Japanese yen getting oversold on low sentiment.

Traders are again very bearish on the Japanese Yen, just as they were back in March 2012, prior to its 8% rally against the USD. JPY/USD is also getting very oversold, as shown by RSI on a weekly chart.


The daily chart is showing a positive divergence in RSI, a bullish sign:


However, a glance at the monthly chart shows a major break of the uptrend since 2007, as well as a deterioration in RSI (diverting downward over the last 18 months).


Traders are more bearish now than in March, but this condition has not yet been sustained for long enough to give the buy signal we had then. Also, I believe the yen may putting in a long-term top, due to the trendline break as well as developing trend of lower lows and lower highs in sentiment readings. Any multi-week rally that may be setting up should be viewed in that context, perhaps as an opportunity for entering a short position.

That said, a yen rally would fit into the global context of a nascent US recession and top in equities, as the yen and dollar have been safe-haven trades along with government bonds from the US, Japan, Germany and UK, among others. Sentiment on US equities has rebounded sharply since mid-November, when it reached oversold territory by some measures. Equity sentiment is not elevated, but if we are entering a bear market it need not become elevated before deteriorating again (a trend of lower lows and lower highs in sentiment was observed in 2007-2008).

One other interesting piece of data here is that Nikkei sentiment has been on the low side since mid-2011. Sometimes the yen and Nikkei have a strong negative relationship, other times positive, so I don’t know how this fits into things, unless Japan is finally going to reflate after 20 years of a bear market in stocks and strong currency and bond markets. We may indeed be at such an inflection point. I would certainly rather buy and hold Japanese equities than bonds here.

Bounce or crash, that’s the question.

Here’s the latest chart of the 5-day average equity put:call ratio. Option markets have done a lot to correct the historic extreme in complacency that we saw in April.


Stocks are still only moderately oversold on a daily scale. RSI has made a sort of double dip into oversold territory, and MACD has also turned down to almost reach a downsloping support line formed by declines over the last 12 months. At some point this year all support should be smashed, but it would be rare to crash right from the very top. A relief rally would clear things up a lot and offer a great chance to get short.


In contrast to the US markets, look at the extreme oversold condition in several major global stock indexes.

6-month Nikkei chart:


The Eurostoxx 50 index:


And here’s a 2-year view of a bunch of emerging markets ETFs. These I suppose could keep rolling over into a waterfall, but I’m not sure we’re at that stage yet.

Yahoo! Finance

Global stock indexes running on fumes

When I’m looking at larger trends I like to visit the Bloomberg global stock market pages, rather than stare at the Dow all the time. To that end, here’s a tour of a few indexes from outside the US.

The German DAX always looks like the S&P 500. 5-year view:

Source: Bloomberg, for all charts.

Brazil’s Bovespa, 5-year view. Looks like a huge double-top. Note, the February decline busted the uptrend, and there have been no new highs since January:


Madrid’s IBEX 35 has been struggling:


The Athen’s stock exchange is even weaker of course:


Here’s the Russian Trading System index, possibly stalling out at a typical retracement level for a post-crash bounce:


The Swedes are feeling frisky, with a recent pattern that looks like the high-flying secondaries in the US:


Moving east, we see that Chinese stocks topped back in November:


The Nikkei’s bounce has been pretty weak relative to most others, and its ascent has been shallow and wobbly since last June:


Nothing looks particularly bullish about the Australian stock market. Its top so far remains back in January, and it’s only barely higher than last October. What will happen when their real estate bubble pops?


Here’s India’s Nifty Fifty, back near peak bubble levels and asking for another wallop. Not much reward for a whole lot of risk here since October.


The general impression here is that these markets have simply made giant bear market rallies as part of a de-risking process from the euphoria of 2005-2007. There is no fundamental value in stocks at these prices (the S&P 500 is yielding under 2%, and that’s among the better returns out there), and if I am gauging mood correctly we are not beginning another great bubble but still deflating the last one.

During the winter of 2008-2009 a lot of these indexes formed solid, tradeable bottoms that were tested repeatedly (look at 2500 above in the Nifty for instance) or outright divergences (see the Bovespa). This was a strong clue that we were firming up for a rally to correct the whole decline, despite the US dipping to a deep new low in March. Well, we have pretty strong resistance levels and divergences since fall in many of these indexes, perhaps warning us not to take the highs in the Nasdaq and Russell 2000 too seriously. After all, there is no more speculative market than China, and it’s been very weak for almost six months. Even the crazy Bovespa, though back at nosebleed levels, has not made any headway since December. Greece has already crashed again, and Spain is thinking about it.

A year ago, there was a wonderful technical case for being bullish. That’s now completely gone, and in my opinion we now have nearly as strong a case for being bearish. These markets are more overvalued, more overbought and technically weaker (broken up-trends, waning momentum ) than at any point since late 2007. It is astonishing that they have rebounded as far as they have, but that does not mean that they will continue – given the character of the advances since last summer, these heights only provide more potential energy for the next decline.

Eric Sprott: new lows ahead for S&P 500

From Bloomberg:

Dec. 29 (Bloomberg) — The Standard & Poor’s 500 Index will collapse below its March lows as an expected rebound in economic growth fails to materialize, according to hedge fund manager Eric Sprott.

The Toronto-based money manager, whose Sprott Hedge Fund returned 496 percent over the past nine years while the S&P 500 lost 32 percent, said the index’s 67 percent rally since March reflects investors misinterpreting economic data. He’s predicting the gauge will fall 40 percent to below 676.53, the 12-year low reached on March 9.

“We’re in a bear market that will last 15 or 20 years, and we’ve had nine of them,” Sprott, chief executive officer of Sprott Asset Management LP, which oversees C$4.3 billion ($4.09 billion), said in an interview Dec. 18.


Here’s what a 20-year, deflationary bear market looks like (Nikkei 225):

Source: Yahoo! Finance


Sprott also still likes gold, and from his perch in Canada he picks up smaller mining and exploration stocks. Although I like gold for the long term, I do take issue with the idea expressed here:

“If you get into this thing where you’ve got to keep printing more and more and more, who knows about the price of gold?” he said. “It will be the new currency in due course.”

Japan of course tripled its money supply and debt load in the aftermath of the bubble, but the central bank’s refusal to let bad debt and bad banks go under has locked the country into deflation and the Yen has remained strong. The debt situation in the US is much worse than in Japan, so our deflation should be even stronger. Japan was also bouyed through the ’90s and ’00s by strong exports as the rest of the world continued to grow, whereas the current bust is global. I do agree that after this deflationary stage clears the way, the government and central bank are bound to destroy the currency. The same could be said for the euro, pound and all of the rest, since none have any gold backing anymore.

The issue is timing — I have been saying since before the crash that deflation would be the situation for longer than almost anyone anticipates, myself included. This is because we have a credit system, not a cash system — in our economy it is credit issuance that controls the value of the currency unit, and credit will be contracting for years to come.

Sunday night futures update

In the first hour of Globex futures trading (starts for the week at 6:00 New York time), I closed up the gold and stock longs that I put on late Friday. I’m letting the Yen run, since it was so deeply oversold and has some support at this level.

Friday’s dollar rally was awesome, and may bode the start of an enormous rally, but it remains highly overbought on a 15-minute scale, so now is a good time to take a wait-and-see approach. Same goes for gold — it’s oversold near-term (from 1228 late Thursday to 1145 Sunday night) but still highly overbought long-term. Because of the extreme overbought condition after a giant parabolic rise, it has the potential to keep dropping straight off a cliff with just brief pauses to keep us guessing. Knife-catchers beware.

Here’s a 1-month view of February gold futures:

Source: Interactive Brokers, LLC

I’m going to watch for good entries on the long side of the dollar and short side of gold and stocks. Things may be aligning for a major downdraft in stocks, now that the dollar is looking up. With the Yen oversold and Nikkei overbought, Japan is also setting up for another try at the deflation trade.

Yen (priced in dollars), 1-month:


Nikkei stock index futures, 1-month:

Deflation trade returning?

While Americans were on holiday, the last couple of days have seen some exciting market action. Stock indexes around the world declined roughly 3-8%, “safe” US and German government bonds rallied, and the dollar plunged to a new low then rebounded very strongly. Gold made a new all-time dollar high at $1196 as the dollar made its low, but when the buck turned yesterday gold plunged to $1130 as US stocks futures (which traded round-the-clock through the holiday) wiped out two weeks of gains in about 24 hours. Higher yield currencies such as the Aussie, Kiwi and South African Rand fell 3-4%, oil extended its decline to under $75, and copper got smacked $0.20 off its new high. One spot of green was natural gas, which extended its bounce to 14% off an area of strong technical support.

Gold showed us what can happen to a levered market after a parabolic move breaks its uptrend. In the wee hours today, it fell $55 in just two hours before rebounding right to resistance (the previous support at $1180, which when broken, precipitated the crash). Here’s a chart of the last two days:


Commentators blame the Dubai default for this week’s gut-check, and the event may have acted as a catalyst, but the fact is that the risk/reflation trade had reached new heights over the last couple of weeks on a wave of complacency. Early this week the VIX nearly hit the teens and the daily put:call ratio put in a super-low print, while the Nikkei, Treasuries and yen offered warnings that all was not well. Browsing through the world index charts on Bloomberg, it is striking how few other markets have followed the Dow to new highs this month. The troops have been losing heart since summer as the generals kept charging ahead, a classic case of inter-market non-confirmation, which can also be seen in the weak action in small-caps and sector indexes like the transports, financials and utilities.

In last few trading hours of the week (this morning), many markets staged a very sharp recovery, as you can see here in this 1-month view of S&P futures:

Source: Interactive Brokers

Today’s pattern played out in nearly identical fashion in oil, gold, silver and other stock indexes. The stall point offered a clean spot for initiating or adding shorts, and those who did so were rewarded nicely in the last 30 minutes of trading as everything sold off quickly.

Next week should be very interesting. The risk trade plateaued for the last two weeks and went through the usual distributive action, so I have been expecting a down leg of some magnitude. Wouldn’t it be nice if this were the one to finally put a nail in the reflation coffin? I am sick of this market, as would be anyone who understands how far out of line these prices are with value or economic reality.

As Dubai’s default reminds us, this credit bust is far from over. There are still trillions and trillions in bad debt out there, and nearly every major bank in the world is still bankrupt and contracting lending (down another 3% in the US in Q3). We have all the hotels, condos and strip malls we’ll need for ages, and the consumer culture of the late 20th and early 21st century is just an unfortunate historical blip. Don’t tell that to Wall Street equity analysts, though — they still think the S&P will earn over $60 next year, just like in boom-time 2005.

PS — check out Dave Rosenberg’s latest essay for a good commentary on the week’s action. You have to sign up, but it’s free.  Click here.

We’re probably at another top; the question is what kind

I’m again very bearish short-term, basically taking the approach that we’re topping until proven otherwise. I think we’re about to roll over like we have three times since early August. Indicators show that each recovery since then has further disheartened the bears and encouraged the bulls, which is as it should be, making each top more likely the final top. It’s a process: the market shakes out as many players as possible, so that the fewest number of bulls and bears benefit.

I’ll start as I often do, with the equity put/call (10-day average) vs. SP500:


Take a look at the similarity between the CPC and price action from January to July ’07 and that of May ’09 to today, and note the last time the 10-day average dipped below 0.55: July ’07.

The VIX is also indicating complacency, with its RSI well into “oversold” territory:


I’m also noting the relative weakness of the Russell 2000 and Nikkei in this latest push upwards. The Russell has only recovered back to its September highs, lagging the SPX and NDX, and the Nikkei remains well below its August levels (as does Shanghai, which topped in early August):



Multiple signs are pointing to an equity sell-off dead ahead (starting this week or next), probably at least of the magnitude of that in July-August 07 or June-July 09, which means 10%, more or less.

Whether we then recover to chop around up here another few weeks like in Sept-Oct ’07 or fall straight down like 1930 and 1938 is anyone’s guess, but CPC, VIX, DSI and Treasuries all say there could be a major top in this vicinity. For an indication of what support follows that top, you can look at technicals and  fundamentals. The first major technical support is the SPX 900-950 area, where we peaked in January and June ’09 (and bottomed in Sept ’01), followed by 750-800 (bottom in Oct-Nov ’08 and Oct ’02 and March ’03), and then of course 666.


Fundamentally, there is no value above SPX 450, a humdrum 11.25X multiple on expected 2009 earnings. Contrary to popular belief, $40 in earnings is not at all a depressed level relative to the last 15 years, but only compared to the very peak of the bubble in ’04-’07. At 450, the market would yield a bit under 5% on today’s dividends (which are still being cut and are only at 2005 levels). A 5% yield would be no huge bargain, but a lot better than the 2% investors are getting today.

For an indication of how quickly parties like this can end, take a look at what happened to the Brazilian stock market today:


This US-traded Brazil ETF was down over 6% before noon today, leaving the previous four trading days as an island top. (I am short Brazilian stocks and the currency.)

If the US market does roll over here by 100 SPX points or so, keep an eye on the put:call ratio. I’ll be ratcheting down stops and very wary of a retest once the 10-day average gets a standard deviation above the mean (we must be 2 SDs under it right now). That said, it wouldn’t do to get stopped out on a 30% retracement only to see the market make an Acapulco cliff dive like in ’87, ’29, ’30 or ’38 as the crowd realizes that things have only gotten worse since last year. If this turns out to be a big third wave, it could take us straight to the March lows three months after the peak.

Some thoughts on the bear market.

This post started as an email that got way too long. I added some charts and put it up here:

The rally has not surprised me (on March 31 I expressed the opinion that we would hit 900 or higher by summer:

…more likely in my mind is a protracted rally extending to 900 or higher by summer, then rolling over to meet a date with 400 next winter. Look at last year’s rallies from March to May and July to August for an idea of what this might look like, though on a larger percentage and time scale because we are correcting a larger sell-off. The case for such a move is bolstered when you hear major investment banks’ strategists calling this a dead cat bounce. Too many people are still afraid to call a bottom, and they need to be suckered into long positions before this is over (along the same lines, too many traders are embracing the dead cat bounce and need to be shaken out before it can get back to leading the buy-and-holders to slaughter).

That said, I was leaning closer towards 900 than 1050:

I am highly skeptical, though respectful, of calls for a the mother of all bear market rallies. Robert Prechter and some other Elliott Wavers, as well as Tim Knight (slopeofhope.com) seem to be anticipating a 6-month or longer rally to as high as 1050. I simply don’t see why that is necessary in this environment. This is a depression, and the last one was accompanied by bear market that, after the first 6 months, maintained the momentum of a cruising supertanker. Rallies of 20 percent and 2 months were about all you got from April 1930 to July 1932 as the Dow dropped from about 295 to 41. That deflation-driven event was a much more orderly bear market than the jagged trajectory of the dot-com crash, which occured while the credit bubble continued to expand. Interestingly, the 1966-1982 secular bear (a brutal 75% loss in real terms) also traced out such a series of steep plunges and rallies as the bubble kept inflating thanks to a compliant Fed and the abandonment of the last trace of the gold standard. Employment was down, but animal spirits were still running high with the computing boom, the advent of securitization, and new innovations in consumer credit.

Though I saw this rally coming a mile away, I have traded it very poorly. First, I put too much emphasis on picking the absolute bottom for a buy-in.  Back in Feb and March I got out of most of my shorts by the time we were under 700, and I entered a bunch of limit orders to put over 1/2 of my net worth in SPY on the long side. Unfortunately, those orders started at 620, and we bottomed at 666. So I missed the bounce, and not only that, starting in April I began to short the junk stocks that were flying the highest and have been the real driver of this market. That was way too soon, and they kept on going, to the surprise of many a long-short fund as well. The outperformance of junk was a surprise, but the overall bounce has not been. When you have mood as compressed as it was back in March and you reach an exhaustion point after 18 months of a strong bear trend, you get a big reversal, which can then generate the extremes of optimism needed to set up the next plunge.

I’ve been buying long-term puts on the S&P and Nasdaq again since late March (way too soon, considering that I expected the rally to continue). I bought a bunch more yesterday, by the way. I view it as extremely unlikely that this market doesn’t decline to the point where solid value offers support — that would be a sub-10 PE and dividend yield of over 5% on dividends that have to fall by 50% or more from here to around $12 for the S&P. That would be the 240 level, but it should take at least a couple more years to get there (or below), if not four or five.

What has always worried me as a short in this market is not a 5-8 month rally, but a 12-18 month affair  like some of those that Japan has experienced in its long bear market since 1989:

Source: Yahoo! finance

That said, Japan’s financial sector was deflating while exports were improving, families had savings and the rest of the world was growing. Today’s situation is much, much more severe of course, and we can only find a parallel in the Great Depression for so many of the economic trends we are seeing. The longest bounce in that bear market was 5 months, and it was of similar magnitude (48% from Nov. ’29 to April ’30; we’re up 47% in the 4.5 months since March 6).

This is the Dow from 1928 to 1931:

Source: Yahoo! finance

And here’s how that bounce looked from 1933:

Source: Yahoo! finance

The S&P500 is now the most overvalued in history by PE (infinite as of this quarter’s running 12 month total, or a dot-com-esque 32 times current annualized earnings levels, about $7.50 per quarter). The dividend yield is about 2.5%, but dividends are nearly as high as earnings right now, which is completely unsustainable (they should be less than half of earnings). On a sustainable basis, the yield is 1.0 – 1.25%.

Here is the S&P PE ratio (TTM data through 12.31.08) going back to 1936. (the dates read right to left, since I can’t figure out how to reverse them in Excel). Data through 6.30.09 would be off the chart:

Real (U-6) unemployment is approaching 17% and climbing, and that is if you exclude the likely 6 million illegal immigrants who are out of work now (who used to take home $100 per day as construction cleanup boys or dishwashers). Throw them in, as we would have in the 1930s, and you get a solidly depressionary 20%.

Credit is still being withdrawn everywhere you look, whether in home equity, credit cards or small business loans. There has been a bounce in the corporate bond market, but that is due to the same technical forces that are driving the stock market, and the big bankruptcies are just beginning. Only the very weakest have gone under so far, like the car companies.

So with this backdrop, I don’t expect this summer’s good feelings to last into the holidays. The markets should start to roll over again soon, since the big-money value investors needed for a sustained advance can find no reason to buy in, and the little guy has been burned too many times to chase this market very far. Volume is very thin, and an unusually large fraction of trading is taking place between automated programs.

When the data to back up the green shoots theory fails to show up after another few weeks or months, and even official unemployment is solidly into the double digits and climbing, while another huge wave of mortgage resets hits the middle class, there will be no hope at all left to support this market, and it will slide to levels not seen since George Bush Sr. was in office.

It will then still not be a safe long-term buy. For that, considering all of the obstacles that the government has created to profit-making, we need to get back to Reagan-era levels, somewhere under the bottom of the 1987 crash.


Source: Google finance

Getting close: Japan may have just made a bottom.

The Nikkei sold off 9.38% last night, closing at 9,203. Coming after a long and steady decline (from 18,250 in June ’07), such a dramatic move to deeply oversold conditions reflects capitulation — the market just throws in the towel. Afterward, who is left to convert to a bear? Bullish sentiment readings in Tokyo must have dipped well into the single digits.

5-day view here:

Source: Yahoo! Finance. Click image for larger view.

Now, I am not calling a final bottom in Japan, since yields are still low and this global depression has a lot further to run, but this may be a major stage bottom. Rallies from such intermediate lows can be extremely powerful, as the fear of losses subsides and gives way to the fear of missing out on gains.

The world markets have been moving together through this bear market, so a capitulation in one major index suggests that relief may be near for the rest, although they may have to make their own dramatic plunges first. Here is a 2-year view of the Nikkei (blue), Europe (VEURX, green) and the S&P 500 (red). Note that the chart does not reflect last night’s dive in the Nikkei.

Source: Yahoo! Finance. Click image for larger view.

Now, once this bottom is in, the rally should only be of interest to traders, not long-term investors, because once it peters out we are going plunge all over again. Anyone who needs these funds for retirement or their kids’ tuition or who is not a proven trader should get out and stay out. Don’t even look at the market news for the next two years, because you will be tempted to jump back in at just the wrong time.

Can’t make your retirement plans work without 8% compounded returns? Well, better scale down on those plans and increase your savings, because this bear is here to stay. The whole concept of putting the bulk of your life savings in the stock market is one of the biggest scams of all. Stocks are a horrible way to save. They are good for investing when they are cheap, and good for speculating if you are a pro, but as a savings instrument they are terrible. What kind of a savings instrument routinely loses 50-90% of its value?

The pervasiveness of the belief that one should save in stocks is a product of a bull market. People had different opinions in the ’30s, ’40s and ’70s. Before long, newspaper columnists will again promote Treasury bonds for saving, and at that point you might want to look the other way and consider that stocks could be cheap.

I would like to be a stock bull again — it is more fun. But I am going to wait until things are really cheap and paying nice dividends. Even after 30% and 50% plunges, respectively, US and Japanese stocks are still only yielding about 2%. Furthermore, dividends are being slashed left and right, so the expected yield is even lower. I want to see at least 8% yields before I buy stocks and put them away.

In 1932, the yield on the Dow briefly hit 15%. That speaks as much to the strength of American industry at the time as it does to the depth of the crash. I would be surprised if US companies hold up as well this time.