first majestic silver

The Fed Is To Markets As Tornados Are To Trailer Courts

June 30, 2016


At one time, the term "cross currents" referred to the tidal transition from an expansion to a contraction. It was unsettling to the establishment. In economic jargon of the day, policymakers were "not rocking the boat" in attempting "to keep the recovery going". All the while, of course "fighting inflation".

You had to be there.

Now they are rocking the boats while trying to boost inflation because that will prompt a business expansion.


Recently, Jeffery Grundlach commented that "Central banks are losing control".

Veteran traders have always considered that central bankers have had little control over financial destiny. Cyclical changes in the yield curve and credit spreads occur regularly. Despite the best efforts of central bankers to prevent the change.

Now, cross currents in the credit markets are setting up a tidal change that again could be devastating. With this, the general public will finally realize that interventionist policymaking is a stupid waste of money.

Stock Markets

Reasonably good momentum was accomplished going into May. The limiter, so far, has been some key moving averages. On the positive side, there has been the "all-onemarket" thing. Crude up and dollar down makes the Fed feel good. Also helps the stock market.

The ChartWorks "Election Year Model" for this year, called for a correction focused upon June followed by a brief rally. This would be into a "Rolling Top". The big "Rounded Peak" was accomplished last summer.

Crude oil soared to 51.71 two weeks ago when a correction began.

The DX set its low at 93.29 at the same time and has been stabilizing.

Both seem to be setting up for change.

In a punishingly volatile world, our objective is to look for change. This contrasts with policymakers who in pushing for constant growth, have exaggerated natural instability. In trying to prevent setbacks a massive positive feedback has been imposed. Negative feedback is always there to correct excess.

Usually discovered in the fall of the year.

As we have noted, central bankers are to financial markets as tornados are to trailer courts.

It is time to review some leading indicators.

Going into last year's peak, the Transports provided the warning and in May it was that the bull market was over.

On this year's outstanding rebound, the Trans have not confirmed the highs for the DJIA.

While the senior indexes are not quite as high as reached last year, the decline in real earnings takes the latest valuations to the moon.

Banks (XBD) led at the highs in 2007 and were coincidental in last year's high.

On this index, the 50-Week ma has guided the play.

After providing support on the way up, it was taken out in July 2007. We used this as guidance and the equivalent take out occurred in August 2015.

And then there has been the second significant rally in the bear, which was turned back by the 50-Day in September 2008.

This has been used for this year's rebound out of trashed conditions in January. The rally could make it to the 50-Week and that would limit the move.

The high for BKX was right at the 50-Week at 71 in April. In the middle of May it reached 71.53, which was little above the declining moving average. The subsequent low in June was below the May low, which makes the financial sector rather precarious.

For the Transports, the 50-Week provided support from 2010 to 2015. And it has been limiting the rebounds on the way down. As with the banks, TRAN has taken out the May low.

Poor action in leading sectors is not good for the rest of the market. The senior indexes have been inflated by financial engineering as well as by central bank buying.

Representing the broad market, the action in the NYA has been guided by the 65-Day ma. The failure in 2002, 2008 and in 2015 was marked by taking out the key moving average.

On the two previous bears, the second rebound was significant and turned back by the 65- Week ma. These were clocked in March 2002 and May 2008. On this one, the second rebound made it to the moving average in late April and the NYA has been trading above and below the declining moving average since.

The rebound high was 10468 in early June. At 10490 now, the May low was 10120. This level is both compelling and critical.

Now, what could turn it down?

A firmer dollar, weaker commodities, widening spreads and the resumption of curve flattening.

As with previous tidal changes, no alteration in Fed policy is needed.


Brexit, Brexit, Brexit!

In two World Wars, England expended considerable blood and treasure in defeating European experiments in authoritarian government. With incredible irony, European authoritarians are taking over England. Albeit with less violence than when "William the Bastard" imposed feudalism in 1066.

The dollar is still building for a rally and once past the referendum it should turn up. We could change the above Swiss headline to "Only lunatics would want to stay in".

Stock Market and Earnings

  • Since January, stocks up and earnings down.
  • Unusual.
  • For how long can the divergence run?

Hong Kong House Prices

  • The high was in August at 143.46.
  • The March number at 125.42 was posted in June.
  • The decline is now more impressive that the one in 2008.

"We've Defeated the Shale Revolution"

  • Fracking is the technological revolution for crude.
  • In the early 1900s, miners learned how to produce from low-grade copper porphyry deposits.
  • In the 1960s and 1970s it was lower-grade Carlin gold and gold leaching.
  • Technological improvements in oil production will continue.
  • The headline is from The Times of June 19.

Bob Hoye is the chief financial strategist of Institutional Advisers.

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