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A Stock Market Top Is Being Achieved As US Treasuries Turn Lower And As Gold Stocks Break Out

Financial market report for January 26, 2011

1) … The weak rise of world stocks,
VT, to close at 48.94 suggests that a stock market top is being achieved.
Dow theory in simplified terms holds that the industrial stocks and transportation stocks make market turns together. The industrial stocks, IYJ, are moving up into an Elliott Wave 5 up; and the transportation stocks, IYT are moving up into an Elliott Wave 2 up; both will be turning down soon.
The industrial stocks, IYJ, are finishing their Elliott Wave 5 up.

The financial stocks, IYF, are forming a rounded top.

The transportation storks, IYT, are rising into an Elliott Wave 2 up.  

2) … Rotation out of small cap shares, IWM, and into large cap Dow stocks such as Exxon Mobil, XOM, International Business Machine, IBM, Walmart, WMT, have been instrumental in driving the Dow, DIA, higher in 2011 as can be seen in their combined chart relative to the Dow. The smart investor of late has been one long International Business Machine, IBM, and short Ryder, R.

The charts of Exxon Mobil, XOM, Walmart, WMT, and Interntional Business Machine, IBM, suggest that a top in the Dow, DIA, will come in soon, that is very soon, and possibly was achieved today.

3) … Significant stock fallers of the day include
Disk Drive Manufacturer, Quantum, QTM, -6.7%
Industrial REIT, First Industrial Realty Trust, FR, -5.0
MRO Services, DXP Enterprises, DXP, -3.6
Restaurant, Chiptole Mexican Grill, CMG -1.9
Latin America Consumer Discretionary Leader, Grupo Televisa, TV, -1.4%

4) … Significant stock risers of the day include
Chemical manufacturers, Dupont, DD, and Balchem, BCPC,
Alcoa Aluminum, AA, is operating on vapors, as the blast higher in Aluminum, JJU,  is unlikely to be sustained.
Iron ore producer, Cliff Natural Resources, CLF,  
Fertilizer Manufacturer, POT, and Mosaic, MOS,  
Refiner, Western Refining, WNR,
Computer Peripheral: Kemet, KEM, and Universal Display, PANL; its chart shows that the wave down is swifter than the wave up. Those who are short from here will experience tremendous gains.
Disk Drive Manufacturer, Western Digital, WDC,
Air Freight, UTI Worldwide, UTIW,
Energy service company, Nalco Holding, NLC,  
Machine tool manufacturers, Illinois Tool Works, ITW, Timken, TKR, and  Flow International, FLOW
Network company, EMC Corp, EMC,
Textile manufacture, Unifi, UFI.
Printed circuit board manufacturer, Flextronics, FLEX,
Small Cap Industrial, Polypore, PPO,
Resort, MGM Grand, MGM,
Design And Build, Foster Wheeler, FWLT,
Agriculture implement manufacturer, Deere, DE
Automotive parts manufacturer TRW Automotive, TRW, Tenneco Automotive, TEN, Autoliv, ALV,
Steel manufacturer, US Steel, X
Pharmaceutical, Questor Pharmaceutical, QCOR
Home builder, Lennar, LEN,  
Tableware manufacture, Libbey, LBY,   
Industrial, Cummins, CMI,

The Morgan Stanley Cyclical Index, industrial component: Eaton, ETN, rose today. It has carried the industrials as well as the Morgan Stanley Cyclical Index; but its chart pattern shows completion and moved up in what is likely to be an Elliott Wave 2 up; and then it will be going quickly lower in an Elliott Wave 3 down.

The chart of the Morgan Stanley Cyclical Index, $CYC, shows a move up into an Elliott Wave 2 up today; soon there is coming an Elliott Wave 3 Down.  

Significant ETF risers of the day came on anticipation that the Fed would continue to purchase debt.
200% of Basic Materials, UYM, and 200% of Russell 2000, URTY moved strongly higher. These rises were to have been sold short at the end of the day, with greater emphasis on URTY as it will be falling faster than UYM.
200% of Oil and Gas shares, DIG.  One could see from the charts that a bounce up had to come as the fall was so abrupt.
Basic Materials, IYM,
Copper Miners, COPX; yet the gain cannot be sustained, as today’s rise in copper, JJC, is simply a rise in a down channel. China credit tightening and inflation destruction has eaten away at the core of basic material stocks such as BHP Billiton, BHP. One can no longer profit from investing in basic material companies.     
Pharmaceuticals, XPH,
Transportation, IYT,
Agriculture, MOO, The chart suggests that one can no longer gain from investing in agriculture production.
Telecommunications, VOX,
Coal, KOL, Even though statistics show that the economy is on the upswing; the chart of coal suggests it is unprofitable to invest in coal production. Ben Bernanke’s easing programs have turned toxic routing investors from the small cap growth companies and the small cap basic material companies.     
Gaming, BJK
Metal manufacturing, XME,
Design and build, PKB, rose to a new high.
Steel, SLX, rose to a new high, yet it has been the US based steel manufacturers such as US Steel, X,  that have sold off more than their peers. Today’s blast higher in US Steel, X, provided short sellers the perfect opportunity they were looking for.
Home building, ITB,
Small Cap Revenue, RWJ
Small Cap Health Care, XLVS,
Water, FIW,  
Biotechnology, XBI, the chart of biotechnology suggests that the age of profitable investing in research and development of biotechnology is done and over; one can no longer profit from investing in life sciences.      
Energy, XLE, and Energy Service, OIH, and Dow Energy Service, IEZ, rose strongly today to new highs.
Timber companies, WOOD, rose to a new high on rising timber prices, CUT. Market traders have capitalized on moneyness coming from QE 2 to inflate timber commodity and wood producer prices higher much to the chagrin of manufacturers in the Italy, UK, Germany and China who use wood products in manufacturing. This is similar to junk bond investors relying on Ben Bernanke to give seigniorage to their junk bonds, JNK. Distressed security investors have benefited the most from the US Federal Reserves Quantative Easing. Mutual fund investors in Fidelity’s FAGIX have seen their portfolio more than double since the Fed Chief began with QE 1.     

The twin spigots on investment liquidity are running dry; there will come a sharp down turn in stock wealth as falling sovereign debt deleverages stocks and as repayment of bank loans unwinds carry trade investments

Peak world stock value is being achieved as the world stocks have reached full expansion on world government debt seigniorage. World stocks, VT, relative to world government bonds, BWX, that is VT:BWX, is falling lower; this will drag stocks down … And peak world stock value is being achieved as the world stocks have reached full expansion on near zero bank of Japan lending. The world stock carry trade, that is, ACWI:FXY, is falling lower; this too will drag stocks down.   

5) … Today’s rise in commodities, DJP, is simply a rally, in a downward channel, as these turned lower at the end of 2010. The rise in US commodities, USCI, is simply a reach to a rally high.

6) … US Treasuries turned strongly lower on anticipation of announcement of QE2 as it constitutes monetization of debt.
Bond vigilantes called the interest rate on the 30 Year US Government Bond, $TYX, higher, and the interest rate on the 10 Year US Government Note, $TNX, higher as well, as these traders control interest rates across the board. They have deemed that Ben Bernanke’s quantative easing, monetizes debt;  and are exacting a price for his policy of debt purchases.

The 30 10 US Yield curve, $TYX:$TXN, flattened 0.41% to close at 1.3413069.   

Yes, there was a flattening of the yield curve causing investors to derisk out of US Treasuries.  The longer out debt fell more than the shorter duration: ZROZ, -3.0%, EDV,  -2.3%, TLT, -1.5%, IEF, -0.6% and BABS, -0.9%.

7) .. Bonds, BND, are forming a bear flag, meaning an upward move in a downward movement.  Bonds fell lower in an Elliott Wave 3 of 3 Down today.
When junk bonds, JNK, turns lower, then the world will commence the end of credit as it is known.    

Junk Bonds, JNK, rose to a new high; this moneyness communicates an investment flight to safety is still on and away from Asia, EPP, India, INP, and Brazil, EWZ, where inflation destruction and credit tightening are evident.

8) … Disinvestment from Emerging Market Financials has been strong this year.
Disinvestment from India has been quite strong in India Earnings, EPI. And disinvestment from Brazil has been strong in the Brazil Financials, BRAF. These have been factors in taking the Emerging Market Financials, EMFN, down this year, as is seen in the chart EMFN, BRAF, EPI, XLF, and EUFN.

9) … The US Dollar closed lower at 77.81 today as many other currencies rose.
Banco Santender, STD, and the European Financials, EUFN, rallied on a stronger Euro, FXE, last week and which seems to today to have topped out at 136.35.  The EUR/JPY, that is the FXE:FXY, closed up at 200 day support, suggesting that its rally has stopped. European shares, VGK, closed at a new rally high, being led by Siemens, SI, which rose 3.2%, forming what may turn out to be evening star pattern.

The Mexico Peso, FXM, rose strongly to a new rally high as did the Swedish Krona, FXS, which drove Sweden, EWD, shares into what may be an evening star candlestick as well.

The US Dollar, $USD, closed at 77.81

The Developed Market Currencies Yen Carry Trade, DBV:FXY, fell lower with the announcement of QE 2 on November 9, 2010; and the Emerging Market Currencies Yen Carry Trade, CEW:FXY, fell lower with the failure of the European leaders to resolve the European Debt Crisis on December 13. 2010. It was on both occasions that central bank leaders, Ben Bernanke, and then European Finance Ministers lost debt sovereignty, and debt seigniorage, to the bond vigilantes who called sovereign debt interest rates higher as is seen in the 30 Year US Government Bond, EDV, and Emerging Market Bonds, EMB as well as World Government Bonds, BWX, lower.     

10) …  Gold, GLD, being the antithesis of sovereign debt, having hit strong resistance, rose today.
Ex Swiss Banker Moise Levi questions, Is Gold Oversold? I have to say yes. The world is very much at an inflection point today with fiat assets having been given moneyness by sovereign debt seigniorage (now failed with today’s ongoing fall in US Treasuries), quantitative easing (probably at its zenith effect) and carry trade investing (proving to be faltering). We are likely passing from the age of leverage which has seen investment growth and economic expansion …. and into the age of deleveraging which is likely to see disinvestment and economic contraction. In the debt-deflationary and inflation-destruction future, there is going to be an investment demand for hard assets like gold and silver.       

The gold mining stocks, GDX, which were turned lower by the flattening 30:10 Yield Curve, $TYX:$TNX, and the terrific fall lower in the 30 Year US Government bond, EDV, rose 3.8%, with stocks today. It is likely that gold, GLD, will rise now having found support. And  it is reasonable that the gold mining stocks, and junior gold mining stocks, GDXJ, will rise some as well. The loss of US Central Bank seigniorage caused disinvestment from the gold mining stocks, as can be seen in the fall of the ratio of the HUI Precious Metal Stocks relative to the 30 Year US Government bonds, $HUI:$USB, beginning in mid December 2010. But now a rally in this metric is likely, as gold and gold mining stocks are likely to rally. The ratio of gold mining stocks relative to gold, GDX:GLD, manifested a rebound today; and gold mining stocks such as Agnico Eagle Mines, AEM, ASA Limited, ASA,  Goldfield, GFI, and Newmont, NEM rose. An astute swing trader could see this coming in the chart of Newmont Mining which is in an Elliott Wave 3 up today.  Like the gold mining stocks, Internet software company,  Internet Capital Group, ICGE, is very much a swing stock; it rose strongly today.  Airlines, FAA, has a wave structure is like the gold mining stocks, the airlines rose 1.9% today. I expect the gold mining stocks to have greater run than the airlines. But there will come a time when the gold mining stocks will fall lower again while physical gold will go onward and upward as stocks and bonds and currencies fall in value. The chart of gold relative to the Australian Dollar, GLD:FXA, rose today. The chart communicates that gold became the world’s sovereign currency and storehouse of investment value when the EFSF monetary authority was announced in July 2010.    

11) … Today was the short selling opportunity of a lifetime, as so many stocks are in a downturn; and in a bear market one sells into strength, and in a bull market one buys into dips.
At the top of the short selling list is Sunrise Senior Living, SRZ, as it is a very volatile Russell 2000 company. Others are small cap revenue firms, EZCorp, EZPW, Dollar, Dollar Financial, DLLR, and World Acceptance, WRLD. And also small cap energy firms SM Energy, SM, and Whiting Petroleum, WLL.

One can short sell at the top, by selling energy services, National Oilwell Varco, NOV, but this has more risk than the others.

Like I mentioned above the 200% of Russell 2000, URTY moved strongly higher. Short selling it at the end of the day was the short selling opportunity of one’s investment lifetime.    

The only stock sector worthy of investing long is gold stocks; and that is simply a short term swing trade.  

12) Loss leading ETFs this year include the following.
Loss leading ETFs include FAA, SEA, VOX, XLYS, and PBE as seen in this Yahoo Finance Chart.

13) Reports on inflation destruction
Inflation Destruction has caused investment volatility and also a tremendous loss of investment in Indonesia, IDX, Thailand, THD, and India, INP and India Small Caps, SCIF. And Peru, EPU, and Chile, ECH, have suffered on disinvestment from Copper Mining, COPX.

Institutional Risk Analyst AIG the "blood doll" of Wall Street?

Stephen S. Roach in Project Syndicate Asia’s Inflation Trap

Alvaro Vargas Llosa in Real Clear Politics The Specter of Inflation

Natsuko Waki of Reuters Emerging economies caught in inflation dilemma

Brian Blackstone and Nathalie Boschat Wall Street Journal Bank of France's Noyer on inflation, emerging nations

14) Countries redouble efforts to improve food security
Jeff Wilson and Whitney McFerron of Bloomberg report  Grain, Soybeans Rise as Food Riots Spur Demand for U.S. Exports. Wheat rose, heading for the longest rally since November 2009, while corn and soybeans climbed as countries increase shipments from the U.S., the world’s biggest exporter, to cut food inflation and quell civil unrest. Food-exporting countries are “strongly advised” not to restrict shipments to prevent “more uncertainty and disruption” in world markets, the United Nations said. Governments in Egypt, Algeria, Morocco and Yemen have faced protests amid rising costs and high unemployment, and a revolt toppled Tunisia’s leader. “Sovereign nations are beginning to stockpile food to prevent unrest, and that will help to boost demand for U.S. grains,” said Jim Gerlach, the president of A/C Trading Inc. in Fowler, Indiana. “You artificially stimulate much higher demand when nations start to increase stockpiles.” Wheat futures for March delivery rose 20.25 cents, or 2.4 percent, to $8.585 a bushel at 11:23 a.m. on the Chicago Board of Trade, heading for a seventh straight advance. Earlier, the price reached $8.595, the highest level for a most-active contract since Aug. 6. Before today, the grain jumped 68 percent in the past 12 months. Corn futures for March delivery climbed 13.25 cents, or 2.1 percent, to $6.5725 a bushel. Before today, the price surged 75 percent in the past 12 months. Soybean futures for March delivery advanced 13,25 cents, or 1 percent, to $13.8775 a bushel. Before today, the oilseed gained 46 percent in the past year. (Hat Tip to Gary of Between The Hedges)

Chart of Grains, GRU, and cooking oil, FUE.

15) … News of the day.
Greg Robb of MarketWatch reports Unanimous Fed holds policy steady

Simon Kennedy of Bloomberg reports Soros, Volcker to Invest in Post-Crisis Economic Research Group. Billionaire investor George Soros said he and former Federal Reserve Chairman Paul Volcker are investing in a new research effort aimed at developing economic ideas following the financial crisis. The plan is for the Centre for International Governance Innovation and Institute for New Economic Thinking to unite, Soros told reporters at the World Economic Forum’s annual meeting in Davos, Switzerland (Hat Tip To Gary of Between The Hedges)

Tyler Durden in article Chinese Interbank Liquidity Collapse Leads To 45% Lending Rate Surge relates: “Following the now extremely well documented surge in short-term SHIBOR and Chinese repo rates, it appears that banks have begun attempting to extract the missing liquidity from end consumers. Various Chinese commercial banks raised lending rates between 10 and 45% over the benchmark rate because of a shortage of funds, the China Securities Journal reported today, citing an unidentified bank official. In the meantime, SHIBOR refuses to pull back, hitting an unsustainable 8.05%, which is worse than Portuguese 10 year rates. Will this sustain? Unclear - the Chinese new year must pass and the recent surge in snowfalls will have to recede before a steady state evaluation can be made, however as we have been warning since December, in a country having one of the biggest asset-liability mismatches, the negative curve convexity on tightening fears, will blow up the near end, isolating bank liquidity. To say that this is bad news if it persists is an understatement”. China tightening can be seen in the chart of Chinese Financials, CHIX. And inflation destruction can be seen in the chart of Chinese Materials, CHIM.”

Euro Intelligence reports: Ireland’s likely next finance minister says he would be seeking renegotiations on EFSF interest rates, and bank bondholder haircuts; new Fianna Fail leader apologises for his party’s economic mismanagement; Germany is still holding out on EFSF compromise, but officials signal readiness to compromise; Merkel and Barroso are said to have had a “lively” conversion over dinner; Lutz Meier says Sarkozy’s is temperamentally unsuited to the G20 presidency, as he is incapable of working out political concepts and compromises; Italy is not participating in the global economic recovery; official French unemployment rises to 8%, while estimates of actual unemployment suggest a rate of 16%; the latest mediation attempt to form a Belgian government failed yet again, as the King appoints himself mediator.

Bryan Keogh of Bloomberg Japan fuels 'overwhelming' $61 bln in orders for EFSF bonds

In conclusion I provide clips from Tyler Durden’s January 11, 2011 article New Global Effort To Patch European Insolvency Holes Buys One More Day:  “Europe is now literally living day to day. After last night it was announced that Japan is joining China in purchasing a substantial portion of European debt, using its FX reserves to buy up to 20% of European issuance and thus becoming simply the latest selfish trade surplus country doing all it can to keep its key export partner afloat (to the detriment of USD bond purchasing, confirming the Fed’s monetization of debt will never end), today that ultimate backstop, the ECB, has for the second day in a row been purchasing Portuguese bonds to make sure there is no collapse in the sovereign debt market. The good news: Greece managed to place €1.95 billion in 6 month Bills… at the ridiculous rate of 4.9% and 3.4 Bid to Cover, which nonetheless happened to be an deterioration in both rate from the previous November 9 Bill auction, printing at 4.82%, and had a much higher 5.15 bid to cover.”

From the AP: “Greece on Tuesday raised €1.95 billion (US$2.5 billion) in a treasury bill auction, easing concerns in the troubled eurozone country a day after bond yields hit a record high. The country’s Public Debt Management Agency said the 26-week bill auction for the starting amount of €1.5 billion was oversubscribed 3.4 times and sold at a yield of 4.9 per cent. On Monday, Greek bond yields touched another record high, exceeding the 10-year equivalent German yield by 10 percentage points for the first time, amid a broader flare-up in Europe’s debt crisis. Tuesday’s debt auction was considered an important test of market sentiment. The previous auction of 26-week treasury bills, on Nov. 9, resulted in a yield of 4.82 per cent. Greece has launched a major effort to cut borrowing costs in exchange for bailout loans worth €110 billion from the IMF and other countries using the euro. Despite being in recession, it’s ambitious deficit-reduction targets broadly met last year. The government insists it wants to return to long-term bond markets sometime this year.”

Mr. Durden continues: “It has gotten so surreal that G-Pap has even said that “EU issues are adding to Greek credit rating problems.” You read that right – the country that exists only due to the EU’s magnanimity (and M.A.D. arrangement), has now decided it has all the leverage to demand that the EU gets its house in order or else. In the meantime Greece also announced that Bernanke’s plan to drown the world in a tsunami of inflation is at least working six thousand miles away, after Greek consumer inflation increased 5.2% in December compared to 4.9% in November. Oddly enough real interest rates in Greece may actually be some of the lowest in the world soon enough.”