The Market Perspective

SOX Index Tanks

Friday Sept 21 2012

You will have to look up the entire article but gold miners in toto have spent more than the cash they generate.  The gist of the article is that miners have vastly underperformed gold itself. Gold is getting more and more expensive to mine, the cost exceeds the benefit. 

I hope I have made my concerns clear, a final spike higher probably lies ahead but is likely to be followed by an even more vicious spike lower. 

Semi Conductors

Semi Conductors are the heart of pads, laptops and phones, welcome to the electrified economy. With stock indexes and gold climbing higher the poor performance of SOX is another sign of an impending top. We have pointed out that various markets top at different times, here is another example. But the big point is that weakness in the Semis is a red flag for the overall economy. 

Intel and Texas Instruments look just awful. Not good. Markets are quiet again this morning, does a final burst up lie ahead?  We will continue our more frequent updates. 

I am thinking that at this juncture it may be a lot easier to start scaling in buys on HDGE,. If  the markets collapse over the next two years as we think, is much easier on our mental state to start top picking after a four year market run up,  than tuning in daily to Bloomberg TV to see if we overstayed our welcome in markets that are already flashing overbought signals. 

I will have more on managing risk, and a look back at the 1973-74 meltdown thanks to information from our friends at the Socionomics Institute. 

Seriously it has been most gratifying to hear from readers across the entire USA this week. We welcome all correspondence and especially your construtive suggestions. And on the revolver  map at the top left on the blog,  one can see our reach expands overseas. 

Thanks for reading The Market Perspective.

Crude Oil Complex Heads South

Thursday Sept 20 2012 pre market Opening in the US 8: 15 AM CST

Put another way, staying long here is a bet that one will be wonderfully omniscient, in a market with the RSI already topped out at 72.22 and with MACD at 1.07, yes one will pick the very moment before the mood switches and all race for  the exits. 

TMP Wednesday Sept 19, 2012 commenting on GDXJ

My point is that RSI bounces between 30 and 72, it cannot get to 100. Once any indicator gets to or near its maximum top or bo tom the indicator becomes of less and less predictive value. Then one is flying by the seat of ones pants rather than on instruments. 

 

This piece provides various rationalizations  for the drop in oil prices.

For new readers I notified all that i exited my long commodity plays on Monday. I posted numerous charts both last weekend and Monday morning explaining the rationale. I also posted an additional list of concerns in response to a reader inquiry. I also offered an Ed Carlson analysis using completely different methods that reaches the same conclusion, Ed's work frankly did not affect my decision but just today I ran across another analyst of some note looking for a top this week. 

I believe that telling readers what I am doing with my money is a necessary ethical component of writing a blog like this. Rest assured the analysis will continue, as I said, I may be wrong but I am wrong with money in the bank. later in today's pose we examine that what might be right for one investor is wrong for another, it si all about risk tolerance and picking tops. 

We will continue to provide unbiased analysis based on the market internals rather than the news or one particular theory or approach. Like our readers I am looking for the next opportunity. 

Having said that, is anyone following the oil market?  The entire complex is collapsing. If the bull case for commodity plays is correct oil has no business being $93. 

Having said that, 

Crude Oil Complex

Over the last four days crude oil has dropped through three moving averages. The entire complex is dropping with heating oil and unleaded gasoline joining to the downside. Do not think that this is a positive, ie, the talking heads on television would have you believe that low oil prices are a good thing. in fact oil prices have a high correlation to stock and metals prices. My Dad worked for an international major oil company, I worked in our family owned oilfield business from 1976-1989, I have continuously written a weekly column on oil prices and the West Texas economy since 1998. And unlike Robert Kennedy jr. I have used lava soap and go jo hand cleaner to remove a good deal of the precious environment from the palms of my hands on many occasions while working in West Texas....

My point here is that if crude oil, a gigantic market, can drop 7% in four days, everything one owns right now can do the same thing. Think about what that would do to recent gains in your portfolio. 

Basic truths about the oil market learned over my lifetime

1. Industry oil market professionals  are the worst predictors of oil prices.

2. Oil prices bear little relation to supply and demand. S and D might vary 20% over long periods while the oil price can move 5x in six months.  

3. Oil prices reflect speculation via zero interest money and exchanges around the world which make this the world's largest gambling casino. 

4. Oil prices display a high correlation to stock and metals prices, they bear an inverse correlation to risk off bonds and the US Dollar. 

CRB Index

The entire Commodities Research Bureau index is also at least correcting. The thing you have to aske yourself, as we head into the traditional weak october season, well do you feel lucky?  is this a correction or the start of a top?

 

 

On August 14 2012 we featured this graph showing how various made tops at different times. The effect is to deceive the various participants in the market into not recognizing what is really  happening. 

The Markets Top Year 2000

Again this is the various markets topping in Year 2000. First the DOW, then the SPX and then the CRB topped, each about three months apart. Like any rationalization it was easy to say well that market may be down but mine is still up, ignoring the overall pattern. 

Another famous Wall Street adage is that markets never do the same thing twice. Perhaps this time crude oil tops first, and then stocks make a final frenzied rally. Remember that socionomics tells us maximum mood occurs at the end of a move. The NASD moved up 40% in the last few months of its rally from  1982 to early 2000, and then it was all over when everyone was all in.  Admittedly my parallel with Dirty Harry's comment is both an attempt at some humor but at this juncture it is also a good idea to ask if you own stocks past your own sleeping point. Is it really better to stay long  100% all the way to what one hopes will be a top thinking that of the millions playing this game you will be calm cool and collected to either have an order placed ahead of time (for one hundred percent of your stocks) or that you will be glued to the screen and somehow pick  a top during the trading day. 

How many professional traders at the New York Mercantile  do you suppose shorted oil at $100 four days ago?

TMP puts on his College Professon Tam for a Classroom Lesson

While all this may sound like a rationalization for my selling on monday and some of it is, most market letters rarely to never ask readers about their own personal comfort zones. Or as Harry Markowitz put it back in the  1950s, what is your risk efficiency frontier?

Here is the idea in a nutshell.

The investor's optimal portfolio is found at the point of tangency of the efficient frontier with the indifference curve. This point marks the highest level of satisfaction the investor can obtain. This is shown in Figure 3. R is the point where the efficient frontier is tangent to indifference curve C₃, and is also an efficient portfolio. With this portfolio, the investor will get highest satisfaction as well as best risk-return combination. Any other portfolio, say X, isn't the optimal portfolio even though it lies on the same indifference curve as it is outside the efficient frontier. Portfolio Y is also not optimal as it does not lie on the indifference curve, even though it lies in the portfolio region. Another investor having other sets of indifference curves might have some different portfolio as his best/optimal portfolio.

As  Harry puts it, the investor gets the highest satisfaction at the tangent on the indifference curve

I would note that remaining long past that point is liable to induce sleepless nights and severe stress on our investor. In other words remaining long or attempting to move from C3 ot C2 is perhaps assuming a lot more risk for that return than one can mentally absorb. What is your sleeping point?  

 

Handily Harry provided us with a chart that illustrates my point here. Return is on the vertical axis and risk is on the horizontal axis. Harry's point is that higher returns only come with assuming higher risk, and remember Harry was writing before we had exchange traded options, futures, ETFs, 3x ETFs and such.  And when Harry was writing, millions of hedge fund mangers and private individuals could not hit one button and sell or buy millions of shares, they can now.  Now my point is that one MUST move further out on the  risk axis to achieve that final nose bleed high return as the graph goes parabolic, it becomes a geometric function not an arithmetic one. 

Now, as the title of this blog is The Market Perspective, go back to Graph One in today's update. Crude oil, after a final week plus move from 94 to 100 gave it all back in four days. As Art Cashin says, one would have to be pretty nimble to have sensed the impending top, THAT DAY! 

It is not difficult to imagine a final spike in these various markets followed by a slump just like in oil, giving back all the gains a few days. So staying long will only work if one can guess the very top. And as we point out the various markets will top at different times making an overall assessment that much more difficult.

The Bottom Line

I believe  tops in various markets  of 18 year significance lie immediately ahead. I believe the markets will exhibit final parabolic like highs. As that happens it becomes increasingly difficult, note oil in the first chart, to sense a proper exit. So the last few percent gains can evaporate quickly as my TLT puts did Monday. That is fine for the modest investment in the puts which still made money. That may not be so fine for your entire portfolio. 

After all sorts of frantic gyrations, it may well be that the markets post election just like post election in 1972, settle into a long protracted boil the frog so slowly he does not notice. From 1973 to  1974 post election markets declined 50% as measured by the DJIA. Since markets crashed in 2008, a long slow decline seems the best way to fool the majority of the participants. 

This morning stocks oil gold off modestly while bonds and the Dollar are firming. 

Thanks for reading TMP we should have a most interesting time between now and the election. 

This chart shold not need any comnent, your road map for what lies immediately ahead!

 

In a Bull Market, All News is Bullish

Wed Sept 19 2012

This analyst suggests gold will take a breather and then advance again.

Jim Chanos is finding more shorting opportunities.

Survivalist mantras have been around for a long time but now they are more mainstream, note that is not all about storing dried beans and fresh water to hunker down in a food shortage, no it is about 

an anticipated violent societal collapse.

We take profits. Did I over react, I suppose?  Okay, why?

In a bull market all news is bullish. In a bear market all news is bearish. 

That is one of the oldest sayings on Wall Street. It was really a precursor to the realization of socionomics that mood determines market direction. At the moment, the predominant mood is clearly bullish. 

We had a  great call with our TLT puts buying at 126-128 on TLT and then holding right into Friday's TLT meltdown. I admit to being giddy. Like the kids in the Night before Christmas, sugar plums were dancing in my head. The puts had exploded in value, bonds melted in the two previous QE money printing exercises, I was on the right side of the market, what could go wrong?

Well I did say that the opportunity to profit via buying an option is quite rare. This was one of those times but, one has to be nimble.  That fabulous trade on Friday became an okay trade by Monday and Tuesday. It made money but not weblog grabbing headlines. The mood changed and TLT corrected upward. And there were plenty of signs that it was quite oversold. Other analysts had commented on just that. 

I started this weblog specifically so that myself and readers would not be caught in a down draft holding long positions. It is easy to exit when the mood is good, profits are across the board, and everyone is relaxed. But the reversal in TLT and the simultaneous low in the Dollar was a cold shower. As Dave Letterman has mused about his success, a little voice comes in and says, it's all over, time to go back to Indiana. 

With profits in just about every position and the bonds and dollar at a daily extreme, I was holding hundreds of thousands of collars of sescurities. Would it be wise to scale in HDGE as a hedge?  Would it be wise to take a partial profit?  Or do nothing?

I suspect the markets will top before the election and take a dive. Since few to no one expects this, that seems logical. When that happens it will be difficult to say the least to exit easily. 

Another dimension of trading is the concept of the Missed Opportunity. Did you buy Apple at $15 when Steve Jobs returned or silver at $3.50, both in 1999?  Those are missed opportunities. 

Will GDXJ go to $30, maybe. but you never really have a profit until you take it. The money we do not make is money that we never had. Or as Jeff Goldblum observed in the Big Chill, ever go a week without a rationalization?

At the upper right gold is up $150 in the last month. IF the spx rises from 1470 to 1570 that will be another 6%. It is already up from 666 to 1470. Is that additional rise worth the worry of where do we exit?   At this point is there a lower risk way to play gold and silver without having a great deal of money in potential harm's way?  I will be examining those alternatives and reporting to you. 

Meanwhile there is no lack of negative news from the Chicago teacher strike (the strike has now ended but the negative is the obvious in your face what are you going to do about it tactic by the union which by the way worked, they got a 16% raise)  to the obvious lack of respect for the USA in the Arab world. Foreign policy wise it is 1978 all over again. An ambassador is dead, does anyone care? (This is  a tragedy and I do not mean to diminish the man's life but where is the outrage?)  Well the mood has not shifted to the negative yet, if it had that would be big news as in

Crowds Riot at US Embassies, Dow Plunges 200 on Uncertain Oil Prices

But we are not seeing that yet. I don't know when the Dark side of the socionomic Forces  will pull the switch and everyone will start worrying about such things. Earlier this year we exited in February and the markets held up for another month or two. 

I put the graph of the DOW from 1987 up for good reason. it is easy to exit when the mood is positive but quite difficult once sentiment turns dark and stocks are not well bid. 

I am certain that I have exited too early. The markets will no doubt run higher. But with a top expected between now and the election one will need to be very nimble, as Art Cashin likes to say, in picking an exit strategy. 

You Tell Me Department - GDXJ

Both MACD at the bottom and RSI at top have gone full tilt from buy in May to whooppee in September, note the blue boxes. We know maximum mood occurs at the end of a run, so there may be more ahead but this is hardly a buy signal at the moment. 

Put another way, staying long here is a bet that one will be wonderfully omniscient, in a market with the RSI already topped out at 72.22 and with MACD at 1.07, yes one will pick the very moment before the mood switches and all race for  the exits. Sure it's easy to look at an historic chart and see the top. It's a lot tougher on a real time  day to day basis. The news won't change it is already negative, but the mood will. So far we still lack an exact Welles Wilder Directional Movement indicator for when that happens. But it will, and suddenly negative events that were ignored yesterday will be of concern today. 

Remember in the markets you cannot sell yesterday, only today, there is no Time Machine. 

Thanks for reading The Market Perspective. 

Posting A Response to a Reader

Tuesday Sept 185 2012

I posted this repsonse to a reader inquiry, There is enough here that it deserves a regualr co0mposition I think. We have spiked in the number of hits today so I am trying to put up a good deal of information.

 

I showed several indicators in the morning post that are well along in their upward move to tops. NOte the High Low and A/D volume charts. Note the weekly chart going back three years which shows a head and sholders top pattern.

Ramki originally had 1474 on the S & P as his projected high in the S & P. We hit 1474.51 as a high.

 Ed Carlson is calling for a high today. I did not come to my conclusion based on his call but on the internals that I regularly report on. TLT and the Dollar are both looking like they have at least made a temporary low. In fact one can make a case the Dollar will find support at this 78 area. Will the Euro go much above 140, I doubt it. Will it get to 140, I don't know.

Since this morning FDX announced an expectation of lower earnings for 2013. I will post later but its YTD chart looks like a topping or distribution patter moving sideways with violent up and down fluctuations.

I don't know how much stock to put in it but this is the 25th anniversary of the Harmonic Convergence which preceded the sell off in 1987.

I may have made an error in exiting too soon but one advisor once told me one of his clients got rich by selling six months too soon rather than six days too late. AS GDXJ has advanced I too was excited to see the profits building in our accounts. But it may also be that commodities like the A/D Volume line are making a higher low before world wide deflation takes control again.

Recall I noted that the Utility Average may have already started down. Shangahi looks terrible.  I may have erred but at least I erred putting money in the bank.

And it may be that owning at the money January 2013 calls on GDXJ vastly reduces one's exposure to poetential loss. Today I noticed the 25.63  January call  at 2.00. That is a whole lot less to risk than 25.63 bucks per round lot. THe current market is quite similar to this time in 1987, I posted that chart for your  inspection. Again perhaps I am early who knows but the internal indicators have come a long way.

Indications are that the dollar and bonds are about to at least short term rally. We can always buy back.

Seattle Technical Advisors

Tuesday Sept 18 2012

We are able to e mail subscribers a special update from Ed Carlson the author of the tech book of the year about George Lindsay's methods. His approach is completely different from mine but we have reached the same conclusion in the same time frame. We both believe this is a time frame for a market top. 

If you are interested in the report drop me an e mail, I am sharing requests with Ed in all fairness for his work and effort but the update is free. 

 

[email protected]

Harmonic Convergence

Sept 18 2012 I

I remarked in my Tuesday morn update that I was getting that Fall 1987 feeling again and then I recalled

The Harmonic Convergence of August 1987. This was a world wide metaphysical event back then. It was as good as things would get. And so I wondered could we be in a similar period now?  We are 25 years forward from 1987 and sure enough

Harmonic Convergence of 2012

Readers are aware that we do not follow grand super cycles but look to market internals and socionomics. But many of the things discussed on the site above have also been noted in our comments on social mood which is becoming darker and darker. We noted the parallel to Carter Obama both elected 12 years into the stagnation cycle and near simultaneous Embassy attacks in 1978 and 2012. Hmm, things are lining up. 

At any rate TMP readers may find this interesting. Just for fun I went back and looked at 1987.

Dow Indus-trials 1987

Again, we laid out our concerns this weekend and this morning. but gee, this is an amazing coincidence eh?  We promised to ramp up our analysis given this interesting time period, one more potential puzzle piece. Whatever one thinks of long term Mayan cycles, there is no question what happeend in 1987. 

TMP Exits Positions This Morning

Tuesday Sept 18 2012 6:00 AM CST

NOTE I sold virutally all my positions this morning. This is a run down of why. I answered one reader post below with additional reasons. As I said in that response, I may be early but at least I am early with a large profit.  We can buy positions back after all.

Worse, your brain-processor may be making serious computational errors comparing the new and the old. One of America’s leading behavioral-finance gurus, University of Chicago Prof. Richard Thaler, explains why: “Think of the human brain as a personal computer with a very slow processor and a memory system that is small and unreliable.” Thaler admits: “The PC I carry between my ears has more disk failures than I care to think about.”

An interesting article on trusting your 'instincts'

Mark Hulbert quotes a Value Line Analyst for 1500 by February.

I would agree with this article which suggests all we get from QE III is higher stock prices, more speculation, not more hiring.

An old Wall Street adage has it that you should 'take your half out of the middle.'  This idea is that one waits for a bottom to be established, then buys, and then exits before a frothy top. 

Since June we succeeded at buying low, now the tough part, judging when to sell high. We are sitting on very nice profits. Stocks are the highest since 2007 and commodities have made nice moves, some are just now breaking to the upside like REMX others have just cracked their 50/200 day MAs like GDXJ.

I just cycled through my 30 some odd internal indicators. Note that yesterday afternoon I re iterated my comment from the weekend that the market could certainly pull back here.  Here are some of my concerns.

Daily New Highs to New Lows

This year long look back shows the 'bump' in dramatic fashion from Ben's announcement last week. But as Peggy Lee wondered, Is that all there is?

Our reliable summation indexers for the NYSE and NASD have not toped out but take a look at

NYSE A/D Volume.

 As Mark Hulbert notes in his column above this has been a tremendous, indeed, historic rally.  This was a huge run of 5500 points. If it turns out this is THE fall high in this indicator,it is telling us to expect lower prices this Fall.  Perhaps we should take a longer look to as we say here, put this in Perspective..

Weekly NYSE A/D Volume

 Here is almost three years of data on a weekly chart. I have tentatively labeled a potential head and sholders topping formation. Note the lower highs in the middle of each year (more or less) as this indicator has climbed to its present point. What we have to ask ourselves, is it really worth it to hang around as far as these indicators have come?  I am suspecting the answer is, no. Take the Money and Run?

NOTE This indicator is turning down just as it did in February, on daily and weekly of course. 

 Weekly Volatility Index

AS with the A/D chart above, is it realistic to keep hanging around here?  Note that the weekly VIX is starting to make higher lows, not dramatically but they are there. Let's move in for a closer look!

Daily VIX

I have not drawn any other indicators here so that you can see the action for yourself. The VIX, so far, is making a higher low in September than in August.  Note the confluence of MAs at 18.

I am reminded of September 1987 when things got weaker after Labor Day. 

 

Do we have signs of bottoming in the dollar and bonds?

The US Dollar

the Dollar has re traced 50% of its move up from the August 2011 low. We have looked for a pullback and we got it. The RSI at top and MACD at bottom either are at lows or are approaching points where one would look for a buy signal. Longer term we believe the Dollar is in a bull market. At this point that thesis is re inforced in that the Dollar is making a higher low here. Notice how long it traded between 78 and  79 ealier this year, there is some support there. 

Bonds versus GDXJ

I am long GDXJ and short TLT, still a good idea?  This ratio  chart suggests the ratio has returned to a longer term uptrend line, connect February March with where we are now. And of course February was a high in GDXJ!

TLT versus Stocks

Here we have the same thing again, are these ratios of TLT to gold stocks and TLT to stocks in general making a higher low?  RSI in the bottom panel is arguing for just that. 

I just looked through each of my holdings and they have had nice runs. In many cases the RSI is over 70 which is  sign of top market activity. 

We have very very nice profits. It is quite difficult mentally to see them evaporate even believing the markets may make one more high this fall. I admit to becoming a bit giddy last Friday with all the nice profits piling up. That is why I took a very long look this weekend and again this morning. 

Investing is a percentage game. One can only attempt to buy when others are selling and vice versa. All the indicators that suggested buying in June have now run to, as we say here, the other end of the hourglass. 

Let's take profits on these positions. 

Re Reading our Weekend Post

Monday Sept 17 2012

Note this comment from the weekend update

So it seems reasonable that stocks may well pull back in the early part of the week. Okay I said that twice, just didn't want you to miss that we said it....

That would be my comment!

I thought I had nentioned 1420 as a possible re tracement level. As negative as I am on bonds our analysis this weekend was correct, the stock market is way ahead of its Moving Averages.

More later I am thinking a pullback in stocks might at least cause bonds to move sideways to up another point here, we could have a double three or something in bonds as they are quite oversold here, note that spx and bonds both over threw their bollinger bands friday.

Monday News from the WSJ

Monday Sept 17 2012 7:25 AM CST

Perhaps the most immediately important column in today's WSJ at least for TMP readers is tucked away on page C2

Long Dated Treasuries Face Tougher Days

In that piece one bond manager after another is quoted affirming our predictions, that bond prices will fall dramatically fueling a stock and commodity rally.

the FED and the ECB are helping everyone out here...they jjust provided a lot of cover to riskier markets to rally. 

Here is an interesting quote, few analysts are calling for a significant jump in yields, the ten year hit an all time low of 1.38% in July.

This morning the ten year yield is at 1.8%k, that is a 30% rise in yield from 1.38%, I wonder what the writer considers 'significant?'

A Good Summary of the Problems

Page A 19 features three articles of interest, George Shultz and others notes that the problems are about to go from unmanageable to completely unmanageable

And a Mid East Professor examines our lack of policy in Libya and Joe Klein echoes the WSJ editorial on the opposite page-Karen Lewis, also see page A3, trumped Rahm Emanuel by calling a strike two days after the Dem Convention ended. she knew the Democrats would not alienate their union base, they would have no choice but to cave in to demands and get the schools open again, and she was right.  In the newsprint edition there is a photo of a female union delegate decorating her car for the Sunday meeting. The decorations include a plastic human skull, tombstone with skull, a skeleton, and another picture of a skull and cross bones. That photo is not in the on line edition or I would have it here. 

This weekend I noted that the harsh social mood we have been predicting has now arrived,from Chicago to Libya. In the original Die Hard movie Hans Gruber and his crew occupy Nakatomi Tower. The police send an Armed RV  to the building. Hans hits it with an RPG. That's enough screams Officer John McClane. Hit it again Gruber replies. The union in Chicago did just that in their Sunday vote, hit Rahm and Chicago again with a few more days walk out....just to make sure Rahm gets the point. 

Socionomics is hardly an exact science but the mood is certainly on display.

Monday Markets

After the big move up last Thursday and the sell off Friday afternoon, as we thought this looks to be a recently typical Monday with a weak openning, bond yields a tad higher. 

The FED Throws a $40 B Party, Every Month

Weekend Sept 15 2012

 Oil prices climbed toa four month high and topped  $100 a barrel in the wake of the FED plan...

the FED announced it would keep buying mortgages until the job market improves. The measure was seen as an unusually strong commitment by the central bank whose previous bond buying initiatives came with a specific end date. 

The market is wickedly strong and a lot of that has to do with events going on overseas said Tony Rosado, broker at Dorado Energy Services in New York. 

Crude Oil climbs to a 4 Month High, page B4 Weekend WSJ

Does anyone have a clue as to why employers would want to hire people just because the FED is literally printing (if you and I did this it is called counterfeiting) money to buy bonds flooding the markets with cheap easy to borrow money.?  The answer is no, it is the classic government knee jerk response, 

we have to do something. 

This picture says it all, The Guru of Good Times 

Just for perspective, $40 Billion is about the Gross

Domestic Product for the entire country of

Paraguay.  Who's the real Party Animal Guru of Good Times here?  See Heard on the Street, page B 16. 

 

 

 

 

Overview

Today we review the risk stock market versus the  risk off bond and dollar markets. A lot of progress towards   has been made since Sept 1 in getting to our expected high for stocks, oil, gold. Bonds have begun the same waterfall decline seen in the last two QE moves. As noted above, this QE III  however has no end date. All of this is laying the groundwork for what will eventually be a return to 1970s type inflation but that will have to wait until the deflation in speculative markets, like Chinese real estate, is exhausted. 

We are long commodity plays listed previously and short TLT via put options. 

 To kick off the weekend, we  chart how stocks have come a long way in a short time. We then examine internal indicators which surprised us in just how far and how fast they have approached prevsious highs. 

 

SPX

SPX has rallied about 180 points off its June 1 low. And it is quite ahead of all four MAs. Notice the red bars during most of Friday's trading as the market sold off a bit. Note this is a two hour chart.  In the lower panel MACD is toppy, again.  All of which is to say the market is probably a bit ahead of itself here. Mondays have been the weakest day of the week for stock trading. After the long awaited announcement Thursday stocks look ready to fall back a bit. 

SPX Bollinger Bands

An alert reader pointed out that the market had not exceeded its Bollinger Bands since 2010! One can readily see the market tested the mid point of the bands several times on the way up. Recall that Mondays have been the down day of the week. So it seems reasonable that stocks may well pull back in the early part of the week. Okay I said that twice, just didn't want you to miss that we said it....

 

TLT The Bond Market

As we have said, the money to  power stocks higher will come from the Bond Market. It too blew through its Bollinger Band but the other way, to the downside. Wave One was 11 points from 132 to 121. A reasonable expectation for Wave Three would be 1.618 x 11 = 18 points rounded. From 128 that spots 110 as a target. And one needs to keep  a target in mind when playing with uber volatile options as I am for the time being. Option expiration is next Friday so that might well be a good target date for our third wave down in TLT. Given the collapse in bond prices on the previous two QEs, there is reason to suspect further weakness here. Third waves are the most powerful. Funds will want to show stock positions by the quarter end which is this month, not losing bond positions. So yes this is overdone, nine days in a row down but the bond market has a habit of not looking back once it starts down. 

TLT Weekly - A Longer  Perspective

The weekly chart puts the Falling Knife nature of this collapse in perspective. We put the SPX stock in dex at top. TLT really had no business going to 132 as stocks were already rising, but that's irrational social mood for you! The 1.618 generated target of 110 has some basis here, note that was the last time TLT touched its 200 week MA. 114 might offer some support but best guess would be to simply target the 110-114 area. I will start taking profits I think in that zone for the put positions. This won't be over until TLT finishes five waves down. I am of the opinion that Elliott Waves really only work well when the mood is very strong, and with everyone and his brother in bonds, and now throwing sell stop orders at the market to get out, yes the mood is strong. 

But the financial sand has to run out of the hourglass. Money is running from bonds to stocks and TLT is just now breaking through its 200 day MA. 

The Dollar versus the Euro

The Euro is racing towards its previous 134 high in February.  The Euro is the solid line with its price on the left vertical axis.  The Dollar is falling to its March lows under 78.5. We are not there yet. This is yet another indicator chart that we will use to judge that odds no longer favor staying at this party. 

Internal Indicators

How Overbought is It -Think  Ed McMahon to Johnny Carson - New Highs New Lows Weekly

I added the pink lines to show the parallel to what happened since last October to the rally off the March 9 2009 lows. This is the first time since then this indicator exceeded 3,000. I looked at all 30 some internal indicators I track and many are much further along since September 1. This is in keeping with the exit out of an extremely crowded trade in bonds  to a 'nobody wants to play empty field' in stocks, oil, gold. 

NYSE Advance Decline Volume

I was rather taken back by just how far various indicators have moved up!  Note this one topped out in a period of two weeks. 

Crude Oil Joins the Party

This weekly chart of oil prices clearly shows the pop up with the heightened tensions in the Mid East as our embassies are attacked and one Ambassador is killed. The last murder before this incident was our ambassador to Pakistan in 1979. And then the Iranians took the entire US Embassy hostage in Iran. We are about as far along in this 18 year period of stagnation as we were by 1979 in that one and the social mood parallel could not be closer.

Note the time line similarity. 

The last era of stagnation was 1966-1982/84. The hostage taking happened in 1978, 12 years after the market topped. Carter was elected in 1976. 

This era began in March 2000. We are 12 years into the period. Now the Embassy attacks are coming in right at 12 years from the start of the period. Barack Obama like Carter came to office eight years into the period. The playbook is right on schedule. As is the incredulous administration response, who would think they would attack the people that oberthrew their despotic leader (Carter took delight in over throwing the Shah as well). 

Consider the cluster of events in both eras

-High oil prices

-A Mid East  belief the US will not do anything in retaliation for violence against the Infidel USA

-High unemployment in the USA

-Deep political division as a result  in the US. We shall see if the election proves to be a replay of 1976 or 1980. 

At any rate, oil will likely top last among the various commodity plays. Note how much oil looks like the previous A/D Volume chart. Before we leave this topic of oil, let's take another look back at daily prices in 2008. 

Crude Oil  2008

This is not a prediction that we are going to $140 oil again, but ..

Note the 40% move in just three months after April  2008.  With the FED sloshing money around with no end point, keep your mind open to just about any possibility, add in the front page headlines of Anti US Mobs on Rampage, the chance Israel might attack Iran, the refusal to complete the Keystone Pipeline here, well just about anything could happen. And oil was the last market to top in 2008. 

The Road Ahead

A reader asks if I still expect a sell off after a stock market top. Let me be sure to make my expectations clear here. 

The market is coming into a top worthy of comparison with March 2000 and the Fall of 2007. Market final bottoms such as 1932 or 1974  usually require a dividend yield of 6 % on major stock indexes. That equates to about Dow 5,000 or SPX 600. 

SPX Monthly since 2000

At far right the 50 month MA is still five points higher than the 200 MA. But frankly I don't think predicting another massive retreat is an extreme position. Any prediction other than that would be extreme, extremely naive that is.  Note the red green lines on the RSI at bottom. RSI has not achieved the over done levels of 1998 or 2007 but it is on its way. This monthly chart of course lags too far to be used as an early warning indicator. I also suspect that we will finally get a crossover of the  50 to the downside of the 200, and that will be significant. 

This weblog is named The Market Perspective for Good Reason. If SPX 600 sounds far out, this is only because every one has become accustomed to the New Normal since 1996. Because it was not until 1996that the SPX rose over 600!  

Monthly SPX

A tenet of Socionomics is that extreme mood occurs at the end of a move. INdeed in the last four years 1996-2000 the SPX tacked on another 900 points more than doubling the index. Consider that people have lived here in the USA   since the early 1600s. It took 400 years to get to SPX 600 and then just four more (1 % of the entire time to move 150% in price) to more than  double it, geez!

Readers, please stop whatever you are absent-mindedly doing and re read the last sentence. Recall that the purpose of a bear market is to clear out the excess speculation and dead wood from the past bull market era. Facebook is a great example, betting the farm on a national on line photo scrapbook. Its 50% collapse in a matter of weeks is the warning of much more to come in terms of curbing speculative excess. 

 The convergence of the MAs is signalling a massive turn ahead in the markets. With US Govt Revenue at 15% of GDP and Expenditures at 23% of GDP, there is no way this will be avoided. And we will be going into the downturn with 47 Million already on Food Stamps.

HDGE - Another Inverse Indicator to SPX

HDGE is a fund that literally shorts individual stocks. This is in contrast to other funds that attempt to replicate a bear fund by shorting futures. Such funds have all sorts of potential problems when renewing positions at month's end. This is not the case for HDGE. HDGE is the solid red line in the main chart, the SPX is the red green bars. At bottom is a new indicator from Stock charts, the Vortex Indicator. It is a bit of several indicators but is a better way of showing what Welles Wilder was trying to do with Directional Movement. Succinctly, when the green line is up in the lower panel, SPX is up. When the red line is down HDGE is down, and vice versa. What we are monitoring is the disparity between the two. The last big disparity was in March, when both the price indexes and the Vortex reached a maximum extreme. We are headed there again, so this is  another indicator in our  arsenal of tools. 

Socionomics

Once again Peggy Noonan  gets the causality backwards in her column this weekend. She suggests that one guy with a video caused the problem just as one guy shooting an Archduke in Yugoslavia started WWI.'  In both cases simmering frustration over old regimes finally resulted in violent social mood-war. The shooting or the video were simply news events that inflamed already hgh tension. 

The op ed in Friday's WSJ by the former Pakistan Ambassador to the US had it right. Islamists are frustrated at their pathetic living conditions and output. They are 20% of the world producing 7% of the goods and services and most of that is simply oil. The You Tube video was just a ruse to get the poorly informed and unemployed whipped int a frenzy, think the French or Bolshevik or Iraq 1978. These revolutions all  featured a lot more violence than democratic nuance. As the Ambassador noted, our Secretary of State unwillingly played into their hands by distancing herself and our government from the video. Gee where was the outrage over  the video of the Daniel Pearl beheading!

We have written extensively about the coming negative mood in everything from geo politics to movies (Batman) to fashions. And each time we warned, we are simply preparing you for a  much more negative mood in the future. Well it is here, now. 

Anti US Mobs On Rampage screams the front page headline 

And in Chicago, one might say anti taxpayer teachers strike demanding wage increases that elude most Americans

Recall that Moody's and S & P had New York City rated Baa the day it defaulted in 1976, now Egan Jones lowers the US from AA to AA-.  The truthis that the US is nowhere near that but such are the ratings. 

The Exit From Dividend Paying Stocks Begins

Here is the mood shift on display. I warned one reader just this morning that the move out of dividend paying stocks had already begun. He seemed surprised so I am adding this chart for those of you still happily clinging to such stocks. The Utility Index has fallen below its weekly  uptrend and is now failing to break through to the upside, trust me, while the SPX and DOW Indus trials make new highs, the Utilities likely will not. It will shortly be joined by the REIT indexes. I still am seeing columns in the media on How to Play the Dividend Game Now!  The real answer is, don't. 

Deflation Hits Bentley GTC

Dan Neil reports that the Audi V 8 powered Bentley GTC is a $17,400 less than the previous twelve cylinder model, gracing the spec sheet at a thrifty $174,000. 

 

 

 

 

 

 

 

Well 2614 words, I do go on. We are approaching an important trend change and here at TMP we  do all we can to insure that our readers are well informed. We appreciate your constructive comments and attempt to respond to all e mails. Tell a friend about TMP, you might save their financial future. 

 

 

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The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance ands no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks.  Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned.  Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital.  No guarantee can be made to the accuracy of text or charts.