That was one heck of a reversal in bonds today off a beautiful double bottom Wednesday and Thursday. Here’s TLT:
The move was so extreme for bond-land that I sold all of my June 90 calls bought under 91, though I’m holding my unlevered TLT.
The dollar extended its decline, though it is looking every bit like the terminal stages of a panic. Just look at the spike tops being formed in the Euro, Pound and silver. I’m also eying crude suspiciously, though the rally has not quite formed a spike.
Another short post here.
Within a week or two I expect a correction or change of trend regarding this “reflation” theme we are seeing. The bond panic is coinciding with toppy looking activity in oil, precious metals and grains. I’m buying puts on crude today with the July contract at 65.33.
The dollar is also a buy here against the Euro, Swiss Franc and likely the Pound and Aussie. I’m long UUP, the dollar bull ETF, along with Treasuries.
The Treasury double short fund TBT has had a great run since New Year’s, when the long bond yielded just 2.5%, the lowest level since the WW2 era. I suspect that a lot of readers were with me on my bond short back then, as most bearish-minded folk had been chomping at the bit to short Treasuries (or had already been short while they ran up from summer 2008).
Now I think it’s time to think about buying this horribly overvalued security again simply because it is so universally hated.
Since they both reflect prevailing social mood, the stock market and consumer confidence move together. Today’s CC figure (about as high as last summer), is another sign that the investing public’s opinion of our economic prospects is overly optimistic:
If this were a stock chart of a company with horrible fundamentals (a prospective short), I would wait a bit longer to see if it kissed the 2002-2003 bottom before going heavily short, though I might start to establish a position at these levels.
What is striking about this 9-year view is how closely CC tracks the stock market, and how much more lackluster the mood was in the dead-cat bounce from 2003-2007 than the true secular peak in the late 1990s to 2000.
Tice has prepared for this bust his whole career and has been cool as a cucumber since it started. He’s an E-waver and thinks we’re on the verge of the big C-wave that destroys all hope.
It is worth noting that the S&P500 Daily Sentiment Index reached 85% recently, and this more than any other signal says to me that we have topped for now. The question now is what happens if and when we drop 50-100 S&P points: do we bounce up to a new high, bounce around a range for several weeks, or keep on going right through 666?
One could probably do worse than taking a position in BEARX right now or scaling in over the next few months.
The bounce has been faster and more comprehensive than I expected. I was thinking that we would top around these levels, but by summer or fall, not early May. I have continued to scale into distant-expiry SPY and QQQQ puts, favoring ITM and ATM, and have now deployed about 1/3 of the money I am willing to allocate to shorts. I also have a smidgen of shorter-term positions in certain ridiculously high-flying restaurant and other consumer stocks.
The bond sell-off and commodities rally indicate that inflation fears now have the upper hand, as most people still believe deflation will be a short-lived phenomenon. The aforementioned movements are setting up nicely for long and short replays, respectively.
Notwithstanding a long-overdue correction, I suspect that stocks have further to run, and am no longer such a skeptic of certain Elliott wavers’ target of S&P 1050. Bullishness is now at 80%, up from 2% in March, but judging from attitudes on TV, there is still a great deal of skepticism to be overcome before we can call a top. That said, the speed and evenness of the advance leads me to expect much more choppiness for the remainder.
Shorting precious metals has been frustrating, and I suspect that we are repeating the pattern of last spring, when we had to work our way through several months of chop after receding from manic levels (1030 gold that time, vs 1007 in February).
It is important to keep in mind the real situation, not just the current market mood (though you can’t trade on fundamentals alone). We can’t work off the greatest credit bubble in history in 18 months and just a 57% loss in the stock market. The real (private, productive) economy is not going to stop shedding jobs, let alone add them, for years, and people are so indebted that they cannot be enticed to reflate the asset bubble or return to previous levels of wasteful spending. It will take a generation to work through our debt and lifestyle delusions.
It bears repeating that today’s official headline unemployment number (8.9%) cannot be compared to numbers from before the 1990s, when the Clinton administration changed the reporting methodology to exclude large segments of unemployed. A more useful measure for historical comparisons is U-6 unemployment, which now stands at 15.8% for April. Today on Bloomberg I heard Christina Romer say that things were nothing like the Great Depression, as she compared apples to oranges. In reality, we are at solidly depressionary levels already.
Also bear in mind that stock valuations remain at bubble levels. This is easy to see when you remember that stocks have no intrinsic value other than marked to market book value and heavily discounted future earnings. The major indexes’ trailing PE’s on net earnings will be under 10 by the time this is over. We still need to work off the bubble that was blown in the 1990s, which didn’t finish deflating in 2003 because of the easing of credit. Every kind of credit is tightening now, unless of course you are a bank holding company.
