Markets in Motion

The rally continues in risk assets (lead by stocks), and has continued to extend upward over the past few days. This was in response to an oversold market in late August. As the rally continues, concerns about the future disappear and complacency sets in. If the underlying fundamentals of the global economic configuration was not so messed up, I would be happy to go along with this enthusiasm. For today, I have included a bunch of charts which highlights the various markets, and how they overlay on top of each other.


I start off with stocks, the bell-weather of all risk assets, which shows that  a top was put in last April. Of course, this was only a correction (61%) of the sell-off from October 2007 to March 2009. So long as the 1175 area is not taken out, I am willing to consider the current rally from the June/July lows to be part of the counter-trend rally/correction process. As stocks move upward, the real question I have is what do the other markets tell us, and how are they inter-related.


Starting off with crude oil, which is another measure of demand in the global economy, we see the last time which stocks have approached the 1130, August and now, that oil is not making it to its previous high prints. This is potentially a bearish divergence, which could be a harbinger of the next leg lower in stocks.


The most bullish indicator which I can find is the index of high yield corporate bonds by looking at the HVOL 12 series, as seen on the next chart. This index (which reflects the spread of an index of corporate bonds) is almost as low as it had gotten in April, and reflects a very positive tone in the corporate bond market. While the stock market is not so optimistic, corporate bond investors might be more optimistic. On the next chart, I have presented the same time series divided by the 5 year treasury rate. Since rates have fallen so much, it makes sense that corporate bond spreads should be falling as rates go lower. While the HVOL 12 spreads have approached the previous April lows on a nominal basis, the next graph of HVOL12/5 year treasury rates, shows that this ratio is well above its previous tights observed in April, consistent with a stock market which is well off its high.


Interest rates (see next chart) have been in a primary trend towards lower rates. The recent rally commenced as stocks were topping. What is interesting to note, is that as stocks have rallied off the June/July lows, rates kept going lower, and the pullback from the lowest rates seem to be lagging the rally in stock prices. In other words, the correction in the bond market is far more muted than the counter-trend rally in stocks. Is the bond market setting up for still lower rates which will come when stocks resume their sell-off? I think so.


The Yen is clearly in a bull trend (less Yen per dollar), despite the BOJ intervention this week. This is usually a harbinger of bad economic scenarios, but I also think there are other factors at work which are causing the Yen to rally. Likewise, the Euro has been in a downtrend for the past year, and well before the stock market started selling off in April. I think this speaks volumes about problems in the Euro-zone, which ultimately should have a negative impact on other markets. There is resistance in the Euro from here (1.31 and on up to 1.39).


Lastly, the gold and silver charts show that they are operating in their own universe, as gold makes new highs, and silver is approaching the 21.18 high, registered in March of 2008, still below the all time high of $50 seen in 1980. These trends reflects concerns about the way in which governments are letting their fiscal affairs get out of control, how central banks are handling monetary affairs, and the proliferation (and printing) of fiat currencies. While gold and silver are doing better, I think there is still a quantum leap higher in prices which will propel gold to 5k to 10k an ounce. And when this quantum leap happens, it will happen real fast, and many people will not be able to get on board. For now, the 1 year, 3 year and 10 year trends are all bullish, so stay with the trend.


Happy Yom Kippur and have a great weekend