Back to Roots and Shoots
In early April, I posed the question: Root or Shoot? around various areas of the economy. This query was provoked by what I continue to believe is the most brilliant investor relations campaign ever or the whole “green shoots” economic recovery theory.
I’m returning to this topic today because of last week’s employment report. On April 9, I wrote, in reaction to the well-received March report, “All in all, a rather mixed bag with nothing definitive in support of the employment situation having blossomed into a “shoot”. Until such a recovery is truly clear, jobs are in the ground: ROOT.”
While economic fundamentals are of less interest to me than what the financial markets are doing via charts, I feel very strongly about two areas of the economy: jobs and housing.
In my April 30 Root or Shoot? Roundup, the tally was dead even with 4 negatives, 4 positives, and 2 neutrals. I chose the ten areas in order of importance as I see it relative to a sustained economic recovery. Employment was first, again a root, and housing second, also a root.
At that time, I wrote, “I do believe that once there is a true recovery around jobs all else will fall into place … while I also believe that until the asset class at the eye of the financial crisis heals fully – housing – a true mending from the financial crisis is impossible.”
I stand by these statements. I have posted two notes about the downward-feeding circular nature of unemployment or, more specifically, consumer fears around the ability to obtain a new job if needed. This fear is like cancer and should the unemployment rate go back into double digits, it will show up in poor consumer confidence and spending figures, feeding, naturally less hiring.
Housing, however, could be the real sucker punch and I believe it’s coming this summer. As soon as the government stimulus fades from the picture, housing is more likely to decline again and perhaps severely. Activity in May confirms this already with five straight weeks of declining mortgage applications and disappointing activity reports out of realtors.
This lackluster activity combined with record U.S. home foreclosures could be the very spark to send the S&P 500 much lower as investors contend with a reality that has been staved off by the government’s year-long ownership of the housing market.
Sam’s Stash, Gold, and the S&P
Here’s an idea – I’m going to start writing this section in the order I set out in its name. And today this means I am going to address the U.S. dollar now that I have a chart I can insert.
As will not be a surprise to you, I think the dollar is going to decline significantly if not collapse at some point in the future.
I have thought this for more than a year now as it corresponds to my other view about “Sam’s Stash” or Treasurys. I continue to believe we will see an auction fail at some point as happened in the U.K. last spring. The moment that precedent was set, it became a matter of not “if” but “when” relative to Treasurys here in the U.S. and I came to believe a failed Treasury auction is what the double top in the S&P 500 points to ultimately.
Not as in a single event, but as I write in Lender of Last Resort Crisis (May 5), the double top warns of the events around the resolution of the U.S.’s struggle to remain Lender of Last Resort to the global financial system.
However, that’s just the story – my version of the story. What do the charts tell us?
The long-term dollar index chart, on the next page, tells us the dollar is going down. Maybe not in collapse but the trend is clearing one of decline. Interestingly though, in my view, we’re at a critical moment on this chart. It is either going to continue to move up for the near- and mid-term, or it is going to fall quickly to below $65 as it, too, could be setting up for another double top reversal at it did in 2009.
(Please go to www.peaktheories.com to view all charts.)
Story-wise, I have a hard time seeing the dollar declining right now, at a time when the world is flocking to the perceived safety of U.S. dollars and U.S. debt in response to global uncertainty. However, the chart above is very clearly showing it as a possibility and so I’m simply pointing it out. Rather, I have to believe, and it is simply my belief, that the dollar will continue to climb higher for the next 6 to 18 months and perhaps even form a double top to where it was in 2000 through 2003 that is possible to see on a longer-term chart. This, of course, may set up a trade of a lifetime – one that I will be writing about as time goes on.
The long-term chart of the CBOE 10-year treasury yield index tells us something different than what the long-term chart of the dollar is telling us. Quite simply, its trend is down – yields are going lower – and because bonds trade inverse to the yields, this means Treasurys are going up.
(Please go to www.peaktheories.com to view all charts.)
It is because of this chart that I put forth my view in March, at a time when the yield was at 4% and some big banks were putting out forecasts of 5.5%, the 10-year would stay below 4% and move closer to 3% with the possibility for a spike down. I still believe this is the case and I think it will be the case for some time – probably 6 to 18 months.
In fact, I think we are more likely than not to go below 3% on the 10-year.
If you recall, last spring, the absolute highest we were expected to go on the 10-year was 3.25%. This was due to the government’s buying of both Treasurys and MBS. I believe the government’s steering, although diluted by the mania that swept every non-physical asset class out there, or a mania for risk, was simply put on hold for a few months.
And so how do I put together these two charts to support the story behind the double top in the S&P 500?
I break every single chart-reading rule out there. I impose my belief on the chart of the 10-year and support it via the dollar index chart and that of the S&P 500. This may not inspire confidence in you, the reader, but that’s where I’m at.
There are so many possibilities as to how the 10-year could suddenly spike higher, similar to the S&P spiking lower in the fall of 2008, that I will address them as they appear in the chart as time goes on for those signs will show up and, again, perhaps in a severe double top just as happened with the S&P 500 well prior to 2008. In addition, the dollar index chart will prove to be a very helpful guide.
Moving on to gold, I sold the small addition I made to my position yesterday slightly above $119 and, obviously, below the $122 I bought it at on Tuesday. Whenever it feels good to take a loss, I know I’ve done the right thing.
I made this decision because, after topping out again at $122, it has traded off as a bevy of bizarre stories are hitting the tape about what various big banks and countries are saying about gold and then doing with their own positions. The chart points to this confusion with its ups and downs and a possible second or minor double top within the still possible major double top.
Until this mess is resolved with an ounce of gold trading at $1,275 and GLD at $124+, I’ll sit it out with my original position. If it continues to trade off, I will sell that position should it move below $115, or confirmation of the minor double top and a likely signal of the major double top, and possibly look to buy GLL or an inverse gold ETF and then to buy back GLD around $90-95 which is where it should correct to in the case of the major double top’s coming to pass.
All of the above is strictly “chart stuff” which is what I will trade/invest on before “story stuff”. I have to believe the story, or that gold will remain the transferrable storage of value should paper currencies collapse, continues on, but the near-term chart is pointing to a flaw with that thesis. Perhaps it is the fact that gold may not be immune to deflation as is believed, only relative deflation.
And now, if you’re still with me, let’s turn our attention to the S&P. I continue to think the near-term, intermediate-term and long-term trends of the index are the same: down. And this, for me, confirms that we remain in the worst bear market of our collective lifetime.
But before I move on, this has been an interesting week for me.
The S&P 500 closed below 1,057 or one of the only two areas that I consider to be of critical support above 677. The other is 880. I have thought for some time that when this happened the S&P would begin a pretty severe decline. Perhaps initially to the target of the bear flag or about 950 and spurred on by Europe while another decline would take the index to 880 and perhaps guided by disappointing housing figures.
On Tuesday, I wrote that this type of a steady decline however it may come – slow and steady or in panic selling – would come after a possible day or two of waffling by the index. Well waffle the index did both Tuesday and Wednesday with one day taking it back above 1,057 and then the other back below.
Yesterday, however, not so much. Yesterday was a 3% move up. Maybe on nothing volume in oversold conditions, but I call them as I see them and a waffle it was not. That part of my “read” was wrong.
This being said, I still believe the index is going to decline in an unrelenting manner, even if slowly, as soon as the next bit of new or renewed uncertainty hits the tape. I continue to believe that it was the close below 1,057 that is our cue of this decline because that close changed the aesthetic and, more importantly, reinforced the downward direction of the chart. I still think we will see 880 sooner than we wish.
And now for the charts of the S&P 500, which have gotten uglier, ironically, with the index’s wagging, not waffling, wagging around 1,057.
Even more ironic is the fact that yesterday’s dramatic move up appears to have stolen some stability from the index.
Although it is more difficult to see with these smaller charts, the 1-year still looks awful to me, or perhaps bizarre is the better word, while the 3-year remains terminal.
The solution to these charts and to the worst bear market of our collective lifetime is to sell equities.
As always, thank you for taking the time to read this week’s piece.
DISCLAIMER
Opinions expressed herein are strictly that of the author and are subject to change without notice and may differ or be contrary to the opinions or recommendations of any professional associations held by the author including the author’s employer. The opinions contained herein should not be taken as specific recommendations to be acted upon. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness, reliability or appropriateness of the information, methodology and any derived price contained within this material. The securities and related financial instruments described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. The author may have or have had interests long or short positions in the securities or related financial instruments referred to herein, and may at any time make purchase and/or sales in them. Neither the author or any person or entity related to the author nor the author’s professional associations, including the author’s employer, accept any liability for any loss or damage arising out of the use of all or any part of these materials.
Disclosure: Long GLD