I wonder if we get a ramp to retrace a lot of this drop, like we did in January:
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This is today:
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If we drop a few points and don’t break the lows and RSI doesn’t break its uptrend, we’re likely to ramp towards 1100.
Another ramp coming up?
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Monthly Archives: February 2010
Smackdown
This would be a pretty good way for a 3rd wave decline to start:
Prophet.net
See how the 30-min RSI called both the ramp off Monday’s low and the turn down yesterday? We’ve got a nice channel line break, too, and RSI has plenty of room to run today.
Yen to test the highs?
Don’t sell short the Yen just yet. It is wedging up to the highs and still seems to find a bid when stocks fall. I noticed this large wedge on the USD.JPY 5-year:
Interactive Brokers
A breakout of that wedge will be bearish for Yen, and a nice spot to think about shorting. For now, I’m letting it run, since the Yen is still the only thing stronger than the dollar in deflation. Note, however, that each subsequent move down in dollar/yen is shallower and choppier than the last, hinting at a pending reversal.
Here’s another way to look at it. There’s still an unbroken longstanding support line in Yen/Dollar, but the rise in 2009 was choppier and at a shallower angle than previous rallies. You can also see in weekly RSI that the trend is tiring:
Add mortgages to the debt bubble (with junk bonds, munis, sovereign debt…)
Mortgages are still cheap, if you can get them. The spread over 30-year T-bonds has fallen to record lows, at just 0.2%.
St. Louis Fed
This spread is unsustainable and will be corrected by falling bond yields (rising prices) and/or rising mortgage rates. It is possible that mortgage rates fall still lower, but the spread must widen to deliver a decent risk premium (the same is true for corporate bonds). I actually would not discount the odds of yet lower mortgage rates if Treasuries rally hard, since we are going through deflation (best defined as a contraction of money and credit) and the real yield is a good deal higher than the nominal.
Lookat CPI minus food and energy (it is mainly higher oil and gas prices over the last 12 months that are holding it up):
David Rosenberg calls mortgages a bubble:
Once again, this Houdini recovery has involved a situation where mortgage rates have plunged and yet Treasury bond yields have been rising — 30-year fixed rate mortgages have fallen to 4.93% and are sitting are record-tight spreads over long Treasury bonds (see Chart 6). Historically, the average spread is 150bps and this differential is now 20bps. This is remarkable and our concern is that investors who may be exposed to mortgages are at serious risk because there is a considerable chance that these rates will be moving higher over the intermediate term — notwithstanding continued support from Uncle Sam’s pocketbook.
Investors must be reminded time and again that mortgages are callable, Treasuries are not; and we are now in a situation where net of fees, which average 70bps, anyone buying mortgage paper today is receiving a rate that is less than what the borrower is paying, How nutty is that? Remember — despite all the ridiculous comparisons to the Weimar Republic, the long bond is THE risk-free benchmark interest rate in the U.S. and with State taxes going up, Treasuries are an even further bargain because of their tax status.
Houses are still way too expensive in the US, as indicated by inventories, income multiples and rental yields, but if they fall to historically cheap levels in the coming years while mortgage rates stay low, they could be a fantastic investment. This is especially true if we later go through a period of high inflation, so that real mortgage payments drop (fixed-rate only of course) while rents and incomes rise.
This goes to show the importance of keeping hold of your cash during deflation, because there will be historic opportunities in almost every asset class.
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More here from David Rosenberg (free account required).
PPS – Here’s an update on the long Treasury note, short junk bond play. As you can see, we are still in a very nice spot to put on the trade:
Newton’s AAPL
Sir Isaac actually dabbled in the stock market during the South Seas bubble — when it started to get crazy, he got out, but then near the very top he succumbed to the mania and bought in again, only to lose his shirt*. Apparently, he forgot his own rule.
Prophet.net
*Reportedly 20,000 pounds, back when the pound was such a mass of 0.925 silver.
All she wrote?
Interesting pattern here. If it holds up, we’re due to drop. If we break 1106, we could challenge 1112.
There’s the gap up. Now how far do we ramp?
Will we challenge 1112 again or peter out somewhere short of it? Would be very bearish if 30-min RSI does not violate that downtrend. At any rate, 1114-ish remains a solid stop for any shorts.
Prophet.net
What does a top look like?
Some charts from historical tops in the Dow, starting with 1901:
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The giant gap down above did not happen in a day. The government forced the closure of the NYSE on July 27 (after a crash when the closure was foreseen), and it was not reopened until Dec 14. The Great War started in the interim.
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In May 1940, where you can see a crash above, the Low Countries fell to Germany and Northern France was occupied. However, charts alone were all you needed to be bearish.
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Sympathy for the euro
Sentiment is still really lousy and downside momentum is waning. This is the same condition that persisted in the dollar from August through November before violently clearing. No telling how long this holds up, but I would not want to get caught short without a stop here — one day you could wake up and find out that it’s spiked 3 cents overnight.
Interactive Brokers
Of course, I am bearish on the commodity currencies CAD, AUD, NZD and ZAR (and actually also JPY as of this evening’s spike), and if these fall the euro is likely to make new lows. Conversely, a euro spike would likely coincide with a general dollar sell-off.
Some kind of news about Greece or other GIPSIs could be a nice catalyst for a rally — it doesn’t quite matter what the news is, just that there is something to get people trading. The crowd’s reaction often makes very little sense and can’t be predicted by news alone.
SPX ready to rebound? (updated after the close)
We nearly have an upward cross on the 30-min RSI:
prophet.net
UPDATE: Of course, the other alternative is that each little bounce gets sold and the oversold condition lasts for another day or so and takes us down another 1-2%, as in the decline from 1100 in early February. The easy answer to this problem is to keep ratcheting down your stops or set a loose trailing stop.
UPDATE 6:20: Well, we got a bit of a bounce in the afternoon, then a sell-off into the close, followed by a rebound in the futures after-hours. If this were like January, we might gap up tomorrow and rally to challenge the highs, but RSI is looking a lot weaker and lots of other markets are acting bearish. Bonds in particular had a very strong day and did not give back any of their rally:
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On the 30-day view of SPX, you can see that RSI is deteriorating faster than in January, so perhaps any correction of today’s drop doesn’t challenge the highs:
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If indeed this is intermediate wave 3 (of minor 1 of primary 3), as a third wave, we shouldn’t expect much in the way of countertrend action.
