Saturday Oct 23, 2010
Rates on the Rise
We are half way through the 18 year period of stagnation (2000-2010)
We are nowhere near half way to a solution to the problems…
Dennis Elam
Overview
- Long term interest rates are trending up
- Smaller stocks do not confirm the uptrend in larger indices
- Internals of highs and lows turn down sharply for major indices
- Manic speculation peaked in commodities and other currencies appears to be peaking, this preceded the 2008 crash
- Additional non confirmations are shown in silver and the mining shares as well as in oil and oil service shares
- The Dollar appears to be making a low along with highs in currencies of commodity producing countries
- We are entering a period much like 1972-74 or 1930-32, we mentioned this previously, we now update with tables for both periods, this will be an excellent map for what to expect the next two years.
Bond Market
We believe the charts of the Aussie and US Dollar as well as the breadth non confirmation Thursday were very important, and said so. Here is another but don’t tell Ben Bernanke. Ben you see actually thinks he controls interest rates. He does not. They are set in Chicago at the Board of Trade where every maturity is traded five days a week. They are set by the Central Bank of China which raised its rates this past week. Our FED is a player not the player.
The April 26 high in stocks was also a high in yields. For the first time since then, long term bond yields have begun to rise. The left blue arrow shows the first rally failure, but bonds made a higher low and on the second effort, decisively popped to new highs. Notice both the 13 and 21 day EMA crossed over the 34 EMA again clearly for the first time. The pink line is the ten year yield which has not risen as much given it is a shorter time horizon, but now it too is rising.
We looked back and yes rates rose the first half of 2008 . We are seeing the impact of the cheaper dollar with investors demanding more yield to hold US paper. How long will it take for the stock market to notice the rise in yields?
Stock Market
We showed the daily version of this chart Thursday, here is the weekly. We outlined the summary in blue at the upper right, a 13.86% drop in a week where the major averages were up! So fewer and fewer stocks are participating, indeed more turned down than up this week despite the higher index averages! And note that despite FED injections in the market today, the High Low never got near the previous level seen in April, it never even matched the highs of January. AT bottom the MACD histogram has turned negative.
Investors are of course focused on the ‘news’ that major indices are making new highs. But our previous chart shows that even among major indices, fewer and fewer stocks are participating in the rise. This is also true if we compare say the QQQQ with the S & P 600 mid cap index, the SML shown here in pink. QQQQ is being powered by a few leaders like Priceline PCLN, a double since July and Apple, up from 240 to 310 in the same period. So we have less and less participation as the major indices climb higher. This is confirmed both internally with breadth turning down as in the previous chart and in this comparison with the index of smaller companies.
Currencies
An interested Austin, TX reader asks why we used the Australian Dollar Thursday for the comparison. Good question and here is the answer. We added copper shown in gray (the gray is hard to see but we tried several colors and this is as good as any), pink is the Australian Dollar, and Green is the US Dollar. Note how closely Copper Tracks the Aussie Dollar, or is it the other way round? Our point was that Australia is a commodity producing economy. Its currency reflects strength, and weakness in commodity prices. Note the Aussie bottomed with our stock market and copper in Fall, 2008. Now we have excessive speculation in commodity prices which led to a rise in the Aussie. The rise in commodity prices was cause by both the cheap dollar and the availability of near zero money here with which to speculate elsewhere and drive up prices. This of course is to no benefit other than the speculator.
Here is a similar example to the Aussie and the price of copper. In this instance the black line is the price of oil, West Texas Intermediate. Note that up until just recently PTEN was trading below the price of oil. PTEN is a West Texas based oil service company. Its fortunes rise and fall with the price of oil. As the price of oil rises, they go to work. As the chart shows, in lat e May at $70 oil PTEN fetched only $12 a share. Now at $82 it has risen to $20. This is out of synch with reality. When PTEN is rising above and faster than crude oil we are in the final days of a blow off in speculation. Indeed it is up 50% in the last two months on a ten dollar rise in the price of oil.
Silver
Silver is literally the most expensive it has been since 1980, so naturally everyone wants to own it now rather than last year at $9. Again we have a glaring divergence and non confirmation. In early 2008, Silver Standard SSRI, a popular silver stock, went higher before the top in silver. Now silver has made a new peak but SSRI is well below its 2008 price peak. The stocks of mining companies should be outpacing the mineral itself, this is the case for many mining companies and their accompanying mineral. Silver has been positively manic, like Priceline, note how it moved the upper Bollinger Band up the last three months. But this past week was a red bar indicating a lower close.
Dollar
There are more indicators than we normally put on one chart but we are trying to reassure those that are still long UUP. The pink dots are the daily Parabolic Stop and Reverse. We now have the first buy signal since the sell signal at the top in early September. The three moving averages in blue red green are flattening out as they should at a bottom, note the shortest is two weeks at 13 days so it will take some time. Note price jumped and is now forming a higher low. Next the black bars show short covering and positive volume. The MACD at bottom has also turned up.
One can google French work stoppages and see that Europe is in bad shape. Sarkozy cannot even get ‘students’ to agree to a two year hike in the retirement age. But things are much worse than that. Click on
Mish for a description of how economies are slowing around the world, China is playing hardball with the US on rare earth minerals (does Geithner really think the Chinese take him seriously). Mish notes that Britain will not be able to seriously project military power any time soon. Its two aircraft carriers will not be finished for years and there will be no airplanes to fly from them even then. This is not going unnoticed by Iran. We are not Stratfor.com here but this is what I meant in the opening quote, we are nowhere half way to any solutions.
Now and Then
Okay we are going official with this prediction. It seems to me that we are at a period much like the fall of 1972. For the last two years, all thought Sept-Oct would be just awful, since Sept Oct 2008 were awful. Well someone managed to keep that from happening the last two falls. And that is what happened back then, take a look.
This is a portion of the table we sent a week ago. Note that the market moved up right through the traditional weak Fall, only to have the bear market which would drop 20% in 1973 and over 30% in 1974, begin in yes January. Consider these similarities between then and now.
Incumbent President won big and then went downhill fast in popularity
Nixon carried all but two states, Obama handily beat McCain. Realclearpolitics.com and Rasmussen both suggest the Republicans will take back the house with a 50 seat gain.
War in Viet Nam and Afghanistan, both long and losing, unpopular with nearly everyone, especially young people
No one has any realistic idea of why we are in Afghanistan, a harsh land that has been repelling invaders for centuries, ask the British and the Russians.
REITs very popular with public
Then REITs were marketed as a widows and orphans investment. Yet I can remember still having shares for sale in syndicate at 13.5 for an issue that came at 15. Alan Abelson would take aim at some REIT each week in his column sending the price reeling the following week. Now we are still grappling with even questions of legal title, and people are flocking to commercial real estate as though it were a bull market again after seeing it meltdown two years ago
Watergate waS rather like the mortgage mess, each dominated the news in its own way for months and months, on and on with no apparent solution
Markets back to previous highs, public assumes everything is okay
The Dow hit 1,000 for the first time in 1966 and made another move to 1050 in 1972. Everyone assumed the worst was over, then as now.
Dollar in trouble, Nixon took us off the gold standard, now the Dollar is being trashed by our own government
High taxes were the norm then with 70% marginal rates.
Failure to renew the Bush tax cuts will give us the biggest tax increase in history
Then inflation, now deflation but Wash policies have temporarily spurred inflation in oil, gold, cotton, sugar, etc
One can argue that the 1970s was a time of inflation but without question 1972-74 was the biggest deflation in stock prices since the 1930s
The ensuing bear market, 1972-74 saw many brokerage firms disappear or merge.
This has already happened this round with Lehman and Bear Stearns, gone, Merrill is much smaller and now on a very short leash, The banks have become brokers thanks to removing Glass Stegall and promptly got themselves in to the same difficulties . All the major banks needed a bailout.
New York City essentially went bankrupt
Chapter 9 was added to the Bankruptcy Code to allow municipalities to officially go broke and start over. Now entire states and numerous cities face the same fate.
We could go on and one but the similarities are all the same. Too many people are expecting another crash now so that will not happen. Instead expect a repeat of the 1973-74 or the 1930-32 experience, take a look at the latter on the next page. We expanded to one decimal place for 1930-32 since the numbers were so small at that time. Let me assure you that we as brokers were endlessly told no to worry as the market was descending on low volume, Of course it was, most people were out and no one was interested. We now have set the stage with most people in junk bonds, REITS, and municipals (ironically the worst of both worlds.) Both periods shown end at the dead low, therefore the time periods were similar. 1973-74 was about a 40% decline but more in DOW terms while the 1930s was a disastrous 89%. But we remind you that many stocks were simply wiped out in both periods making it a clean 100%. Already FNM, FRE, Countrywide, Lehman, and Bear Stearns are in that clean 100% camp, oh GM too…
Oh one more thought. In 1972 the exchanges were not able to keep up with the paperwork of trading. And so there were shortened trading days some had fewer hours than others.
Now we have had numerous flash crashes, as I write Tyler Durden at ZeroHedge is reporting yet another in currency ETFs. We can imagine this happening during trading hours, with high frequency trading, probably the culprit anyway, what will the Exchange do? What trades will be deemed legitimate? With this kind of volume could trading be suspended in certain ETFs until the mess is straightened out? Is anyone at the NYSE thinkgin about this?
Now, our Editor asks a good question, can the overall stock market hold up until January, or into next year in the face of the internal decline shown on page 3, the fact that interest rates are turning up, etc. One must avoid reading headlines about unemployment, reduced expectations etc and look at what the market is telling us, that is what technical analysis is all about. And the market is telling us not that it can but that it will hold up. The best indicator is the weekly A/D chart, let’s take a look. There is no sign of a top in this indicator, note how long it took to roll over in 2008.
This indicator suggests it is still early 2007! Note the distance between the MAs then and now. It took until the summer of the following year in 2008 for the MAs to start crossing over. I can roughly count a fifth wave in progress now. But clearly not one of the three MAs has even begun flattening out. So, can the market hold up longer, absolutely. At top the actually NYSE index shows again a non -confirmation, lower price but a higher A/D line. Too many people are too bearish too soon. We stuck by our 1180 prediction and were proved right. The market will go where it wants when it wants, until then, watch the charts not the emotions.