"Major market tops generally form in two phases. The first phase, as discussed in the previous chapter, marks the end of the uptrend and the start of the distribution phase. During the first phase, however, buyers remain active, buoyed by hope the bull market is merely resting.
This hope is reinforced by most economic data, which remains upbeat and pointing towards continued growth. Earnings for individual companies remain strong with analyst estimates indicating continued growth for the quarters ahead.
But the stock market is a discounting mechanism, with prices based on expectations, not current conditions. Consequently, market tops are not made amid gloomy predictions of slowing economy or recession, but when conditions for future growth may appear brightest.
Likewise, major market bottoms occur when the outlooked seems darkest - a primary reason why so many investors sell at or close to a bear market low and then are reluctant to re-enter when a new bull market begins.
Using the works of L.M. Lowry and R.D. Wyckoff to identify key market turning points from the book titled: Mastering Market Timing.In the second phase of a major top, signs of buyers fatigue becomes more evident, while selling becomes more aggressive. Typically, buyers become increasingly discouraged, as fewer and fewer stocks keep pace with the gains in the market indexes."
A quick update on this Monday afternoon Asian time: technical setup from the the previous two posts, which in particular has me tracking Gold and Aussie Dollar inflection points, look like this:
Chart 1: Gold is looking weak and could break down...
Source: Bar Chart / Short Side of Long
Chart 2: ... while Aussie Dollar might be breaking already.
Source: Bar Chart / Short Side of Long
There is evidence of price weakness in various risky assets from credit spreads (corporate bonds) to EU equities and risky currencies from the commodity complex. None of these are confirming the recent euphoric rise in the S&P 500. More on that throughout the week!
What I Am Watching
If Japan continues to print money isn't that inflationary for the world economy, pushing up the price of food, fuel, assets?
ReplyDeleteIn theory yes, but only for the commodities that are priced in Japanese Yen. Remember that majority of world's major commodities trade in Chicago and New York. Therefore they are priced in the US Dollars. Usually, but not always, a decline in the Dollar's value correlates to increase in commodity prices. This is much more evident during secular bull markets like the one we are right now.
Deletehttp://www.zerohedge.com/news/2013-02-11/how-fed-handing-over-billions-profits-foreign-banks-each-year
ReplyDeleteThis needs to go viral. Please send this to 5 other blogs. Don't break the chain. ;-)
During periods of low economic growth and continuous money printing, the best way to protect yourself history has always been via rare assets. These can include a wide variety, but my favourite remains Precious Metals.
DeleteTiho,
DeleteWhat about miners? Since it is so depressed, when precious metals bottom, miners should outperform. Right?
Thank you!
This morning I was reviewing Gold's sentiment and it is extremely depressed. Gold Miners breadth is also very oversold. All in all, any breakdown would be a final shake out and therefore buying opportunity in my opinion. I remain a long term bull on PMs sector.
DeleteTiho,
ReplyDeleteWhat do you think about Jim Roger's short Treasuries call? There seems to be too many bears at the moment, including him, to be the top of the bull market.
Many times on the blog, people ask me what I think of Soro's, Bass's, Dalio's, Roger's, Faber's opinions and so on. These guys are very successful and very wealthy for a reason. They are some of the best investors the world has ever seen, so for me to comment is really unnecessary.
DeleteMy on take on Treasuries has been one of overvalued prices for a long time. I believe that the Kondratiev Wave is ending and the 31 year bull market in bonds with it. So I am not investing in Treasuries myself. However, timing the top specifically to a week or a month has been difficult as central bankers post pone the crisis in Europe and China. The top could have already occurred during the Eurozone panic seen last year, or it might come in days, months and quarters ahead. We are close to the end. Having said that, in all honesty, my view since November 2011 has been that Treasuries are close to a top and yet the prices remain high.
Another dilemma here is that stock prices are in an overvalued territory with sentiment resembling euphoria. Therefore, one could see risk off / deflationary sell off (which has been post-poned for a long time already) and in that scenario Treasuries could continue to benefit. But I wouldn't be a buyer, they are too overvalued for me.
If US-Treasure Yield has to run the same track as Japanese. We still need the final blow off. This chart has the German and US-Treasure yield reversed 10 Years and The Japanese on top.
Deletehttp://www.agrocura.dk/NR/rdonlyres/81417DF5-367A-40BB-BEF5-9864933AAFA4/0/RenterJapanGermanUSA.jpg
Since Europe is not fixed and US equities are in the midst of euphoria, I think the Treasury might surprise on the upside in the short term.
DeleteLooking at Japan.
DeleteThe Japanese YEN is oversold on Daily chart and RSI has setup a divergence to Price which indicates that Yen will start rising to correct the huge drop!
http://stockcharts.com/h-sc/ui?s=$XJY&p=D&b=5&g=0&id=p32086451680&a=292672002&r=1360695385470&cmd=print
The Yen is related to Nikkei index which is overbought and setting up for a correction to the downside.
http://stockcharts.com/h-sc/ui?s=$NIKK&p=D&b=5&g=0&id=p34417277204&a=278248293&r=1360695939218&cmd=print
10 Year Bond Yield vs. Nikkei index.
http://stockcharts.com/h-sc/ui?s=$NIKK&p=W&b=5&g=0&id=p82801056523&a=254880950&r=1360696209715&cmd=print
Jimmy Rogers keeps talking up the Fed's buying $85 Billion of Treasurys each month - - -
ReplyDelete- - -but he neglects to point out that there's $70B worth of bankruptcies , foreclosures each month as well .
So as the Fed prints money , the rest of the economy contracts money
That is a valid point JJ Minohan
DeleteI have to disagree here:even though there are indeed instances of credit contraction,the overall data clearly show that the high priests of inflationism have been very successful in blowing another remarkable bubble into existence(i.e. the supply of money and credit is growing,and has been growing for quite sometime now,at a remarkable pace).
DeleteYou can see the data here(and you can notice how private banks have been happily contributing plenty of booze to the inflationary party):
http://blogs.forbes.com/michaelpollaro/files/2013/01/RTMSUS-1-18.pdf
This is also well worth a read(as is the rest of the blog)and puts things into proper perspective:
http://www.forbes.com/sites/michaelpollaro/2013/01/28/the-next-greater-recession-now-baked-in-the-cake/
Hi I noticed that you are short against the Aussie dollar and long against the yen - do you mean in relation to the $US? If I were to short the aussie dollar can I do a pairs trading ie $US up $AU down? Or do I just short the Aussie on the futures and buy long the yen. Just getting to know the jargon so I can make the trade. I also see that the Aussie dollar is the highest its been against the pound in the last 28 years. Is it worth buying pounds with Aussie dollars or will it go highter?
ReplyDelete