix.