Pigs No Longer Fly; What Are The Implications?

April 29, 2014

Along with the highly publicized loss of leadership from big tech, the US stock market is now in danger of losing another, and possibly more important leader, the piggies or banking sector.

While the weekly chart of BKX has not yet broken down, it is very close to doing so after sporting a negative RSI divergence for the better part of the last year.  We should not jump the gun with bearish scenarios, but as always we want to be among those looking forward and ready, just like in 2007, which was the last time BKX-SPX began to roll over in earnest.

NFTRH has followed the BKX-SPX (leadership) ratio every step of the way during the current leg of the cyclical stock bull market.  Most recently we noted that BKX-SPX failed to make higher highs on two occasions.  This put the ratio – and by extension the stock market – on alert as we watched for a lower low.  Ladies and gentlemen, let me introduce you to a lower low.

BKX-SPX ratio (daily chart), from NFTRH 284

A bull rally is a series of higher highs and higher lows.  The bull phase in leadership by the banks over the S&P 500 is now over.  Okay great, we have expected this to happen.  But it is the implications and conclusions that can be drawn from a failing BKX-SPX ratio that is important.  Without conclusions after all, a ratio indicator is just a neat little tool making all sorts of noise about nothing.  Here are some implications.

Interest Rates

With the Utilities sector still rallying strongly (Utes like a low interest rate environment), with the bottoming patterns NFTRH has been noting in 10 and 30 year Treasury bonds and now with the prime beneficiaries (of Fed policy) noticeably under-performing the S&P 500 we can begin to firm up conclusions about T bonds and interest rates.  We have been noting potential bottoming patterns on the bonds for several weeks…

30 & 10 year T bonds, weekly chart from NFTRH 284

…and been targeting 3.2% or so on 30 year yields for months now, ever since the ‘Continuum’ stopped right where we thought it would at its decades-old limiter, the 100 month exponential moving average (amid all kinds of rising rates hysteria I might add).


Interest rates are dropping toward our 3.2% target.  I am personally long Treasury bonds of several durations.  Aside from T bonds as an asset, they are a risk ‘ON/OFF’ indicator.  If yields continue to decline, it would not be bullish for the stock market or other markets positively correlated to the economy.  It could be bullish for gold if short term yields decline faster than long term yields.  If long term yields decline faster, it would not be bullish for gold either.

BKX-SPX Ratio & Gold

The shaded area highlights the most recent phase of inverse correlation where gold acted first as a refuge as confidence in the financial system dropped during the Euro crisis (in a ‘double bottom’ echo to 2009) and then was kicked to the curb as players collected themselves and started to regain confidence at the end of 2011.

BKX-SPX is a confidence indicator after all.  It had been dropping since 2006 and finally resolved in a final bottom in March of 2009.  Since the bottom in 2011 the banks have been tepidly out performing the S&P 500 despite continuing Zero Interest Rate Policy (ZIRP), which is obviously beneficial (and aimed at) these first users of newly created money.

With a phase of sentiment reversal (toward confidence in policy making and US markets and hatred of safe havens and risk ‘OFF’ assets) nearing completion, it would appear that gold’s time in the desert is nearly done.

With ZIRP now nearly 5.5 years old, the Fed has been in financial and economic benefactor mode and yet the conduit to a revived economy in a system built on lending (and a willingness to extend and take on credit), AKA the banks, may be losing leadership over the stock market.


If the breakdown in BKX-SPX continues, expect gold to find a bottom within the next several weeks or few months.  NFTRH continues to manage the process from a shorter term perspective.

US Economy & Inflation

Of course, “it’s the economy, stupid”.

All of the inflation that has been promoted since 2008′s liquidation of the previous inflation (Greenspan’s) has been in service to reviving the economy, just as Greenspan’s commercial credit bubble was.  What has actually happened, despite some recent improvements in the economy (as foreshadowed by the Semiconductor ‘up’ cycle well over a year ago) and business lending, is that ZIRP and various permutations of QE have barely kept things lukewarm.

This has been a bubble in official or governmental credit and the Fed balance sheet vs. the previous commercial credit bubble.  On this cycle the ‘pigs’ are living up to their unofficial name as they appear to have learned the lessons of 2003-2007 and have mostly fed at the trough of beneficial policy, but undertaken far less risk than official entities have.


Risk has merely shifted from commercial lenders to the public by way of its ever expanding Treasury debt, which is being used to fund both the economy and the inflationary operation now under way.

Sure, the much publicized QE ‘taper’ is under way, but as we have noted all along, that operation should be incentivizing the banks to get even more in the game due to the implied profit motive of a ‘borrow at ZERO, lend long at higher yields’ carry trade.  Yet BKX-SPX under performs.

What happens if BKX-SPX really does break down despite all the cards beings stacked in favor of the banks?  One result would be a massive loss of the confidence that has so systematically been rebuilt by policy over the last few years.


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The symbol for silver ‘AG’ comes from the Latin word ‘agentum’ meaning silver.

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