Does Wall Street Believe in the Rally?

I am starting to see some very strange divergences as stocks continue their daily climb.

Let's take a took at some weekly charts.

Stocks have been soaring as seen here on the SPY (S&P 500):

Treasuries have remained relatively flat despite a large rise today. Here is the TNX (10 year) and its sharp drop in yields:

Gold has also steadily risen throughout the week as seen here via GLD:

While the dollar has sold off severely:

Some Questions:

These are the big four that I follow each day, and I think the price action here over the past week is very interesting.

My first question is why are flight-to-safety assets performing so well after such a huge move in equities?

Bonds should be selling off hard as stocks rise and yet yields have stayed relatively flat. There was a strong BTC of about 2.9 on a 30 year bond auction today which is why yields dropped so sharply today.

This leads me to my second question: Why did a 30 year bond auction see such huge demand with a yield of only 4.2%? This is telling you the bond market is not worried about inflation.

I mean think about it: If inflation soars to 10% annually and your return is 4.2% you will get pummeled on this long bond purchase. In fact, if anything, this is a signal that the bond market is actually scared to death about deflation.

This leads to my next question. Why is gold soaring in price if the bond market is worried about deflation? Gold typically trades higher when inflation fears are present although this is disputed by some economists.

My next question. Why is the market acting so afraid as stocks soar to new highs? Strong inflows into bonds and gold are fear indicators. Could there be a lack of confidence among the bulls regarding this recent rally?

Finally, my last question.

How far does the dollar have to freefall before the stock market takes notice? Folks, this crashing dollar is extremely worrisome for me. A strong economy is almost always is accompanied with a strong currency.

There will come a time when the dropping dollar turns into a serious headwind for the bulls. At what level? Who knows the way this wacky market is trading.

What I do know is energy prices are creeping up along with other commodity prices as the dollar drops. Meanwhile, at the same time, wages are flat and we are losing jobs by the hundreds of thousands each month.

This has the potential to stop the consumer dead in its tracks. Just go back to the days of $147 oil if you need to refresh your memory.

The Bottom Line:

None of these correlations add up folks. The market is trading like it has 5 different personalities. You might as well just call it Sybil these days.

Today alone: Sybil acted bullish, feared deflation, feared inflation, and traded the US currency like its not worth the paper its printed on(which it probably isn't).

Sybil's price action is extremely unstable and inconsistent folks.

This should concern all investors regardless if you are bullish or bearish.

Disclosure: No new positions today.

Comments

[Dave Wrixon:]

Does it matter whether they believe or not? Is it not more important whether they correct or not?

Sep 11 06:05 AM

[CautiousInv...:]

Gold, which has a mutiple personality disorder, and equities are on the same page and both see reflationary trends. Gold may also see chaos and attempts to replace the dollar as a reserve currency.

The collapsing dollar, which has been reduced to a carry trade instrument, is further reason for gold to and equities to celebrate because commodity prices will increase, import inflation will increase while profits of exporters grow.

The bond market, though, buys none of this and only sees anemic growth and deflation. And contrary to what has been published on SA, precious metals do not do well in periods of deflation.

Bonds appear to be the odd man out but they generally anticipate changes in direction better than do equites.

Sep 11 06:14 AM

[Roger Knights:]

Well, gold's action could be due to "anomalies" like Barrick's de-hedging purchases and perhaps buying in anticipation of buying from China (individual and/or state). It needn't be safe-haven buying, IOW.

But the rest of the picture is still pretty screwy. If the big investment banks are playing footsie with the gov't. by not taking major long-term short positions, and by being publicly bullish, that could partly explain the market.

If some sort of unofficial devaluation of the dollar is coming by year-end, which I heard rumored six months ago, that could explain three of the four charts, but not Treasuries. (Unless Treasuries are being secretly sold to Asians at a discount, in some roundabout manner. Or unless there is a well-founded fear in central banking circles of some major international incident (including a terrorist attack) in the pipeline.)

Sep 11 06:24 AM

[neers87:]

Sounds a bit like the last girl I dated, I couldn't make any more sense of her than I can this mkt. When in doubt - Get Out!

Sep 11 06:39 AM

[Michael Clark:]

Gold will be the only game in town if deflation runs its full course globally. Who is going to buy the dollar, with the Fed pushing on a string, keeping the dollar weak? So what currency do you buy? Commodities? Not really currencies -- and when the global recovery falters, and deflation takes over, no one wants to be holding copper or oil or aluminum that no one needs. Gold/silver is the only commodity that is a currency. Gold will soar in this deflation. Penny gold mining stocks will go through the roof.

Sep 11 06:53 AM

[Davewmart:]

You are attempting to bring rational analysis to bear on an irrational situation.
Market manipulation by the Fed is so large that the market does not function as a price discovery mechanism.
You really need to ring the Fed and Goldman Sachs to find out what is being pumped - analysis won't cut it.

Sep 11 07:13 AM

[GMak:]

I did the same study recently. I could not agree more with the divergences of this strange behavior. For gold, it's obvious that breaking $1k is now meeting a lot of resistance - top out? On the other hand, Crude is hovering around low $70's and it's been there and could not break the resistance at the mid-70's - another sign of topping out? USD/EUR is trading around its Oct 08 low - resistance coming? Dow is within striking distance of hitting its +10% for the 2009 & maybe a psychological threshold - will it ever get its resistance, GS? 10-Yr Treasury is stuck at mid-3's for a while now.

If my analysis play out, all five of these components would hit some sort of psychological resistance VERY SOON and trigger the massive sell off. The ultimate beneficiaries are Shorts on Equity, Gold, and Crude; along with bulls on USD and Treasuries. That may explains why the 30-Yr at its low-4's is selling like iPhones.

Other possible signs - end of 3rd quarter & pre-warnings. I can't see how commercial banks could repeat 1st and 2nd Qtr performances since the refinance activity is practically dried up even if they make huge margin on the spread on those foreclosures. On the other hand, they probably have to start releasing the bulk foreclosure baskets soon to realize the losses (how long can you hide it.) As for retails, I can't see consumers would be buying anything between now and Thanksgiving since we all know crazy sales are happening every week now (at least in CA where everyone is broke.)

Last but not least, I always have this thought, what does market rally in China has to do with us. They are cashing in the greenbacks to stockpile commodities. We're buying "Tens of Billions" less from them compare to just two years ago. As a matter of fact, we are about to start trade war with China (Yes, can you believe our government?) China's plan is to dump its stockpile of greenbacks as quickly as possible; what is there to cheer about?

Well, I guess the big guys already have the plan worked out. Bait them in and squeeze the poor investors... of ALL countries.

Sep 11 07:29 AM

[Pauly B:]

If I were in China why would I buy anything but gold right now. I hold all this US paper which is turning into worthless paper.

Then I see the US and other countries have their printing presses turned on 24/7 and a huge deflationary spiral developing.

On the contrarian side though this whole thing appears to be getting just a little bit tipsy. One little word out by the FED on the dollar could leave alot of people in tears on their commodity plays.

There is alot of manipulation in the currency markets we the public will never know.

Sep 11 09:14 AM

[Baboon:]

Great analysis of the US. Thanks. Is this analysis true on the global scale?

Sep 11 10:11 AM

[inthemoney:]

> None of these correlations add up folks. The market is trading like it has 5 different personalities. You might as well just call it Sybil these days.

I think it is simple - monetary inflation . Newly printed money needs to go somewhere to be rpotected from devaluation, this is why all the assets rise at once and dollar falls.
People don't see it, because they simply don't believe it can happen here in the great USA. They don't beleive that their own government and the bankers can support such open money printing, but they are and they are lying when they pretend that the newly minted assets bubbles are a sign of a recovery. They know full well what is happening.

Sep 11 10:19 AM

[Isnt_It_Jus...:]

QE by the FED will be ongoing by using currency swaps with foreign CB's and then having them buy each other's gov debt. This accounts for the $ falling, gold rising, while treasury yields remain low. What Americans have to ask themselves is, after decades of consuming more than we produce, can we get away with a free lunch for the first time in history? I think not. The only question the US gov can decide, with this monetary policy it is pursuing, is who the losers will be. Somehow I doubt it will be the rich people.

Sep 11 10:31 AM

[rosey99:]

If we sufficiently inflate asset values, the good old days will be back. People will stop whining about lost jobs, and lost income, and we will all party like it's 2006. Credit will once again flow freely, and the USA will be the land of milk and honey. This seems to me to be the prevailing attitude, especially by those who pull the strings (or think they do) of "high finance."

I, for one, have doubts. You remember how to play musical chairs, don't you?

Sep 11 03:31 PM

[The Housing...:]

Great thoughts all.

What I find interesting about this whole thing is the banks lose if inflation gets out of hand.

All of their assets are in dollars. This move up in gold has to make them unconfortable. The inflation the Fed is creating via monetization could destroy the banks and all of their dollar denominated assets.

This is why I believe the Fed will pull the rug out on this liquidity sham which will leave us with a deflationary disaster.

These are certianly unprecedented times.

Sep 11 04:41 PM

[Albertarocks:]

I've been keeping charts of certain relationships (i.e. $SPX/$WTIC, $SPX/Gold, $SPX/$USB, $USB/Gold, etc.) and I find them going basically screwy. They aren't making much sense any more, that I can see.

On further reflection, I think this is a function of the bankers' panic and fear driven manipulations. They have their own greedy reasons to pump up certain markets artificially, thereby wrecking the normal relationships that common sense would dictate should exist. In the long run though, the entire machine will sort it self out and sanity will return to the markets... sanity as in proper relationships will once again emerge. And when sanity does return, the S&P won't be trading at 130 times earnings (as some calculations show is the current case). Will they return to 15 times earnings eventually? You bet they will, and probably in a crash scenario that the dark lords' screwing around with normalcy is setting up here.

I have a new rule. Never be long over a weekend. Actually, I can't see any reason to be long now at all because the FED's minions have made this the most dangerous market of all time, in my humble opinion.

Sep 12 11:15 AM