ARE WE TOPPING?
Can anything make these stocks go down? Well, Bernanke's 'call' might make stocks go down -- his call on tapering off QE. In my last post I talked about how the strong US Dollar was not healthy for the illusions of global recovery.
Not everything is well with this market. First, let's look at the NDX, the Nasdaq 100 Index, which looks to be getting ready to take a header.
We introduced our Pulse Indicator a month or so ago. The Pulse Indicator -- red line below, top pane -- vanishes as buyers vanish; it turns down to zero. The pulse of the NDX just vanished. One must also be aware of the trends in the bottom pane. The pulse can vanish is a minor pullback, for a very short time, and then reappear again when the rally continues. The NDX is showing a pulse vanishing and a trend downturn. This has been a very negative combination two other times since September 2012, as shown in the chart.
The strength of the US Dollar has disrupted Ben Bernanke's ruse. The ruse is that the global economy is recovering. The truth is that central banks know how to inflate assets (primary by weakening the US Dollar, and thereby inflating assets priced in Dollars -- a method of raising all boats but the Dollar). Central banks do not know how to create organic growth periods in economies. This is primarily so because the central banks only believe one side of the coin exists, more and more credit, more and more debt. To accept Deflation as an equal partner with Inflation is against the ethics of central banks, whose job is to perpetuate perennial economic growth through manipulation of monetary policy. Without a weak Dollar, Bernanke's ruse expires. Commodities sink; US housing sinks; and eventually stocks also sink.
Japan, by triggering massive currency devaluation around the world, is accelerating the fall of Ben Bernanke. It is a race to the bottom now, as all other nations of the world join the Currency War started by Ben Bernanke, the UK, and Switzerland. Why did it take Japan so long? Currency War; Trade War; perhaps then actual military war. These are all things that TOO MUCH DEBT unfurls.
A decline in commodity price sis fueled by a stronger US Dollar, and is a sign that the so-called global recovery is a false commodity.
Stocks to consider shorting? If you want to look at stocks to short, if you are convinced this is the market top about which we have been continually warned, here are some.
Housing stocks have been stellar performers. But this is an artificial market, because of the Fed's intrusion into the picture, guaranteeing the continuation of bad mortgages in order to fake a housing rally. Propaganda. Mortgage REIT's look horrible; and lumber has broken down. DHI, below, also appears to be breaking down.
The Nikkei Japanese Index closed down 3 1/2% on Monday. Tyler Durden writes in Zero Hedge today that turmoil in the Japanese bond market is exemplified in the number of JGB Repo 'fails' -- where a repo agreement breaks down, has gone up sharply.
Until the last few days, the attention of the mainstream business media has been on how 'wonderful' Japan's policy prescription must be since its stock market is soaring at a record pace. The reality is that the far bigger JGB market has been crumbling. As we explained here, this is a major problem for the bubble-blowers, as the extreme volatility (VaR shock) that the Japanese Government Bond market has been through in the last few weeks has some very large and painful consequences, that as yet, have not been discussed widely. The term 'shadow banking' has been one ZH readers are by now extremely familiar with as we have discussed this as the panacea of unseen leverage (most recently in Europe and China) for years; the funding markets in Japan, so heavily reliant on JGB repo for short-term liquidity and the efficient functioning of two-way markets in the bonds, are hitting a wall. As JPMorgan notes, the number of JGB 'fails' - where a repo deal breaks down - has more than doubled in the last week. For a market that represents 40% of the total Japanese money-market, this will be a critical area to watch for a JGB waterfall.
Durden quotes from a JP Morgan report:
The sharp rise in JGB volatility has not left the JGB repo market unaffected. The ¥80tr large Japanese repo market accounts for 40% of the total size of Japanese money market (which it also includes CDs/CPs, currency swaps, BoJ money market operations, and Call transactions) and it is an important lubricant of the JGB market. This is because repos with JGBs as collateral, account for more than 99% of domestic repo transactions. The haircuts are typically very low in the JGB repo market ranging from zero to 2%. This is because market participants are comfortable or accustomed to control risks through margin calls without often setting a haircut upfront.
But these margin calls or haircuts where applicable, tend to rise when volatility rises. And the rise in margin calls or haircuts has caused a rise in "fails". 175 fails in the month of April represents a sharp increase from March but it is still much lower from the >1000 figures seen immediately post Lehman. A fail is a situation where a recipient of JGBs in a transaction does not receive the JGBs from the delivering party on the scheduled settlement date.
Typically the number of fails in Japan is quite small, partly because market participants try to avoid fails in advance, and because some market participants have never experienced fails. According to the BoJ, the situation is quite different from that prevailing in US repo markets, where fails occur much more frequently than in Japan and where market participants take action in accordance with the fails practice on a daily basis.
The retrenchment in Japanese repo market is then fed into the JGB market propagating the initial volatility (VaR) shock. The repo market is used by market participants for funding or short selling and its functioning is important in maintaining a two-way market for JGBs.
In yesterday's extra long post I wrote about the possibility that 10-year TBond rates hitting 2.2% could trigger a crisis in America's TBond market also, with much selling in an attempt to hedge against chaos triggered by rising rates in the MBS market.
It looks and feels like a top here. Of course, I have learned not to underestimate what Big Guns (a lot of money) and not much ethics can do to control financial markets -- so I'm watching anxiously also, uncertain of what new derangement of which central banks might be capable.
Michael J. Clark, CGTS