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Gary Tanashian
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Gary Tanashian is proprietor of Biiwii.com. Actionable, hype-free technical, macro economic and sentiment analysis is provided in the premium newsletter Notes From the Rabbit Hole (http://www.biiwii.com/NFTRH/subscribe.htm). Complimentary analysis and commentary is available at the 'Biiwii Blog'... More
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  • S&P 500 & Gold Stocks, Mirror Manias

    We have been working a theme lately about the mania going on in US stocks (some valuations are not overly manic but policy sure is) and also the one going on in the mirror (a fun house mirror at that) in the ugly precious metals sector.

    We are in a time of utter reverence for great and powerful Oz-like people doing not so great things to the rates of interest that would be paid to savers and prudent people (Zero Interest Rate Policy or ZIRP), and doing wonderful things for leverage (substance) users, speculators and asset owners (MBS and long-term T bond buying).

    It's a bail out of the type of people who put the financialized economy at risk in the first place and a bail in of those that cannot afford to take risks and gamble as the Fed seems to so desperately want the masses to do. How are they bailed in you ask? By continuing to follow the prudent conventions of the last century into a new era of 'Inflation onDemand' ©, which was instigated by the Greenspan Fed and has been carried to new extremes under the Bernanke Fed after Greenspan's mess unwound in 2007-2008.

    Slowly but surly things are coming around to policy makers' wishes. Grandma may still be holding out with her shrinking passbook at the local bank, but more and more regular people are joining the bull party going on in stocks. It is a 'new secular bull market' after all! Best of all, 'it just started this year and there's plenty of time for it to run' thinks a newly bullish public. As of the Fiscal Cliff drama 1 year ago, the public was firmly bearish and convinced that 'the bear market' and 'the great recession' from 2008 had not yet ended. 3.5+ years into the bull cycle, no less.

    Look at the beautiful chart below with its monthly MACD ripening and its RSI doing something that has only resulted in market crashes on the last 4 occurrences, including the crash of '87. Hopeful bulls will proclaim how long the RSI remained over bought while the stock market rose unabated from 1995 to 1998. Yes, you are right sir. But that was the mania stage of a secular bull market born by the way, of relatively sound monetary policy. This one is a cycle, just as the one that blew out in 2007 was a cycle.

    (click to enlarge)

    T-minus 4 months?… The cyclical bull market in US stocks (a series of higher highs and higher lows, uninterrupted since March, 2009) will be 5 years old in 4 months. The manic phase of the secular bull that ended in 2000 lasted roughly 5 years. The inflation-fueled and cyclical bull market instigated by the commercial credit bubble that ended in 2007 lasted roughly 5 years.

    Now the current specimen rises ever higher carrying new sponsorship that basically sat out what it thought was a bear market from 2009 through 2012. They have bought the 'new secular bull' promotion hook, line and sinker. How do you think this is going to end, eh Bueller? Well, probably with a blow off as manias tend to do.

    Blow offs never end well. Ship of Fools, thy name is the US stock market. Yet for now, the ship sails happily through calm waters.

    In the mirror we have the mess that is the HUI Gold Bugs index. The inflation mania that ended in spring of 2011 loaded the precious metals boat. The boat got heavier with refugees from the acute phase of the Euro crisis and then HUI got technical warnings 1, 2 & 3 with the critical warning being a loss of 460 (2) as silver built up a huge commercial short position in its Commitments of Traders data, and a final warning being a loss of the neckline (3) to a massive topping pattern.

    (click to enlarge)

    Technical damage has been done on all but the biggest pictures as we watch for secular bull market down leg 4 to be put in. The trend line break (shaded yellow) is probably freaking people out right now. NFTRH has been allowing for that ugly event for many weeks now as we cover multiple bottoming scenarios that are in play. Trend lines are less important than bull market 'higher lows', which in this case can come anywhere above 150.

    A complicating matter is the measurement of the big topping pattern, which is roughly to 100. Could that level be reached in a final puke fest and clean out of gold bugs? Yes, and it could be epic. But the index is a candidate to bottom any time now and shorter term management will help tell that story. The monthly chart above is just a big picture for perspective.

    So it is getting near time to think about selling the cyclical US stock bull and buying quality situations in the counter cyclical gold stock sector because there is this quaint old notion in the financial markets; buy low and sell high and because we have a clock ticking on the S&P 500, the economy and most importantly, the policy making that has propped them.

    Bottom Line

    Everyone now loves the US stock market bull and utterly detests the ugly image of the gold stocks in the fun house mirror as the public has finally decided to run with the aging US stock bull and the final holdouts are throwing in the towel in the precious metals. Wall Street is running another errr, operation, with the Fed behind it with supporting policy. Within the next half a year I'd expect a long anticipated macro pivot to be engaged and a counter cyclical phase to begin taking shape.

    For now I am personally both long and short certain US stocks but managing the arduous process of a coming pivot, where the idea will be to lock and load positions and then sit into the next cycle. NFTRH will be managing this process every step of the way as it has done since inception in September of 2008. If you are so inclined, check out this service that never predicts, but always keeps the analysis in alignment with macro themes.

    Biiwii.com | Notes From the Rabbit Hole | Free eLetter | Twitter

    Nov 27 8:32 AM | Link | Comment!
  • Janet Yellen Nails It

    From an earlier post by Biiwii.com guest Doug Noland:

    Senator Dean Heller: "A quick question about quantitative easing: Do you see it causing an equity bubble in today's stock market?"

    Yellen: "I mean, stock prices have risen pretty robustly. But I think that if you look at traditional valuation measures, the kind of things that we monitor, akin to price-equity ratios, you would not see stock prices in territory that suggests bubble-like conditions. When we look at a measure of what's called the equity risk premium, which is the differential between the expected return on stocks and safe assets like bonds, that premium is not - is somewhat elevated historically, which again suggests valuations that are not in bubble territory."

    Thank you Ms. Yellen for testifying to my point. Equities are not in a bubble by "traditional valuation measures", just as I have been saying. If you are sincerely and actively bearish the market you had better be bearish because you either think monetary policy is about to fail (i.e. its efficacy is going to wane) or that policy makers are going to be forced to cease and desist, most likely by the Treasury bond market.

    Yes folks, here is that chart once again (courtesy of SlopeCharts) telling its story of a broad US stock market rising in line with one of its "traditional valuation measures", general corporate profits (green line). Right there in parabolic accompaniment of stock prices and corporate profits is Janet Yellen herself, as represented by the black line, which is money supply growth courtesy of the Fed's ongoing ZIRP and QE operations.

    (click to enlarge)

    She tells the truth. Stocks are in line with traditional valuation measures; and also with non-traditional policy measures. This week in NFTRH 265 we introduced another view into this dynamic…

    (click to enlarge)

    Excerpted from NFTRH 265′s closing (Wrap Up) segment:

    "Federal debt was used throughout the meat of the 20-year secular bull market as Alan Greenspan feasted upon the wellspring of monetary goodwill that was left by his predecessor Paul Volcker's inflation fighting policy (as interest rates approached the high teens).

    Federal debt was then ramped down after it had done its job in instigating a bubble in stocks (S&P 500's Hump #1). As we have documented in other graphs, Hump #2 was instigated by the bubble in commercial credit that was promoted by official policy on the Fed Funds rate.

    Now we have Hump #3. This one is rising in real time with a 'hockey stick' of debt accumulation by the Federal Government as well as the Federal Reserve. The racket will end. So if people want to view NFTRH as a fundamentally bearish newsletter, so be it. NFTRH is bullish on honesty and bearish on dishonesty on the biggest picture.

    The stock market is honestly rising as far as credit accumulation, money printing and willful policy will take it. Right now, that appears to be pretty far. But I simply ask that people remain aware of the mechanics beneath the surface of the mania."

    Biiwii.com | Notes From the Rabbit Hole | Free eLetter | Twitter

    Nov 17 1:22 PM | Link | Comment!
  • '3 P's' Supporting Massive Market Speculation

    Policy, Profits and Propping… that is without a doubt the underlying fundamental support for a massive and growing phase of market speculation that becomes more dangerous with every week that it lurches forward. Once again, the chart that proves this in no uncertain terms:

    ppp

    'Policy, Profits & Propping' courtesy of SlopeCharts

    Note the 3 humps on the S&P 500 (orange). Again we review…

    • Hump #1 was a massive speculative surge that separated the stock market from all reasonable measures of fair valuation. It was the terminal phase of a great secular bull market in US stocks.
    • Hump #2 was not over valued compared to corporate profits, which were generally instigated by the Greenspan inflation that began in 2001. From this inflation sprang a massive bubble in commercial credit. Wall Street took over and sold the inflation to the world in the form of dangerous securitized 'investment' instruments. As long as it worked, corporate America flourished; especially financial corporate America.
    • After the liquidations that inevitably followed Humps 1 and 2, the Bernanke Fed instigated the mother of all monetary inflation attempts as ZIRP (zero interest rate policy) was initiated in December 2008 and remains an accepted, almost forgotten part of the macro landscape to this day. Add to this an automated regimen of Treasury and MBS 'asset' purchases (despite the 'taper' jawboning that periodically hits the media) in an attempt to keep long term interest rates down and deleverage the previous bubble, and you have policy working over time. Introducing Hump #3, who's time is coming due if it is to match the roughly 5 year lifespans of Humps 1 and 2.

    The point of the chart above is to illustrate that those with an agenda to ride the trend and look smart are correct when they state that the US stock market is not particularly over valued… if one shuts off one's brain and accepts policy (blue Monetary Base line, which is but one of several money supply measures) as being at all normal or healthy. Corporate profits (green) are doing great. All's good as the S&P 500 is merely keeping up with its fundamentals.

    But these fundamentals are 100% dependent upon some quasi financial institution's will or ability to continue the inflation. Or, as with Hump's 1 and 2, the public's willingness to continue the speculation. A secular bull market blew out in 2000 as the final speculative surge by the public and wildly imprudent financial 'professionals' just expired and fell apart. In 2007 something went wrong with the Ponzi racket certain big institutions had going, in which they enriched themselves at the expense of the public through an officially supported commercial credit bubble.

    Today we are asked to believe that policy, profits and propping can go on indefinitely, and in the most optimistic views, into a new secular bull market. The public generally believes that a new bull market began early this year after having sat out the first 4 years of the still-ongoing cyclical bull that began in March of 2009. This is going to end very badly, whether sooner or later. March of 2014 is 5 years, but there is no guarantee this bull will reach that nice, round number.

    The following graphics courtesy of Sentimentrader.

    The public (largely dumb money) is now lovin' itself some stock market.

    (click to enlarge)

    In fact, in the tradition of the great blow off in 1999/2000, big tech is the center of the speculative attention. This aligns with the recent post A Cyclical 'Mini Me' to a Big Secular Event. This is not a new era, and it is a bubble; in policy making or more accurately in market participants' willingness to believe in policy making.

    Ben Bernanke is the same man that everybody hated in 2011. The Fed is the same chronically inflating entity. It is just that this go round the inflation is 'working' toward the ends that would appear to benefit the most people, and as with previous inflation-instigated speculations (in crude oil and silver for example) speculators are jumping on this one. Go have a look at the charts of crude in 2008 and silver in 2011. Or how about the Nasdaq 100 in 2000?

    (click to enlarge)

    NDX monthly, from NFTRH 261

    This chart was produced in NFTRH 3 weeks ago to illustrate the extent of participation in this echo bubble (again, the bubble is in policy, not so much stock prices this time), which is a cyclical version of the secular thing that blew out in 2000. Does NDX look vulnerable to you? How about when considering the Sentimentrader graphs directly above? Or Rydex cash levels (a lack thereof)? Or current margin levels being employed by stock market speculators? The list goes on.

    Bottom Line

    Bubbles can go on and on until they expire and meet a furious end. I am sure many people think they will get out at exactly the right time. It's just a game of musical chairs. Was yesterday's hard drop anything to be concerned about? Well, recent high flying bubble stocks like FB and TSLA are showing some cracks (and topping patterns). MSFT seems to be blowing upward with hot money thinking it better get a hold of the likes of dependable old Mr. Softie, leaving the high flyers and high valuations behind.

    This bubble can endure out to next spring by my work. It can also end tomorrow… or yesterday. The point is that the Federal Reserve, through its automated and destructive policy, has indeed instigated another bubble with speculation running high. A big change is coming. Don't get played. Forget the 3 P's; go with the 3 C's… Caution, Clarity and eventually, Capitalization.

    NFTRH is managing events in a clear and grounded manner, in the weekly letter and by in-week updates at the site. It seems clear that one year from now the landscape is going to look very different than it does today. The only way to be in alignment with changes is to see and evaluate the potential and timing for these changes in an ongoing manner, subjecting the analysis to various acid tests along the way. You arrive at your destination intact and ready to capitalize through unbiased and consistent work, not through predictions or holding to dogma through thick and thin.

    Biiwii.com | Notes From the Rabbit Hole | Twitter | Free eLetter

    Nov 08 8:54 AM | Link | Comment!
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