Major markets had one of their worst days in months, as doubts over central banks’ willingness or ability to stimulate economic growth sent stocks and bonds tumbling.
This is the lead for an article in the weekend WSJ. The media is forever trying to find and event that is causal to the news. But that is not the way social mood works. Internally generated social mood results in social action. The Social Action on display friday is the result of a conjunction of long term cycles. We have discussed this for the last year here. As it has not happened, and stock prices rose to new highs, readership here has fallen. Perhaps that is about to change.
Central Banks all over the world have done the only thing they can do, lower interest rates. Europe and Japanese banks have actually driven rates negative. The problems with this are as follows.
- It didn't work. All that happened was it enabled companies to buy back shares which increased earnings per share which boosted stock prices which allowed their stock options to gain in value.
- If there is anything to the idea that low rates spur an economy,the Central Banks are now out of bullets, With rates at zero, there is no way to lower them further.
- But that is not going to happen anyway. What is much more likely is that the fear of default is causing rates to move up. Already rate sensitive issues are falling hard. Cohen and Steers REIT fell 3.77% on Friday, wiping out months of yields to investors.
- I have posted several articles about he dangerous condition of underfunded pensions on my academic site. http://www.professorelam.typepad.com Many funds assume unattainable annual returns which means they are grossly underfunded. The Dallas Police Fire Funds is underfunded by over $200,000 per retiree. These problems of these zombie funds, walking dead, will soon be front and center in the news.
- Recall the European PIGS debt crisis from 2010? Did anyone ever do anything about it? No, just lower rates with the same non results there as here.
- Alastair MacDonald in his latest Parallax Letter points out that for decades stocks had an average annual return of 4%. But since 2009 they have been averaging 15% and more including dividends. How will the numbers return to the mean of 4%. By drastically lowering prices, that's how.
Interest Rates
ICF

This may be the one picture says it all chart for the week though I have just begun looking through the charts. Clearly this is signalling higher rates ahead as individuals buy REITs for yield. Shares are sold in fear that higher rates will lower prices. And in a softer economy, REITs will have a harder time renting space.
Five Year Note Yield

I suggested the five year note yield would be valuable in tracking yield direction. The point again is that the market is not waiting for Janet and her buddies at the FED to do something. Yields are rising.
Given that European bonds have negative yields, in a higher rising rate environment we may have a situation where there are no bids for such money losing vehicles.
Yield on the 30 year bond jumped 2.88% Friday With rates at all time lows the potential for bond market disaster for those holding such low yielding bonds is, well, tremendous.
Thirty Year Bond Yield

Just recovering half the fall would take yields to 5%, double today's rate. In bond math that means the bond price would be cut in half.
And if we take the chart all the way back to 1982-84 when rates peaked, half way is more like 7&.
Just stop and think what that would mean for Central Bank Balance Sheets now holding trillions of dollars of near zero yielding bonds. It means huge losses.
Stocks Bullish Percent 50 Day

The bullish percent chart shows the overall market really peaked last April in terms of breadth. Despite some higher index readings, the breadth of the market has been falling.
Classic Distribution in Stocks

During market tops,the smart money will bid shares up. This enable them to have a ready market to sell into at higher prices.
I recently switched one of my accounts to allow for more flexibility in trading. The 'advisor' was certain we were headed for Dow 20,000. No doubt this is the predominant thinking in the advisor community.
The Transports lost 3.15% Friday.
Our ten week cycle was up last week. The markets should head down now for another ten weeks if this cycle continues. Certainly Friday was a potential kick off to the downside.
Euro

As we mentioned previously, nothing was ever really done about the PIGS failure to adhere to the EU rules of spending versus GDP. Here we put the French CAC index under the Euro. And sure enough,the French stock market rises and falls with the Euro itself.Lower prices are ahead here.
Energy
The big story is Apache and its discovery of an oil and gas field in the Davis Mountains. This area has had zero activity in oil and gas and once again, new technology proved the existing wisdom dead wrong. See our column in a separate post.
XLE

For now the XLE trend remains up. Major oil company stocks fell with the overall market.
Crude Oil

The 48-49 are is now important resistance to overcome if the trend in crude is to remain up.
A potential wave count for Crude Oil

One possibility is that oi is now in a fifth wave of five. The firs 1and 2 up down sequence may be complete. If so this third wave needs to quickly advance
and take out resistance at 49.
If not, we have an A B C correction with C at the top around $52. If that is the case, the market is headed down. Frankly the lower lows seem to favor the latter case to me.
XAU

The XAU appears to be in a 4th wave on the weekly chart. This suggests silver and gold have higher to go as well.
The Bottom Line
Our friends at Elliott Wave favor the idea that there are higher highs left for stocks. The strength of the sell off with18 stocks down for each one up suggests to me that this is a change in trend. We shall see. the inverse stock fund DOG has not given a weekly buy signal yet.

DOG and DXD bear watching for a significant turn.A significant turn will occur on a drop in the S & P below 2101.
Best estimate at this time is for a serious sell off with the first leg down in Sept then a rebound in Oct and then another decline in November.
The Euro is weakening and the US Dollar is strengthening which is another negative for oil.
Gold and silver look higher.
Crude oil must take out the 49 level to remain in an uptrend.
Social Mood

Trump needs to move over 40 and Hillary needs to drop under 60 to really reverse the trend.
If in fact the markets have topped and are headed down into the election, that could be the trigger to cause a big reversal in the chart above. The chart is from the Iowa Electronic Markets.
Trump does not see the world in liberal or conservative terms. He only sees winners and losers. From that perspective, his comments on Putin's popularity are correct. In fact at this time Putin may be the most popular leader in his own country among all leaders in the world.
Consider the throw the bums out attitude in Argentina, Brazil, Venezuela, France, Germany, and Italy. Social mood towards politicians is negative. This past week the President of the Philipines referred to Obama as an SOB. Now that is negative mood.
The Clinton Foundation has collected millions of dollars from various parties seeking present and future access to the presumed winner of the 2016 election. No wonder the headlines are now saying things like 'Wall Street Backs Clinton". For sure there are not going to be any refunds from the Clintons if she loses.
Pop Trends, Price Culture
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