Hey Guys, I trust you are all having a hugely productive and or relaxing Sunday.
Volatility has been stepping up across asset markets in the last few weeks. From fixed income to equities to commodities volatility is increasing here so its correct to take a step back and double check where we are.
Its the start of the month so, as always at this time, we find the monthly report from the good Doctor Marc Faber doing the rounds, so to speak. Here he is being quoted on zero hedge today.
As an aside, I’m also going to double check those fund flows. To my mind the great rotation from fixed income into equities has still not occurred. What has occurred to date is that the negative fund flows out of equities has reversed. That equities are now showing positive fund flows but that this is alongside the continued positive fund flows to fixed income. Participants are simply more positive toward equities than they were as a store of value. They are not yet negative fixed income. They remain positive fixed income so this is simply a change in sentiment toward equities. Ie no longer ultra bearish. They are now mildly positive equities and mildly positive fixed income. I want to see very positive equities and very bearish fixed income. Even this situation doesn’t have to lead to fixed income rates surging up in the secondary market, imo. Issuance by the gov is declining and yet demand is immense from the fed so fixed income can sustain outflows and yet rates remain stable. Corporate credit may be another story of course as issuance remains strong and growing, and why not at these rates. If fund flows start to go negative unless the fed steps into corporate paper then we should expect to see high yield rates rise eventually. This remains the lead therefore, imo, for direction in credit markets and fund flows.
So leaving aside some of the brilliant political and social analysis the good dc makes on the UK and US systems ill cut to the chase of the directional market issues.
1) Dow transport failure to confirm may 22nd intraday top. The dow transports are technically followed as a key sector confirmation or not of the Dow. So weakness would indicate stock weakness.
What do we see? Dow transport made her intra-day high on the 21st of may. The day before. She remains well above her 50 dma and 200 dma and her bull high momentum trend line is intact since nov12. She has out performed the sp500 and Dow over the period. Her breakout from feb13 to new highs intact and supportive.
2) Utility sector weakness. ie down 10% since its peak mid may. Utilities had out performed on the way up. Recently in a parabolic way with a breakout of her trend line. She has since sold off hard. Is this a lead of market weakness? Utilities selling off can occur due to a number of things. Utilities are usually associated with defensive allocations. So i) rotation – we see some evidence of rotation as the cyclical recovery story builds – is this strength or weakness? 2)Rates rising – if rates rise utilities will perform poorly. The utility sector has inelastic demand for highly regulated controlled price products and services. See this article..
http://seekingalpha.com/article/1470081-interest-rates-inch-up-be-careful-with-widely-held-richly-valued-dividend-stocks?source=intbrokers_regular
Again weakness or strength? I’m certainly not convinced by the utility weakness being a directional indicator for this market. & precedents are very poor for this. Note also the cyclicals have taken up the batten, for now.
http://seekingalpha.com/article/1474231-cyclical-sectors-assume-leadership-for-now?source=intbrokers_regular
3) Lumber prices have collapsed by 30%. This indicates the US housing market is far from healthy and may show weakness ahead.
Futures markets for commodities are highly volatile. Lumber prices roared up until the end of march as everyone got long on the back of the US housing recovery story. The prices have since collapsed. As we can see from US starts the nos are weak and not strong. The US housing recovery is an asset price recovery not a demand recovery story. This mirrors clearly what we see in the world economy imo. We have interest rates at zero and plenty of cash seeing a home. So in this environment as wages fall asset prices rise as the mountain of paper money seeks assets as a refuge from the expropriation of the central banksters. In this environment should be surprised by lumber price weakness. Not in my book. In my book this is perfect and whats more does this indicate that house prices will decline? No. The two are not correlated at present given this is not about demand. This is all about monetary conditions.
To quote Austrian economics, as an answer. It is to be expected that in economies that display high inflation we should also expect to see high spare capacity. Yes this is the theory and it is also exactly what we see in the US, UK, Euro zone etc, cpi inflation aside, for the moment! Prices can rise as demand collapses. This is totally consistent and indeed this is exactly what we should expect to see.
WEALTH WARNING – NEVER SELL ANYTHING ON THIS INDICATION, IN MONETARY EXPANSIONARY ECONOMIES.
4) NYSE 200 and 50 dma not confirmation, weakness. I prefer to use the sp500 200 and 50 dma. The SP500 stocks are the bulk of the market cap. The russel2000 would be the next best thing. The NYSE is the entire market which doesn’t weight the large caps in any way. As a tech comment using the nyse 200 and 50 dmas is a highly dangerous thing to do as it weights Apple in line with “Missouri Funerals”. The sp500 also doesn’t weight but as the sp500 is composed of large cap stocks its a better judge, imo.
The above aside. Another tech comment. The above 200 and 50 dma no of stocks is a momentum indicator. Anyone who has used momentum indicators before knows how these work. They display weakening or strengthening momentum. Their absolute nominal level is not as important typically as their distribution. When i look at the distribution of these charts even using the nyse 200 50 its not displaying obvious weakness to me. She shows a very strong trend with a recent test mid april of her 200 dma trend line. She is at 80 stocks above their 200 dma. The recent may high in indexes was not confirmed it is correct but the non confirmation was marginal. Ie the prior high was 83.5 and she made 82 or so. Weakness yes and hence weakness begets more weakness and we have a near term correction under way. But to signify a market top here using this indicator would be wrong imo. Its not enough. We need more distribution for sure before making that statement.
And switch to the better s&p 200 and 50 stocks making new highs! Enough said..
Here the 200..
ENTER $SPXA200R in the symbol area for the 200 link http://stockcharts.com/h-sc/ui
And ENTER $SPXA50R for the 50.. You will see the strength and imo this is much more useful indicator series than the too wide (full of sme cos) nyse indicators.
Also recall here why this market moves higher! It is not about demand but about monetary conditions therefore the buyers are large, even sovereigns and central banksters so we should expect to see nyse weakness vs DOW and SP500 strength! the large caps are the buy area not the main street small caps! This, again is confirmation to me – not weakness.
5) Speculative stocks collapsed. Ie Fannie mae. This is a tricky one. You could argue this either way. I see plenty of cyclical speculative stocks breaking out so im not convinced on this one as yet. Lets see.
6) Fixed income falling – yields rising. Its true yields have risen in the last 6 weeks. On this correction will yields fall or rise. The nominal level yield for debt is close to historic lows. The high yield has moved a long way in the last few sessions downward but she did confirm the recent breakout. The piigs debt is still very cheap. This element is an evolving story. To my mind the nominal levels have bounced off the recent lows in terms of yield but thats all we have at present. Stocks are unlikely to fall given rates are so low still. Its not a nominal head wind yet but price could be signifying the start of a trend change and possibly the ending of the secular bond bull. Possibly but how many times have we heard this in the last 4 years! Many times and so we watch this. Its too early to get short on this price evidence also.
7) Commodity currencies – ie AUD. Weakness as lead of collapsing real demand.
The aud was very over valued on the optimism that the em story would take off again and high real returns would persist and even increase on the aud. Everyone was long the aud. This is unwinding and could unwind in a large way. Personally i always saw the great risk in the aud unwind trade and on record here as avoiding the aud and preferring the cad as an investment and aud as a short term trading vehicle. The aud weakness is two fold – EM weak real demand as well as future and current yield expectations falling off.
Does the weak aud provide a lead on equity direction? Commodity direction yes, for sure. EM stock direction – a better correlation. Possibly not a lead but a laggard as interest rate policy lags what is already occurring! But equity direction world wide im
less sure. The DM world which inc japan is more than half the global economy and is 90% of world financial asset market liquidity, is consumer dominated. Interest rates for debt define the DM worlds economy and nominal prices far more than do commodities and EM world growth. Can asset prices continue to rise in the dm world in spite of EMm world sluggishness and Australian commodity and economic slump – for sure! No problem there.
I think you could look at Marc’s indicators and use them to equally justify that we are close to the end of this correction more so than using them to justify a more sustained correction.
I could sight a number of indicators in response to the bullish side, btw. Inc the US finance sector that shows no signs of break down here and remains uber bullish.
A key indicator many have often sighted to the down side is excessive bullishness in sentiment. We see no such excessive bullishness at present and, as above, fund flows as well, though more positive are hardly excessively bullish here.
http://www.aaii.com/sentimentsurvey
Please note here there is some evidence of reversal coming soon from sentiment. Ie bullishness is now below historical averages just as bearishness is above historical averages. This is not what you would expect to see for a deep market correction to occur or at a time when equity markets are still at or very close to all time historic nominal highs.
Inflation adjusted failure to breakout note and real inflation adjusted well down. And for the record here i’m not convinced we have seen the real inflation adjusted lows for equity markets as yet. Imo we likely have this event to come! Does this make me want a different asset class, not really. I hold bullion. I don’t, at this point, want to hold even more as i believe the evidence is for high equity asset price inflation, even inflation adjusted for now. Of course the time will come to be a seller but not yet, imo.
Ive been a great follower of Marc for a long time now and i know he has been very bearish for a long time on this market. He has rightly, in spite of his own worries, maintained a 25% allocation to equities through this last 18 months or so but he has under allocated therefore and he has miss read the nominal run we have had. This is no critic of Marc as such. He reads the unsustainable nature of this nominal asset price run up correctly imo. But its timing isn’t it. We have financial repression that will and should continue to push up asset prices for as long as the lunatics are running this asylum. Only when we start to see inflation and or rates surging higher will we have a serious nominal crash in asset prices. Until then, short term moves aside, I would continue to by dips and seek value in large caps where ever u see it.
Here a counter view from financialsense.com from yesterday:
http://www.financialsensenewshour.com/broadcast/fsn2013-0601-3.asx
I guess, in summary, i sit somewhere between the two. I don’t see this as the usual recovery. This is monetary induced melt up in asset prices only, in my opinion. As an Austrian, i’d expect to see real demand continue to drift but equally, as a trader, i don’t underestimate how powerful this nominal burn up could become! There is so much liquidity in debt and inc cash reserves its a monetary tidal wave. If a fraction of that tidal chases assets nominal levels could double from here. Heroine yes, of course! But please recall, heroine addicts can live for a surprisingly extended period!
For my own book I remain long equities with some leverage across world markets. I have near zero exposure to bonds and limited commodity exposure though I’m on alert to increase weightings to materials and more cyclical themes given the recent bounce in prices. I remain light European equities. Following the early Q1 profit take on the J-reits i have zero exposure to the long Japanese equity trade and at present have no position in the jpy carry trade. Both remain highly attractive though patience patience. For the moment we have renewed concerns on the rate of accent in Japanese credit market rates leading to jitters in jpy equities. I hope the entry will show during this quarter or early the next.
In my opinion, the major themes will continue to be collapsing real demand, collapsing real incomes, nominal asset price rises, expansion of government, more regulation, policing and militarization.
And here different debt (credit markets for banks, debt for everyone else!) markets indexed vs the cac40, sp500 and dax. Why I remain out of euro equities and light on the euro currency for now.
