Signs Of The Times
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We are staying with the theme that the big financial rebound out of a crash has been accomplished – somewhat later than we expected. The fifty percent retracement on the Dow was accomplished along with terrific bullishness.
As measured by Investors Intelligence, Percent Bears declined to 16.7 on December 2 and to 16.5 last week. Strong sentiment continued this week with bulls running three times the number of bears. This is another way of looking at it and the ratio has not been beyond 3 since October 2007 when it reached 3.16. Brokers were happy and trained economists were celebrating the genius of policymakers. Early in the week, the hot action drove the ratio to 3.13, which is in bull market ending territory.
The establishment is back in full song, and Bernanke has pointed out that there are no asset bubbles and no "mis-evaluations". One “bubble” could be curve steepening.
By reliable measure, stocks are as precarious as in 2007. However, credit markets had been deteriorating since June of that fateful year. After some relief in September, deterioration resumed and took the stock market down.
Going in to this rounding top, credit markets have been benign, which has been a key indicator of the "risk-free" environment. Some researchers call the flight to risk as the "new normal", but it could be that "normal" is behind the times.
Credit conditions have eased since the TED-Spread and the Sub-prime provided the warning on the Dubai World failure. It is worth noting that the brief widening did not specifically point the finger to Dubai or to Greece. Just that something was coming down.
Since then, nothing but sunshine, but stock market internals continue to deteriorate.
Of course, with a research team that has been dedicated to anticipating change the question remains "When?".
As with the change in October 2007, the key beyond extremely bullish sentiment was deterioration in credit from late September. Quite likely it will require something similar.
In the meantime, the gold/silver ratio crept up and briefly touched 65, but did not get through. Rising though will set the uptrend, which would be the warning on the party.
Over in bankland, failures continue and the BKX seems to be doing a rolling top. The big rebound set highs at 48 in late August, 48 in mid September and 49 in mid October. This initial decline was to 41 at the first of November.
With this, our proprietary Bank Trading Guide rallied to 172 in mid September. After a decline the rally tested the high at 168 in October and declined to 155 at the end of October. Taking this out would set the downtrend and this would not be good for most banks and financials.
The low for the Guide was 139 on February 26 when we were advising that the action was so bad that it had to be bought. The low for the BKX was 18.6 on March 6. As noted above, the rebound high was 48.
Near-term, the last low was 41.7 on November 4, and the recovery high was 44.6 on December 2. Falling through the last low will set the downtrend.
The past few weeks have not been kind to the long bond. From overbought at 123, which was resistance, the future has declined to support at 118. It could churn here for a while, but the bond seems vulnerable. The CPI report is unfriendly and prompts a question about Fed Pavlovian responses. They might step back from extreme central banking.
If so, short rates could increase. The chart on the yield curve has also been extreme and could be setting up for one of those "turn-of-the-decade" events. Previous ones include gold's blow off in January 1980 and the peak for the Nikkei right at the turn from 1989.
Quite likely, it will be market forces that reverse the curve and the "carry' is not contemplating any change in the trend that started over two years ago. The chart on the 30s to 2s set a "high" at the first of the month with the highest daily RSI in two years.
As noted last week the corporate bond market has soared enough to register an Upside Exhaustion. Also noted was that it could set a higher high before failing. Often into yearend is seasonally favourable for bonds.
Spreads at the long-end continue to narrow.
Currencies: The change in the forex market has been likely to be important--as important as our call on February 27 for a weakening dollar.
On this turn, the euro topped in late November while the DX continued in its usual bottoming pattern until the first week of December. Ross expected the turn to be set in rising above 75.5, and this was accomplished on December 4. So far, the high has been today's 77.8.
An intermediate uptrend has been likely, which could be unsettling to outstanding action in the asset plays.
The Canadian dollar high was 97.7 in mid October with the initial low at 92.2 a couple of weeks later. The rebound made it to 96 at the end of November. Taking out 92 would set the downtrend, which seems likely.
COMMENTS FOR ENERGY AND METAL PRODUCERS
Energy Prices: Crude oil suffered a nine-day slump to enough of an oversold to suggest a seasonal low is being accomplished. After a two-day bounce, the resumption of dollar strength has dropped the price today. It could take a few weeks to conclude that the low is in, and an intermediate rally could follow.
Oil stocks (XOI) are not as oversold and could decline into January.
Natural gas continues in a "weather" market, which is overwhelming seasonal weakness.
At 5.89 the price is testing the 5.75 high in mid October, from whence it slipped to 4.44 a week and a half ago. The squeeze is intense and could soon end. The firmer dollar and seasonal weakness could force the price down into January.
Gas stocks have recovered but not with the same strength as the product. The high was 549 in mid October, the low was 485 last week. So far the high has been 533. This seems vulnerable to a slide into January.
Base Metal Prices: Mining stocks (SPTMN) have jumped in the past week to yesterday's 1030, which seems to be a test of the 1020 level set at the first of the month.
Over the past four weeks, the sector seems to be expending a lot of enthusiasm with little net gain. The low for the index was 178 a year ago and the high has been the 1030. The only correction on the move was from 670 to 570 in July. The stall-out could be anticipating an important high for metal prices.
Copper is often a guide and it is close to concluding the Sequential Sell pattern. That is on both the weekly and monthly reading, which anticipated the big top in the euro in late November. Or going the other way, the recent low in the DX was anticipated by the Sequential Buy pattern.
Often the anticipated reversal can be dramatic – as with the reversal in the dollar. Of interest is copper's slump today.
Base metal prices and mining shares are eligible to an intermediate decline.
Gold Sector: The expected consolidation is working out, but the initial break was too fast. It took only six days to generate the daily Capitulation reading.
On any such signal the low can take a week and today's decline continues the correction. It is worth noting that the rally in the DX is becoming impressive.
Gold stocks (HUI) reached an overbought at 516 at the beginning of the month and have been expected to decline into January. Support could be found at the 390 level.
Gold's real price, as represented by our Gold/Commodities Index (GCI) set an uptrend in September, which began to anticipate a resumption of credit concerns. In late November it reached 392 when the Dubai World default was reported. It turns out that the rise had been anticipating a specific failure, rather than a general one.
After reaching 400 with the Dubai thing, the G/C declined to 373 last Thursday. It is stabilizing and if it resumes the uptrend it would be anticipating the next "problem".
Considering the direction of the dollar, the next "problem" could be more widespread.
Another confirming indicator would be the gold/silver ratio advancing through 65.
In the meantime, senior golds as well as smaller-cap producers can decline further, presenting another buying opportunity for the sector.
Gold's real price will continue its cyclical bull market, which is indicating the usual postbubble increase in investment demand. Producers are recognizing this and will have to become much more aggressive in building reserves. So far this has been mainly done through acquisition.
Legendary gold rushes have occurred close to the bottom of a great depression – California in 1849 and the Klondike in 1897 are examples.
It is worth emphasizing that the rising real price enhances mining profitability as well as valuations on gold deposits. Senior producers could soon cause a gold rush in the exploration side.
We have been expecting that this would become outstanding in 2010.
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