We’re at the point in the equity bull market Cycle that every piece of news is construed as positive for the equity markets. In many cases, the news even appears to accentuate positive possibilities. The speculative nature of the current advance has by now captured the vast majority of market participants; the media and the pundits are no exception.
For example, the markets were pushed higher last week by several news events, even though the headlines hit the same themes that have been recycled for the past 3 years, and that are almost certainly, by now, fully discounted in prices. The news events included Japan calling off next year’s planned sales tax increase, China surprising with an interest rate decrease, and the ECB announcing that they will be buying assets. These are all related to the tired narrative that central banks and related authorities can alter the natural long term pricing/valuation trajectory of the markets. The world’s equity markets soared on the announcements, and in the process completely ignored the weak fundamentals that gave rise to them. The S&P and Dow even reached new all-time highs, in general very bullish developments. But in this case, the gains were built upon the shifting sand of sound bites rather than economic fundamentals.
The economic reality behind the announcements is anything but positive. To start the week, Japan surprised the world by declaring that it has – again – entered into recession. In addition, China’s HSBC manufacturing index fell to 50, a six-month low, burdened by an extremely high level of non-performing internal debt from overbuilding. And in Europe, the economies are tottering on the brink of recession, while inflation is very close to turning negative. Even in the U.S, where the landscape is relatively better, industrial production fell 0.1% and the Markit manufacturing PMI hit a 10 month low.
It’s clear that the meddling of the world’s central banks is in response to a rapidly deteriorating world economy. And equity markets, if not the underlying economies, are responding. For now, equities are choosing to ignore the fact that the patient – the world economy – is sick, and that these policy changes are only artificial responses to symptoms, and are far from cures. Central banks may have the ability to artificially raise asset prices, but it is only temporary. The idea behind current central bank actions, that higher asset prices create a “wealth effect” that will become self-sustaining and spur economic growth, ignores two key facts: world economies are laden with high, non-performing debt, and the economies’ problems are structural in nature.
In Japan, an easy-money policy has failed for 20+ years due to a highly inefficient domestic economy. Since 2008, when foreign consumers stopped buying cheap Chinese knock-off consumer goods on credit, China has bridged the economic gap through trillions of Dollars of debt used to fuel construction projects. The debt is largely non-performing, and its creation has led to a speculative bubble in real estate as well as massive oversupply. Adding to the world’s troubles, Europe is structurally a political and regulatory nightmare, with a banking system that’s holding huge amounts of bad loans. The European banking system is woefully under-capitalized and is not in a position to extend additional credit.
These problems are structural and can’t be fixed with liquidity, so pumping additional cheap money into these economies is not a solution. Money can be created through cheap credit, but money velocity cannot. Until we see a real business cycle downturn, one in which non-performing debt is finally expunged from the system, we will never have a foundation for organic economic growth and an expansion of GDP. In short, the world needs to experience a fair amount of pain before it has the potential for real gain.
The implications for world equity markets are significant. Given the world’s poor economic fundamentals, equity markets at current levels are both artificial and unsustainable. They are far from reflecting the current economic state and, more importantly, are completely misaligned with future risks. Once the business cycle turns lower again – as it inevitably will – the market will collapse on itself and will be seen to have been hugely, woefully overpriced. The market re-pricing which occurs during these periods is always severe and generally swift. It’s the market’s mechanism for closing the imbalance between prices at the peak of speculative fever, and the market’s intrinsic value. But since pricing imbalances often work both ways, during true secular bear markets, prices (valuation) typically fall well below a market’s true value.
Markets are often ignorant of what lies directly ahead, and I believe that’s the case with equities today. After a relentless move higher, the recent sideways consolidation has given way to yet another speculative spike higher. The rally since the last Daily Cycle Low has been extreme by any standard, but the character of the current move is now consistent with the final weeks of a blow-off top.
Calling a top is difficult at best, and I’m much less interested in being right about a top than I am in generating grounded analysis and presenting it well to readers. In this case, it’s hard to see the current spike in equities as anything other than a blow-off move into a final top. It’s the only description for what the equity markets are doing. Blow-offs end with a final exhaustive peak, we’re not there yet. And to be perfectly honest, I’m not sure exactly when it will peak…only that it’s likely to be in the coming month. A possible clue is the length of the typical Daily Cycle, roughly 40 to 45 trading days in total. If this breathless trajectory continues, then this Cycle is likely to mark that peak. As it’s already on Day 27, that Cycle top is just another 13 to 20 sessions away, just in time for the holidays.
The Financial Tap publishes two member reports per week, a weekly premium report and a midweek market update report. The reports cover the movements and trading opportunities of the Gold, S&P, Oil, $USD, US Bond’s, and Natural Gas Cycles. Along with these reports, members enjoy access to two different portfolios and trade alerts. Both portfolios trade on varying time-frames (from days, weeks, to months), there is a portfolio to suit all member preferences.
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Don’t Think Too Hard
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Midweek Market Update – Dec 17th
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An Epic Blowout
/in Public /by Bob LoukasThe FED’s easy money has encouraged rampant energy speculation and over-investment, resulting in more than $500 billion in new loans and investments in just the past 4 years. And so long as Crude prices stayed comfortably above $90, investments made money and everyone was happy. But once energy prices started falling, the decline quickly became a negative loop-back effect because the very high levels of leverage could not tolerate the move. Whenever asset prices fall in a highly levered market, there is often a sudden lack of liquidity to absorb the speculators’ need to unwind leverage, leading to desperation and fire sales. In the case of energy, the sudden disappearance of “investors” highlights just how speculative the underlying market had become.
It’s not exactly a Black Swan event, since Crude and other assets occasionally move with incredible ferocity. But to a highly levered and speculative population who chose to ignore the risks as being far too improbable to worry about, it’s a situation where debt cannot be offloaded at any reasonable price. At $55 bbl Crude prices, much of the new debt simply does not work, meaning that significant energy company junk bond defaults will occur. Although this is obviously bad for the energy complex, it also has very real implications for broader systemic risk.
The only saving grace may be that it appears that Crude has entered the final, vertical decline of the crash. A bottom in the $50 range is in no way guaranteed, but it is likely that the low will come in the near future. Notice on the below chart that the current move down started from a June top. Since then, we’ve had no better than a Day 3 Cycle top, showing just how extremely Left Translated recent Cycles have been. The chart also shows how relentless the downward move has been, and the 3 distinct channels it has taken. Within each channel, the declines have taken on a steeper, more vertical aspect, to the point that Crude prices are now near free-fall.
When a market enters into crash mode, there is no way to know where it will bottom. Unlike Crude, the energy producers have, to date, held up relatively well. And recently, they put in a very convincing counter-trend rally at the same time Crude appeared to be finding a bottom. But unless Crude does find a bottom, and quickly, the energy producers will, I believe, be punished with extreme prejudice, as we’ve yet to see “crash-like” selling in many of the names.
As is clear on the below chart, Crude was already deep into the timing band for a Low when energy producers rallied, fooling everyone into believing that a new Cycle was already underway. Normally, a sector rally in equities foretells a new Cycle, especially in an oversold, extended asset. In this case, it was just a vicious trap, a setup for the crash we’re seeing now!
I’ve shown Crude’s sentiment chart a number of times in the past few months, so I know it should be taken lightly when used to discuss Cycle timing. But I’m presenting it again because we now have a situation where sentiment is matching that seen during the massive crash of 2008. There comes a time, even during a bear market, where the market can’t absorb more selling, where it becomes exhausted of sellers. I’m not sure if we’re there yet in Crude, but based on this chart, it’s clearly imminent.
This crash has been a long time in the making, and has seen 6 consecutive months of lower prices without a single instance of back-to-back weekly gains! As a result, we have record low sentiment levels on the heels of the 2nd fastest rate of change (decline) ever recorded. This is a crash, no way around it. The effects on the industry will be long lasting.
As we can see below, price has entered free-fall. Cycle timing is out the window in this sort of scenario, as price can fall almost indefinitely, technically to zero. There is no way of knowing when it will bottom, but of interest is that the 2008 crash also began with a June top and ended with a December low, a 6 month decline. All that we can say with confidence is that the current move down should be very close to finished.
The Financial Tap publishes two member reports per week, a weekly premium report and a midweek market update report. The reports cover the movements and trading opportunities of the Gold, S&P, Oil, $USD, US Bond’s, and Natural Gas Cycles. Along with these reports, members enjoy access to two different portfolios and trade alerts. Both portfolios trade on varying time-frames (from days, weeks, to months), there is a portfolio to suit all member preferences.
You’re just 1 minute away from profitable trades! please visit: https://thefinancialtap.com/landing/try#
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Calling all Ships
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Midweek Market Update – Dec 10th
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Bonds Still Have Legs
/in Public /by Bob LoukasA solid U.S. employment report on Friday sparked a sell-off in the U.S. government bond market. And with the positive report, the FED is now under pressure to raise rates sooner than the market had been expecting. Considering that the bond market is already deep enough in the current Daily Cycle, it was surprising to see price hold above the 10dma to close out the week.
In reality, even more than the Gold market, the bond market had every reason to sell off aggressively on Friday. The Cycle timing was supportive of a decline, and the massive 2014 rally and overbought nature of the bond market made it ripe for a “realization” sell-off.
Considering the massive jobs number, the fact that bonds didn’t sell off shows just how much investors believe that the equity markets are carrying outlandish risk. This is a cyclical bull market in bonds because there is an underlying rotation into bonds at the same time speculative (high risk) capital continues to flow into equities.
If the equity markets were correct, and the economy was truly doing well, the bond market would be making new lows instead of new highs! Bonds continue to be gripped in a controlled, deliberate march higher, reflecting a cyclical bull market.
As the bond market enters week 11 (of a standard 22-26 Week Cycle) within a powerful, multi-Cycle move, I can only trust the trend and the relatively favorable weekly Cycle count when declaring that I expect further upside. And considering that 10-year Japanese and German bonds trade well below 1%, while (most) European sovereign bonds trade below 2%, the US 10 year bonds yielding 2.3% shows us there is a surprising amount of upside potential remaining in the bond market.
A Time to be Sitting
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Midweek Market Update – Dec 3rd
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Midweek Market Update – Thanksgiving Day
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Reminiscent of Pompeii
/in Public /by Bob LoukasWe’re at the point in the equity bull market Cycle that every piece of news is construed as positive for the equity markets. In many cases, the news even appears to accentuate positive possibilities. The speculative nature of the current advance has by now captured the vast majority of market participants; the media and the pundits are no exception.
For example, the markets were pushed higher last week by several news events, even though the headlines hit the same themes that have been recycled for the past 3 years, and that are almost certainly, by now, fully discounted in prices. The news events included Japan calling off next year’s planned sales tax increase, China surprising with an interest rate decrease, and the ECB announcing that they will be buying assets. These are all related to the tired narrative that central banks and related authorities can alter the natural long term pricing/valuation trajectory of the markets. The world’s equity markets soared on the announcements, and in the process completely ignored the weak fundamentals that gave rise to them. The S&P and Dow even reached new all-time highs, in general very bullish developments. But in this case, the gains were built upon the shifting sand of sound bites rather than economic fundamentals.
The economic reality behind the announcements is anything but positive. To start the week, Japan surprised the world by declaring that it has – again – entered into recession. In addition, China’s HSBC manufacturing index fell to 50, a six-month low, burdened by an extremely high level of non-performing internal debt from overbuilding. And in Europe, the economies are tottering on the brink of recession, while inflation is very close to turning negative. Even in the U.S, where the landscape is relatively better, industrial production fell 0.1% and the Markit manufacturing PMI hit a 10 month low.
It’s clear that the meddling of the world’s central banks is in response to a rapidly deteriorating world economy. And equity markets, if not the underlying economies, are responding. For now, equities are choosing to ignore the fact that the patient – the world economy – is sick, and that these policy changes are only artificial responses to symptoms, and are far from cures. Central banks may have the ability to artificially raise asset prices, but it is only temporary. The idea behind current central bank actions, that higher asset prices create a “wealth effect” that will become self-sustaining and spur economic growth, ignores two key facts: world economies are laden with high, non-performing debt, and the economies’ problems are structural in nature.
In Japan, an easy-money policy has failed for 20+ years due to a highly inefficient domestic economy. Since 2008, when foreign consumers stopped buying cheap Chinese knock-off consumer goods on credit, China has bridged the economic gap through trillions of Dollars of debt used to fuel construction projects. The debt is largely non-performing, and its creation has led to a speculative bubble in real estate as well as massive oversupply. Adding to the world’s troubles, Europe is structurally a political and regulatory nightmare, with a banking system that’s holding huge amounts of bad loans. The European banking system is woefully under-capitalized and is not in a position to extend additional credit.
These problems are structural and can’t be fixed with liquidity, so pumping additional cheap money into these economies is not a solution. Money can be created through cheap credit, but money velocity cannot. Until we see a real business cycle downturn, one in which non-performing debt is finally expunged from the system, we will never have a foundation for organic economic growth and an expansion of GDP. In short, the world needs to experience a fair amount of pain before it has the potential for real gain.
The implications for world equity markets are significant. Given the world’s poor economic fundamentals, equity markets at current levels are both artificial and unsustainable. They are far from reflecting the current economic state and, more importantly, are completely misaligned with future risks. Once the business cycle turns lower again – as it inevitably will – the market will collapse on itself and will be seen to have been hugely, woefully overpriced. The market re-pricing which occurs during these periods is always severe and generally swift. It’s the market’s mechanism for closing the imbalance between prices at the peak of speculative fever, and the market’s intrinsic value. But since pricing imbalances often work both ways, during true secular bear markets, prices (valuation) typically fall well below a market’s true value.
Markets are often ignorant of what lies directly ahead, and I believe that’s the case with equities today. After a relentless move higher, the recent sideways consolidation has given way to yet another speculative spike higher. The rally since the last Daily Cycle Low has been extreme by any standard, but the character of the current move is now consistent with the final weeks of a blow-off top.
Calling a top is difficult at best, and I’m much less interested in being right about a top than I am in generating grounded analysis and presenting it well to readers. In this case, it’s hard to see the current spike in equities as anything other than a blow-off move into a final top. It’s the only description for what the equity markets are doing. Blow-offs end with a final exhaustive peak, we’re not there yet. And to be perfectly honest, I’m not sure exactly when it will peak…only that it’s likely to be in the coming month. A possible clue is the length of the typical Daily Cycle, roughly 40 to 45 trading days in total. If this breathless trajectory continues, then this Cycle is likely to mark that peak. As it’s already on Day 27, that Cycle top is just another 13 to 20 sessions away, just in time for the holidays.
The Financial Tap publishes two member reports per week, a weekly premium report and a midweek market update report. The reports cover the movements and trading opportunities of the Gold, S&P, Oil, $USD, US Bond’s, and Natural Gas Cycles. Along with these reports, members enjoy access to two different portfolios and trade alerts. Both portfolios trade on varying time-frames (from days, weeks, to months), there is a portfolio to suit all member preferences.
View the Site: The Financial Tap
You’re just 1 minute away from profitable trades! please visit: https://thefinancialtap.com/landing/try#
Feel free to share this post via the below social media avenues.