First off, thank you all so much for the congratulations and well wishes that came pouring in. My wife and I read all the e-mails right there in the hospital while the baby slept peacefully next to us, and it was really wonderful.
The big story this week in financial markets has been the action in bonds. With Dr. Greenspan speaking in front of Congress, bond traders wanted to hear that the "deflation" gambit -- which had pushed bond prices so very high -- was still in play at the Fed. They were sorely disappointed. Yields at the long-end have jumped up at an astonishing rate. We were actually getting serious inklings of this a few weeks ago -- and that's why I brought up the idea of perhaps allocating some out of bonds and into gold -- but now it's official.
There is now potentially a very dangerous wild card for the economy, and for financial markets of all kinds. With sharply rising interest rates, the mortgage refinance credit boom is now likely to stop dead in its tracks. And a great case can be made that a housing-fueled credit binge has been the main pillar of this economic "recovery".
This bond action also puts the bubbly behavior of housing stocks at direct risk. Check, for example, the monthly chart of diversified home builder Ryland Group (RYL), which is the rival for any networking or telecom stock of the late 90s.
We all know by know that the market has to purge out excess. But it doesn't have to happen on any sort of schedule. The action in this group will be particularly telling whether now is a time of reckoning for the housing market.
Of course the econo-bulls will point to this drop in bonds and attendant rise in yields as direct evidence of the start of an economic recovery. They will conveniently forget that the prior blistering run in the bond market may not have been exactly predicting deflation, even though it surely seemed like it was at the time, which was only ,uh, 5 weeks ago.
This action in the bond markets gets to the heart of the dilemma now facing every person that wants to participate in the equity market going forward. We are now living through an era of incredible destabilization in financial markets of every kind. Big market swings are blowing up and "whoopee cushioning" down with regularity. With financial speculation the name of the game -- rather than actual direct economic investment and growth -- then big momentum moves can come and go with astonishing speed.
I think this action in the bond market is foretelling a similar fate for equity prices. The fate of the stock market rests on whether we're seeing a genuine pick-up in the economy, and a typical business-cycle recovery, or whether we're really in a longer post-bubble adjustment period currently financed by a massively liquid "credit-cycle." I think there is overwhelming evidence that the only thing keeping the global economy moving forward at a crawl is the U.S. homeowner, and our country's appetite for credit and debt of all kinds.
But the Fed's ability to jaw-bone rates down is now officially over. The specious deflation (wink, wink) argument is now history. The easy money period is drawing to a close. There now has to be actual deflation for the Fed to step in and buy the long-end of the yield curve, as the dollar will get absolutely creamed internationally if the Fed is perceived to be monetizing debt (creating new money to buy old debt) for the sake of the U.S. housing market. Gold and silver will be the safe havens if this scenario starts to unfold.
Anyway, I'm pointing out this macro-debate because there is serious potential for Fed-engineered markets to crumble if interest rates start to go up of their own accord. And that's what's happening now. We've got to know what's happening right now in the big picture, more than ever.
The S&P 500
The action in stocks lately has been particularly interesting for a fairly narrow trading range. The market has had some great recent chances to break down and to break out -- and neither event has happened. Both the bears and bulls have smelled victory, only to stumble at the finish line.
If you're the betting type, the odds-on play has been to bet against the massively bullish crowd, especially with the VIX in the low 20s. But that bet hasn't paid off. At least not yet. Absent a strong break-out to the upside off earnings reports -- which decidedly has not been happening -- then it's starting to look more and more convincing that the bullish crowd is at last feeling some pressure. The bar had to be raised for the second half of the year, and by and large it's just not happening. That's what the market is saying anyway.
The VIX is also starting to pop up. One of the things I've been looking for to characterize a true intermediate-term sentiment change would be a move below the recent VIX range that quickly popped back up on a flurry of white candles. That's what we're seeing now. We need to see more of this to be confident that the trend is really changing, but this is what the start of an intermediate downtrend often looks like on the VIX.
If the market is going to retain its bullish "buy-the-dips" bias, then today is the day to buy this recent dip. If the SPX drops decisively under 985, then the bullish forces will have missed the easy oversold buy point, and the market may be tipping its hand that a much bigger drawdown is in the works.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Filled 2 points to 8% full of negative sentiment.
SHORT-TERM: Remains in a decline phase but will have to break above short-term resistance of 10% on the tank or else roll up into an advance phase.
MID-TERM: Progressed to 24% in its decline phase with our Confidence Diffusion Index rising to a bearish 2 (out of 7). That's still low, but a change of character from the "very low" 0-1 area it's been living in lately.
LONG-TERM: Remains at a neutral 96/4 but seeing a fractional move toward the bearish side of the gauge. Weekly CDI moves to a bearish 1.
BOTTOM LINE: The mid-term gauge is threatening to give an interesting sell signal. On the other hand it has threatened this before lately. If the SPX breaks down out of the H&S Top (972ish support) then we'll very likely have a confirmed sell signal on sentiment as well, with the tank rising up over 20%. Unless/until that happens, it's a bit iffy.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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