Ever since the jobs report we've noticed that the stock market (NYSEARCA:SPY) has no intraday follow through. That is not a sign of a typical bull market. CBs may want you to buy into the breakout. But the Fed added a word in the Wall Street Journal ("WSJ") which concerned us, "urgency." Slow economies don't typically deserve urgency unless inflation has sprung.
Here is the reason that we think the market is up overnight but not up intraday.
Global central bank ("CB") money is up. This is not news.
Source: Monetary Watch
(This won't stir inflation will it?)
Europe CB money is up. This is not news.
ECB: Above shows the size of the ECB balance sheet building and building some more. (This won't stir inflation will it??)
And US money is not up of late but it's way up historically. The US is not the new buyers. If anything the Fed has pulled back of late which may be a sign of tightening.
What worries us is we just saw that US funds are starting to see inflows. We think this will trap innocent individual investors. We will see if it has any lift intraday to markets. So far not.
Above you see that the recent week saw a new rush by US investors to buy into the US market breakout. The above chart shows net inflows into mutual funds and ETFs.
Buying push so far has been from overseas investors
Foreign CBs However Are Maxed Out
Liquidity is coming overseas from Japan and the EU. Foreign central bank easing policies have purchased everything in sight.
We reported that Japan's CB (Central bank) already cornered the Japanese market. There are no more bond sellers in Japan. If an institution wants to buy a bond the CB already bought it. If anybody wants to buy a bond ever again they have to swim over to the US.
The ECB is running out of bonds to buy as well. Some say they will be maxed out in a few months unless they change the rules of what they allow themselves to buy (We'll see what the ECB meeting has in store).
The world is at redline.
(Picture: CBs are at redline globally.)
After the CBs are finished who will be left to buy?
Rising Rates While GDP Slows Is Not A Bullish Market Setup
While fundamentals have gone sideways or worse inflation has been ticking higher and the US is considering raising rates which will make everything even slower.
While GDP has been slowing the Fed is considering raising rates which is a very strange setup. That is not a bullish market scenario even though the market goes higher.
And the market is moving up because there are no bonds to buy anywhere in the world not because the fundamentals are good.
But as CBs reach their limit who will be the next buyer? Who's left?
Here's GDP in the US.
We don't know how to stress this enough but this is not the typical setup to RAISE rates. This will slow the economy further which typically coincides with down markets.
Fed Language Changing To A Sense Of Urgency?? Did I Hear That Right?
But the US has no choice because their main measure for PCE is picking up fast. You probably heard us say this a few times.
If you look at the difference between Current and Chained you have a 3% rate of change difference. PCE has heated up the last two months to well above the Fed redline mandate of 2%. That's why the recent WSJ Fed article used the term "urgency."
"But new rounds of strong economic data-particularly on hiring or an uptick in inflation-could increase their sense of urgency in the months after their meeting next week."
Hmm Urgency?? I thought we were ho hum running along happily and quietly at 1% inflation or near deflation. Are you telling me that a number or two over the next month or two could mean we need a sense of "urgency."
That sounds like a change, doesn't it?
We've been writing many times that inflation is "on the table." It's here. All the quantitative eating (easing) is driving inflation higher.
Now, despite that there is no great growth yet we need to RAISE rates.
Rip-roaring 1% GDP and Uh, Oh we need to raise rates?
Sorry let me rephrase that. Rip-roaring 1% GDP and Uh, Oh, sense of urgency, we need to raise rates?
Ouch Ouch and Triple Ouch.
Please tell me (even if you believe there will never ever in the history of mankind ever be another rate hike...just for fun answer me...) what will a rate hike mean to that 1% GDP? It will make it 0% then -1% and so on.
Yet the market, overnight climbs everyday up.
Let's review how big this risk scenario has come. CBs are maxed out buying bonds. Those low bond yields support markets. Now investors see up stocks despite the fundamentals and say, "Hey wait a minute, I'm not missing this bull move. I'm in." Based on?
The CBs are the ones clearly now holding the market up through their bond buying that is not working to drum up growth.
They are maxed out unless they change the rules so that bubble is on its last legs.
Inflation is coming and will be a natural air out of the bond principal values. (Inflation may be coming "urgently" according to Fed leaked whispers to the WSJ).
Who will be left holding the bag, everybody who is piling in now.
The CB strategy must now be either:
1) Not pay attention to what they are doing by sucking in innocent investors into a non-fundamental based market
2) Purposely trying to suck all investors into a non-fundamental based market.
Either way it's pretty bad. If corporations operated this way I'd hate to say where their management would be sitting for many years. (Your not going to get me to say it).
CBs Got Lucky With Brexit
Here's the sequence we see that caused the breakout.
First lets look at the volume of Brexit.
Look at this chart for index option volume for June. This gets a wow rating.
Let's ask a question. Which side do you think most took on the Brexit news in that straight blue line (above)? We think short, puts, selling calls, get me out and short type volume.
What happened next? A jobs number that on a two-month basis (smoothing for the strike in May) was about inline with the last month but slower than the last year.
Here's a longer term chart to show you that the number wasn't so amazing to deserve this much attention. But timing is everything.
Add to that the following week had options expiration.
Many many people post-Brexit were caught what? SHORT.
Lets' go through the timing of events that caused the breakout
Brexit caused a record short position (chart above) : June 24th
Record massive short position taken by the world.
Jobs come in decent but simply bounced back from May: July 8th
That massive short position needed to cover because most foreign investors probably didn't even pay attention to US jobs. They also needed to adjust for next week's options expiration.
Options expiration of the record levels seen in June: July 15th
Then they needed to cover or exit until expiration in-the-money positions that they may have been short.
We respect the reason for the breakout but we would say that this was a one time setup sequence of events that worked to perfection.
We do not think the breakout was totally an amazing news driven event.
We think it was a global massive short squeeze following a huge position post-Brexit. Maybe?
That's why we expect this breakout to fail and reverse.
We don't see intraday follow through.
We see all CBs running out of ammo soon.
We see the US reducing global ammo by tightening at some point.
Let's take a quick view of the intraday to see there is no intraday follow through.
This setup worries us. We see up opens which we like for a bull move but we mostly (except for July 8th's short squeeze) don't see intraday follow through.
We see the Fed definitely out of bullets. We see the ECB needing to change rules to fit in new bullets, but they are running out soon. We see Japan in desperation and out of bullets.
We see the breakout as a one-time, stars-aligned short-squeeze event just to suck everybody in one last time.
With all of that we see the Fed planning to raise while GDP is slowing because inflation may be "urgently" picking up.
Something from somewhere will let the air out of this one. For now we know we don't want to be long. We want to short when we see some intraday breaks and follow through confirmation on the downside.
Please be safe.
If you want Elazar's analysis on Seeking Alpha, scroll to the top of the article and hit "Follow." Elazar also writes real-time pieces as news is reported. If you want to be among the first updated check the box for "Real-time alerts on this author" under "Follow."
(Aggressive Ignores our Medium Term Fundamental Call and just focuses on the week)
Disclaimer: All investments have many risks and can lose principal in the short and long term. This article is for information purposes only. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Chaim Siegel, Elazar Advisors, LLC, bestideas, their related parties, and its authors harmless. #in, $spy, $qqq, $iwm, $vxx, $ycs, $fxe, $EUO, $YCS, $uup, #elazaradvisorsllc, ^GSPC, INDEXSP:.INX,
(NYSEARCA:SDS) (NYSEARCA:SPXL) (NYSEARCA:SPUU) (NYSEARCA:SPXN) (NYSEARCA:SH) (NYSEARCA:IVV) (NYSEARCA:RSP) (NYSEARCA:EPS) (NYSEARCA:SPXE) (NYSEARCA:SPXT) (NYSEARCA:SSO) (NYSEARCA:SPXU) (NYSEARCA:SPXS) (NYSEARCA:SPLX) (LLSP) (NYSEARCA:SPXV) (NYSEARCA:VOO) (NYSEARCA:UPRO) (NYSEARCA:RWL) (NYSEARCA:SFLA) (MUTF:RYARX)
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in SPY over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.