As one would expect at a critical juncture, the markets are eerily calm. Volume and volatility are at multi-month and multi-year lows. It's times like these when it's tempting to doze off, wander aimlessly at the beach, or otherwise assume everything is A-OK.
Meanwhile, as usual, the financial pundits at large are pontificating upon all of the various 'indicators' du jour to parse the tea leaves and determine what it all means. And of course, they are ignoring the bigger picture context and the looming Tsunami that bears down upon us with each passing minute.
So while not one to dwell on the minutia, I will nevertheless lay out some key indicators at this juncture that have me less than sanguine, not withstanding the flatlining market.
Attenuation
This current flat lining of the market is exactly what we would expect at a critical top in the market. It's the concept of attenuation (loss of signal) writ large. As I have shown for some time now, the Russell 2000 small cap market is attenuating in tighter and tighter fractals. And the German DAX is clearly doing so as well:
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| R2K |
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| DAX |
Junk Rally:
This latest rally leg, which represents the tiny far right "v" in the two charts above was led by the worst performing stocks of the past year e.g. Research In Motion, Caterpillar, Cummins and First Solar. Meanwhile, the top performing stocks of the past several months i.e. the high dividend paying stocks such as Philip Morris, Kimberly Clark and yes WalMart were all rolling over. So when considered relative to the the non-existent volume, clearly it was a short-covering rally, not the start of a new bull market in Blackberries. The high dividend, consumer non-discretionary "safe haven" stocks always hold up the longest...
New Highs Diverging
The following chart shows the New Highs - New Lows (black line) against the market. Most of the time, the line tracks the stock market well - as it should. Look to the far right. This divergence indicates a narrowing of breadth, as one would expect as fewer and fewer stocks are participating in the rally.
Transports Still Lagging Industrials
A lot of people have noted that there has been a major Dow Theory non-confirmation for months now - wherein the Industrials are trending higher and the Transports are trending lower. The key point I would make is that at the recent top in April, the Transports were the last sector to "tick higher" before the whole market rolled over. What did Transports do today? They outperformed the market...
The Dollar Wrecking Ball is Coiling
They call the much maligned U.S. dollar the "wrecking ball" on Wall Street because when it rallies it takes away all of Wall Street's treats and goodies. Two ways: First it kills earnings for multinationals which have to translate foreign earnings back to U.S. dollars at a steeper conversion rate. Secondly, it kills the beloved carry trades in which dollars are borrowed at 1% in the U.S. and "invested" abroad at 5x the interest rate. Add in copious leverage, wait 12 months and shit a massive bonus on Dec. 31st.
The dollar is in an uptrend off of a well-established base:
Gold
It's a shame about gold. It's the most beloved trade of our time - the Dotcom trade of the 2000s. There are more ads on the internet for gold than for car insurance and boner pills put together. The markets have been in "risk on" mode since early June yet as you see below gold is going nowhere, despite the fact that Hedge Funds and China are are once buying gold in quantity. Shouldn't that mean that gold is going up? Hedge funds buying gold during "risk on" just means that they will be puking it out under "risk off", as margin calls force them to sell anything that isn't bolted down. And gold is not a liquid asset. Also, gold is priced in dollars, meaning any dollar rally automatically lowers the price of gold, so gold would have to outperform the the dollar in a flight to safety. As for EWI, they say that gold will either go up or down from here - ok, thanks...Lastly, gold tanked 30% in 2008, so again, am I to believe this time will be different? Other than that, gold is great...
Those Terrible Treasuries
If we think the dollar is maligned, well Treasuries are outright despised. Mostly because despite all of the great 'reasons' treasuries should tank, they refuse to do so. Just the other day the greatest bond guru of all time (according to CNBS), Bill Gross, indicated he was shorting Treasuries. Well, he was wrong last year, so I am not sure why we would believe him this year, unless we had the attention span of a coked up flea... He readily admits in the LA Times article that you have to own treasuries in a slowing economy. Well, guess what's coming. Clearly, the main (unspoken) reason why Treasuries are universally "hated" by Wall Street is because no one can make any money off of them (income-wise). What other reason can there be to short the one and only asset class that held its value through 2008 unless you assume 2008 can't happen again ?
So what are Treasuries doing now? They are correcting off of a multi-year high i.e. they are trading inverse to stocks, exactly as one would expect of a safe haven. My overall Treasury thesis is here (Invest at your own risk).
Long-term (30 year) Treasury ETF: TLT
