A Sense Of Ending

May 22, 2015

Signs of The Times:

  • "Companies and consumers are on a borrowing spree."
    • Wall Street Journal, May 4.
  • "Fed's George: Identifying bubbles is 'always murky territory'."
    • Market Watch, May 6.
  • "Janet Yellen is losing patience."
    • Business Insider, May 10.
  • Maybe Janet Yellen doesn't know much about financial bubbles.
  • "Stock buybacks are notching new records, U.S. companies announced $142 billion in buybacks last month. Up 121% from April 2014."
    • Wall Street Journal, May 8.
  • It seems that many companies do not fully understand bubbles either.
  • "Thirty-year [German] bond prices have declined 12% over the past two weeks, or roughly 25 years' worth of yield."
    • Bloomberg, May 6.

As Fed Chairman, Greenspan made the dreadful conclusion that a bubble could not be identified until it was over. By this profound wisdom, the bubble in German bonds did exist.


We are all prone to bias. If you are in sales with a big base metals mining firm, Fed easymoney policies will drive up copper or zinc. If you are with a big gold miner, it will drive up precious metal prices. If you are with a big oil company, Fed recklessness will drive up energy prices. If you are in a cozy chair in academe it will confirm your theory that nothing but good will come from central bank easing credit.

In 2011, the strength of the bull market in commodities was outstanding--enough to prompt the big "Sell" signal from our Peak Momentum Forecaster. That was in that fateful April and the conclusion was that there would be a cyclical bear market for commodities, including precious metals. With some trading swings, the CRB declined from 370 to 206 in March. Gold has declined from 1923 to 1141.

Clearly, Fed recklessness has not favoured commodities, nor precious metals.

Interviews with gold bugs on radio or web-casts can be frustrating. All they see is the old and narrow formula that Fed easy money will drive gold up. Not only that, but on the trip to $5,000 gold will rise faster than the costs of mining. This, like all biases, is selective and ignores the bias about soaring energy prices.

Lately, they are convinced that huge expansion of the monetary base is hyper-inflationary and will drive gold to "$5,000".

Our response has been that hyper-inflation has been on since 2009 and it has been in global bonds, with the German bond reaching the equivalent of gold at "$5,000". It has been the biggest bubble in history and it is starting to fail.

The huge expansion in the monetary base began to lift off in 2009, as bids returned to global stock and bond markets. This is with the first cyclical business expansion and bull market for financial assets out of a classic crash. The Fed needs speculative bids and leverage to expand its portion of credit.

Both cycles are mature and beginning stall out. In which case, the monetary base will stop growing and at best "flat-line" for some time. Perhaps as long as the satellite measure of global temps has flat-lined. Now at 18 years and 5 months.

Beginning in the 1960s, gold bugs did the financial world a great service in seriously criticizing the Fed. However much has changed since gold's peak in 2011 and they should review all of financial history. More immediately a quick review of the "Velocity of M 2 Money Stock" chart would be appropriate. It is still in a distinctive decline.

Stock Markets

The usual economic reports continue to weaken. This "macro" turndown began around December and our overall thesis has been that in an era of financial excesses, the cycle for business and the cycle for share certificates will turn down together.

Weakening economic numbers seems to be a cyclical thing. The buoyant stock market seems to be a seasonal thing. The two are bound to get together.

Some researchers have price targets, we use time and dynamic targets.

The slump into October registered a Springboard Buy and one target on the rally was for around March and the other was for around May. The latter was also our target for the "rotation" whereby depressed commodities could rally.

It is time to check the objectives.

Is the market up when it should be? Yes.

Are there signs of speculation? Yes - momentum in Biotechs (IBB) has been outstanding. New issues in China have been a market phenomenon.

Does the move have sound fundamentals? No - inflation in financial assets has driven equity valuations to remarkable highs. The economy seems to be weakening.

This makes up our usual list for when important targets have been met.

One more question is needed.

Central bankers have been remarkably aggressive in buying bonds, sub-prime bonds and stocks. Will the official bid for equities lose its nerve before it runs out of taxpayer money? We can't answer this one right away.

Now for pattern recognition.

On the big picture, the NYSE comp (NYA) continues in the Rounding Top pattern.

Within this, the Dow Theory has been giving an alert to change. The last high on the DJIA has not been confirmed by the equivalent in the Transports. This has been a warning. Over the past two weeks, TRAN rallies were turned back by the 50-Day ma. This week it took out support at the 200-Day and taking out the April low at 8528 would set the downtrend.

The old and venerable Theory seems to providing some gravitas this week.

Tuesday's ChartWorks noted the tightening Bollinger bands and that the breakout will likely be to the downside. The Biotech chart was updated and we have seen this chart before. South Sea Company in 1720, Radio Corp of America in 1929, Cisco in 2000 and IBB now. Now also includes the straight-up action in ABC, ABMD and ESPR.

As noted a couple of weeks ago, straight-up in the spring of the year has been the season when speculators exhaust themselves.

By way of wrapping this sector up, the action has met timing targets with momentum and sentiment. The nearby pattern is within a tightening band that will force a breakout. Likely down.


A "rotation" for commodities was possible into "around May".

Last week we noted that crude oil had accomplished an outstanding swing on the Daily RSI from very oversold to over-bought. The low was 42.41 and the high was 63.50 last week. After a modest decline the high is being tested.

Oil stocks (XLE) accomplished a similar rally from very oversold to over-bought. The low was 73 in March and the high was 83 last week. The limit was the 200-Day ma and our advice was to take money off the table.

Base metals (GYX) and miners (SPTMN) recorded an even greater swing on the way to overbought. Last week's advice was to take some profits. Metals rallied from 300 to 245 last week. SPTMN rallied from 513 to 832.

Both have weakened a little and it will take a test to conclude the move.

Cotton set its high with the cyclical peak for most commodities at 219 in March 2011. The low was 57 in January and the rebound has made it to 68 a couple of weeks ago. There is some resistance at this level and we see no reason for this to become a big performer.


As reviewed last week, the DX became extremely overbought in March. Part of the move related to the decline in commodities since June and part was due to off-shore buying of US stocks and corporate bonds.

The decline from 100.71 to 93.50, a new low for the move. However, the swing from overbought to oversold on the Daily has been impressive. The 94 to 93 level represents support. There is also support at 92.

The opportunity is that important commodities and the dollar have traversed similar swings in momentum and are becoming eligible for the next significant change. This is within the season when such a reversal is possible.

Momentum on the Canadian dollar also accomplished the big swing and is becoming eligible for a setback.

Credit Markets -- "A sense of ending"

- Bill Gross, May 4.

Because of its profound implications we have published frequently on a reversal in the bond markets that could be equivalent but opposite to the reversal in 1981. This began with our January 15th Pivot that began to look for "ending action" for the US bond future. It did not take long for the rally to become impetuous enough to register a rare Upside Exhaustion reading. This prompted our special study of the 20th called "Ending Action". The high was set at the end of January.

The April 9th Pivot noted that even the European market was vulnerable to the change in Treasuries. The low yield for the German bond was set on April 17th at .059%, a number that will never-ever be touched again. An historical absurdity.

The rise to .70% has been very damaging to the longs and as noted a few weeks ago it could be equivalent to when Soros shorted the pound and made it work. Can't think of anything finer than dispassionate traders¹ making money while destroying the nonsense of unlimited central banking.

¹This would be an enhancement of Samuel Johnson's view that "There are few ways in which a man can be more innocently employed than in getting money."


The low for JNK at the end of the mini-panic in December was 37.26 and the rebound made it to 39.79 at the end of February. The correction was to 38.73 the next rally made it to 39.65, late in April. Trade since has been either side of the 50-Day ma at the 39.25 level.

This is not too robust in what could be a robust month. Exposure to spread products should be reduced.

Once again it is worth emphasizing that it is a privilege to be a participant in this segment of financial history.

Labor Market Conditions

  • Three consecutive "downticks" seems to precede recent contractions.
  • Two "downtick" months in 2006 and in 2012 were setbacks with no follow through.
  • If the May report for Labor Market Conditions is down sharply it would be a warning on the possibility of a cyclical contraction.

Credit Spreads Have Been Narrowing

  • Note the seasonal reversal from a strong market last June.
  • The worst was associated with panic selling of crude oil and weakness in other commodities.
  • The narrowing in the spread from 213 bps to 176bps in March was a reaction to the panic.
  • The next phase of narrowing has been seasonal and the 176 level has held five times.
  • It seems likely that this year's seasonal turn will have profound implications.

Draghi Looking For Policy Alternatives

Link to May 15, 2015 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2015/05/central-banks-about-to-get-harsh-lesson

Listen to the Bob Hoye Podcast every Friday afternoon at TalkDigitalNetwork.com

Bob HoyeBob Hoye is the chief financial strategist of Institutional Advisers.

The Fourth Coinage Act of 1873 embraced the gold standard and demonetized silver, known as the “Crime of 73”