There are a zillion fundamental reasons why I don’t trust this rally. I will spare you the lectures. Here is one picture that tells all.
S&P Performance vis-a-vis Steep Rallies in T-Bonds
I think the ensuing stock sell off will be really fierce. There is a lot of data due for release tomorrow. The selling could begin as early as tomorrow.
Disclosure: I am 100% short.
Mohan- You made a fantastic call last Tuesday evening using the 10 year yield. After the latest two day rally, yields went crashing back to last Fridays opening lows. Certainly looks like well be seeing intense selling sometime real soon. 100% short (SDS, SKF and QID)
Sorry for my lack of knowledge on this. But looking at the chart it seems like there a steep incline in the T-Bonds which completed yesterday. Now what ensues is a drop back to the average. Doesn’t this mean the stocks get to rally again?
The bond rally is continuing form last week – with a slight pull-back yesterday.
Mohan:
Are you still holding your shorts in APOL and PCLN ?
TIA
Yes.
very interesting chart action….a significant flight to safety should result in less money in risk taking arena. personally i think the rash of plans, news conferences, bailouts, acronyms, are all starting to lose shock value and starting to look more like desperation moves..
i think the public at this point will start realizing…the light at the end of the tunnel is a train
thanks for your chartwork
i am with you all the way on the shorts into tomorrow. i’ve got my puts waiting for some fun action. thanks for the analysis. makes me feel better about the conclusion.
Tony C’s new video out: Bye Bye Rally…
http://www.youtube.com/user/ThePracticalInvestor
Comments from GS
NY ROUNDUP – Tuesday, November 25, 2008
HIGHLIGHTS
Richmond FED composite manufacturing index for November -38 from -26
FED starts TALF $200 bn fund for consumer finance support, also starts $500 bn GSE fund
US 3Q GDP revised to -0.5% – as expected
US 3Q corporate profits drop 0.4% after tax
US FDIC Bair: 3Q bank failures rise – worst since 1993, fund reserves off 23.5% q/q
COMMENTS
The US markets managed a three-peat – with equities up for three consecutive days — the most in a decade. The driving force behind the rally was the surprise FED TALF lending facility that will buy ABS and consumer loans and the GSE facility with US Treasury to buy $600 bn of agency debt – both actions push the FED further down the path of quantitative easing. The market took the action as a signal of future growth potential as the FED moves harken back to the Japanese actions of the lost decade. But for every fix there is a fault and that came today in the USD. The heart of USD weakness remains the fear of future inflation. That risk seems far away from the present situation where markets just last week were pricing in a global recession and got a -0.1% core CPI as evidence. Even today oil closes down 7% – mostly because of lower demand expectations. What seems a larger risk for the USD is the ability to fund the future obligations of the government – but again today’s 5Y auction shows the fallacy of this argument. The crush of data on the economy – a weaker GDP, continued weak house prices – all point to the shifting psychology of the consumer. The fate of the US debt rests with the choices of extending debt and spending or hoarding cash and saving – and right now savings wins. Expect this market to watch that savings rate data closely. The asset allocators will also be at work – its month-end and the shift of money to bonds over stocks in a world where central banks buy debt outright begets a rush for duration. So today may be special for the equity market, but its more significant for the bond market as 10Y rates drop 24 bps and the mortgage spreads narrow by 60 bps and the rush of money to safe havens stalls a bit thanks to the expansion of the FED’s balance sheet – all at the expense of the USD wit the EUR closing over 1.3050 set for 1.3117 and then 1.33.
CURRENCIES
Cross Low High
EUR/USD 1.2804 1.3081 Close: 1.3024
USD/JPY 94.94 96.70 Close: 95.64
EUR/JPY 122.73 125.91 Close: 124.56
GBP/USD 1.4982 1.5532 Close: 1.5445
EUR/GBP 0.8400 0.8566 Close: 0.8433
USD/CHF 1.1832 1.2061 Close: 1.1880
EUR/CHF 1.5399 1.5521 Close: 1.5473
AUD/USD 0.6336 0.6617 Close: 0.6470
USD/CAD 1.2126 1.2462 Close: 1.2282
NZD/USD 0.5367 0.5588 Close: 0.5453
Thanks Pete
Here’s the one from this morning Mohan. It’s a bit late since I’m on vacation. Seems everyone wants to buy the dip (in currencies). i wonder if the same will apply to equities.
LONDON MORNING ROUNDUP – Tuesday, November 25, 2008
HIGHLIGHTS
FT:: Obama pledges to shore up economy.
WSJ:: Obama Chides Auto Makers in Fresh Blow.
FT: Tax hit to fund £20bn fiscal stimulus
Germany Q3 Capital Investment 0.1% – much higher than expected.
SUMMARY
Focus for FX markets remains firmly on the equity action – will the latest sharp bounce from the lows prove to have longer term momentum this time round? Macro names remain very wary and largely on the sidelines in FX space. The response in G10 FX markets to the sharp equity rally has been disappointing post the US close. EURJPY traded up to test 126.25 in late NY however there was decent Asian crossJPY selling flows overnight – EURJPY has drifted back below 124 zone through the London morning. At the NY close USD was trading firmly on the backfoot versus G10, with a high in EURUSD of 1.2960 – however Asian trading saw USD trade off the lows with a lack of follow through momentum to yesterdays moves. G10 FX flows in London morning have been very light – our spot traders remain skewed to buying risk on a dip. In EURUSD our trader looks to buy dip to 1.2825 zone with intraday stop back below 1.2775 area, in AUDUSD our trader would buy AUD to 0.6350 with risk then back 0.6225/50 levels, our GBP trader would see 1.5050 in cable as buy opportunity with stop back to 1.4925 (10 day MA now at 1.4940 – we broke through yesterday). From a technical perspective drift lower in EURUSD from the highs looks corrective for now. Yesterday’s daily close above the 13th Nov high at 1.2857 gives a break higher from the recent range. 1.2857-1.2815 should now be good support with potential for a move to the prior spike high from 30th October at 1.3300. Yesterday’s move up the 2nd largest since EUR’s inception. However, it is interesting to note the price action in the US with S&P dropping over 2% off the session highs in the last hour of trading – there still seems to be selling/capitulation interest into the market rally. Today we look to various events in US session – data wise we have Q3 GDP, consumer confidence and home data. The market attention however is likely to be firmly on two press conferences: Paulson/Bernanke are speaking at 3pm London – they will give further detail on the Citigroup bailout and also potentially, as reported in overnight press, on a plan to use TARP funds to help re-invigorate the consumer-lending market. Obama is scheduled to speak at 5pm London – market will be focused on whether he reveals any further details of his proposed fiscal stimulus package.
11 of the biggest 2-day advances for DOW (11% or more) came in the period 1929-1933;
One in 1987
One in 2008
Enough said.
http://seekingalpha.com/article/107759-lucky-number-13-a-big-two-day-advance-in-the-dow
look at todays daily candle… spinning top.. go back a bit and you can see this same pattern. the top was followed by a small up day and then heavy selling. if we get a small push up tomorrow im shorting it and putting in a stop. we could then see heavy selling. take a look at this video analysis for the spinning top and look back at the chart for this descending channel:
http://www.youtube.com/watch?v=2KmXmivzGEI
Nice chart and analysis Mohan!
I wonder if the inverse correlation that we have witnessed recently between the price of bonds and the price of equities is one that will continue, and if so, will it continue in the same manner and degree that it has in the past?
Correlations between two variables often exist in the market and they can be useful for recognizing inflection points in trends. But like all other market truisms, correlations work until they don’t. Until recently (last 12 months) rising bond prices were bullish for equities as the falling yields made it easier and cheaper for businesses and consumers to obtain debt and fuel consumption and expansion. Until recently (last 4 months) falling oil prices have been bullish for equities as it has represented low fuel bills and operating costs. Now falling oil prices are seen as bearish because it represents a view that the world demand is falling off a cliff due to global recessions. So while correlations can exist, I guess the importance for traders is to determine why the correlation exists, and assuming we have identified the right causes, what can undermine those causes and end the correlation?
The correlation between high bond prices (and therefore lower bond yields) and lower equity prices is based upon the assumption that capital is seeking the security and safety of US treasuries, which portends bad a flight from risky assets such as equities. This assumption makes sense especially with a rapid drop in yields. But are there other reasons recently for the ramp up in bond prices that don’t support a correlative drop in equities? Here are a few possibilities:
1. “Year-end buying by mutual funds and companies looking to dress up their accounts is one reason behind the massive demand for Treasuries”. – WSJ 11/24.
2. “But analysts agreed that the main factor propelling Treasuries higher — with the benchmark 10-year note rising a full 2 points in price — was the Fed’s announcement that it would buy housing-related securities with $600 billion in an effort to free up mortgage lending. When the Fed purchases mortgages, investors will buy longer-dated Treasuries to maintain stable returns, analysts said. ‘The Fed is buying mortgages on an outright basis. They are buying fixed income so it supports the bond markets generally, not just mortgages,’ said Carl Lantz, an interest rate strategist at Credit Suisse. ‘They are going to be buying mortgages from dealers who would have been short a Treasury as a duration hedge. Then the dealer buys back the Treasury and so covers his hedge,’ Lantz said. When market participants “short” an asset, they bet that its price will decline, adding to selling pressure in that asset. When market short positions are reversed, that tends to buoy the price of those assets.” IBD 11/25
3. “Mikhail Foux, Citigroup global markets analyst, said investors “have started anticipating quantitative easing” or the purchases of the long-dated government securities by the central banks that are needed to lower interest rates in the economy. He said, “We are not necessarily sure quantitative easing will materialize, but that is what the market thinks at the moment.” Forbes 11/25
Do the deteriorating economy, low consumer confidence and recent economic data cause investors to seek the security of Treasuries? Sure. But the three reasons cited above don’t necessarily have anything to due with a flight to safety, and therefore the rise in bonds doesn’t necessarily portend bad news for the stock market. Here are some other thoughts:
1. “Meanwhile, the yield on the 3-month bill rose to 0.12% from 0.01%. The 3-month yield is still near lows not seen since the height of the financial crisis, when it fell below 0%. The yield on the 3-month Treasury bill is closely watched as an immediate reading on investor confidence, with a lower yield indicating less optimism.” CNN 11/25
2. “But frazzled Main Street investors shouldn’t blindly shadow the supposed “smart money.” When the panic trade ends (Friday’s markets offered a glimmer of hope), the pros will seek some degree of risk and will pull money out of Treasuries. Treasury prices will move lower, leaving potential capital losses for those who don’t flee government paper as fast.” WSJ 11/24
3. The chart posted shows the RSI above 70, a point at which each of the previous bond rallies turned lower. If that pattern holds true this time, it would do so with equities rallying as well. A positive divergence.
4. While the correlation may hold true, it requires a trader to take more of a swing position with respect to the market. A trader looking to Treasuries for future stock movements could have made their entry last Thursday or early Friday and would have been very, very early. Rates reversed quickly on Monday during the equity rise, only to reverse course again today. Equities meanwhile kept their gains from Friday and Monday and consolidated today.
I have no idea where the market will be tomorrow or next week or next month. The recent market action seems bullish to me. I am not long or short. I am in cash. I have been intra day trading and going flat at the end of each day. The intra day volatility swings have been enough excitement for me. J But here are some things I think may give this rally legs into the end of the year. Again, this is prefaced with the disclaimer “Of course this is just my opinion, I could be wrong”:
1. Vix is contracting. Almost went under 60 today, and did not break out when the market was down 160. 50dma is around 56, and some are calling a double top on the Vix and a trip back to the 200 ma in the 30’s.
2. During the Oct bottom, new lows were at a historic 3,000 or so. During the latest bottom, new lows were nowhere near that. A positive divergence.
3. 2002 lows held thus far on the weekly and likely monthly charts. I think that is more important than the daily breach from Thurs.
4. We still remain very oversold on a weekly and monthly basis. I think that needs to be worked off before we head lower. Need to trap more bulls.
5. Seasonality is coming into play and institutions that are long only, and comprise a majority of the money in the market may want to put money to work.
6. Optimism about the new administration and potential stimulus programs, and bailout of GM.
7. Armageddon trade appears to be off from last Thurs. With the latest Fed programs and actions (injection into Citi, backstopping their toxic assets, buying consumer and MBS, leveraging the Tarp funds, etc) Washington has done an about face from the inaction of last week, and are taking all the steps that were not taken during the depression. Sure this will lead to problems down the road, but there is no reason we can’t rally now.
8. Financials have been beaten with an ugly stick and have a lot of room to get back to their 50dma. News flow is beginning to be a little more positive for the group. — Carlos Slim took equity in Citi during the slide last week.
9. Sentiment is so negative that any somewhat positive news can spark a large rally. Geithner nomination is a case in point.
10. Technician John Bollinger is short term bullish. And he has 3 charts. J http://www.cnbc.com/id/27911135
Lets be clear, this is a rally within a bear market. I am not a Pollyana. Even EWT recognizes “corrective” moves from the primary trend. This could be one of them. Good entries, stop losses, and money management are critical. My opinion on the rally could change in 12 hours. I reserve the right to be flexible. But the very short term trend at the moment appears to be higher, and if that is the direction the market wants to head, who am I to argue? Buying out of the money puts when the VIX hits 40 making them reasonably priced, isn’t arguing. It is remaining cautious for the drop that could happen any given Monday.
Good luck to all.
Brian,
Great stuff.
That is a lot of typing. It would take me an hour to type that much text.
As I always said, stocks don’t necessarily follow an orderly decline in T-bond yields. It is the ‘panic’ buying of treasuries as indicated by steepness of the lines that brings the stocks don.
If you notice, all but one of the blue lines in my chart indicate pretty steep rise in T-bonds (hence steep fall in yields – I say this always to help newbies).
Another recent dynamic in the market is, that the number of traders has increased dramatically. If multi-year moves are happening in hours, why not trade. Why sit on them and risk losing all the gains and more? I am an example of position trader turned to near day trader. I can move quick but sometimes my strong convictions make me lethargic.
So my point is, in this environment, everything will turn on a dime for the foreseeable future. I think a new major leg down could start as early as tomorrow. I am expecting this one to be extremely brutal for the buy-and-holders.
Mohan,
kind of recall that you mentioned in the intraday comments that devaluation of USD maybe good for the economy in the long run. here is an interview Jim Rogers gave on Bloomberg lately with a different message.
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vJzshG4o708g.asf
I am nowhere in the league of Jim Rogers. He will more likely be right than wrong.
I just found another nugget. Equity put/call ratio is the lowest it has been in more than a month.
http://www.schaffersresearch.com/streetools/market_tools/cboe_eqpcr.aspx
and this means…people are very bullish?
some magic hand is holding this market up during this rally… you can feel it. this will give way but not until after thanksgiving + a few days. they want this bullish sentiment to be talked about around the dinner table and get more retail investors involved again. grasping at straws this market is. im sure whomever is propping this market up in hopes of investment coming in after the holidays will be forced to give up should this plan go unfufilled. time will tell. im short a few stocks but unwilling to play a broader market trade for more than intraday action… which has been plenty. any bets we trade lower overnight again and then gap up in the morning. whomever is propping this market up is basically giving overseas sellers a higher price…how very thoughtful.