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How Watching Market Psychology Can Help You Time the Market

Elliott wave patterns in price charts reflect the struggle between the bulls and bears
By Elliott Wave International

 

Two economic reports hit the newswires Thursday morning (March 6). Both were important, yet each one had the opposite implication for the trend. The market chose one report over the other, and the question is, why — and what can we learn from that? Read more.

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All Together Now

 Our mid- May commentary, “Debt Bomb,” showed a chart of the important 10-year lending rate, the rate to which most peoples mortgages are tied, observing that the rise in short-dated Sovereign bond yields were travelling through the yield curve at a frightening pace.

Although the US 30-year yield is more important for the cost of dollar mortgages, we’ll stick with the 10-year for this posting for both continuity and due to the fact that its 30-year bull market, rising price on falling yields, ended in mid-2012, whereas the 30-year continued until January of this year since when its yield has stormed higher by 38%!

Returning to the US 10-year the first chart shows the 32-year bull market which commenced in 1980, and the mid-2012 turn since when the yield has jumped by 60%.

20 May 2015 Blog 1

Also overlaid is a Fibonacci retracement table where a reasonable 38.2% to 61.8% target equates to a potential yield of between 5% to 10% pa. In the “Land of the Free,” just think what a doubling to quadrupling in the servicing costs of mortgages will do the housing market specifically and to the wider economy in general.

Please remember to give a big thank you to the Federal Reserve for providing the “perception” that 1. They control interest rates and 2. The encouragement for USA PLC to leverage up to the hilt.

Moving swiftly on we note an interesting correlation, defined as “a statistical measure that indicates the extent to which two or more variables fluctuate together,” between the 10-year bond yield, the $gold price and the $US inverted to better show the relationship.

 20 May 2015 Blog 2

Logic would suggest that as interest rates climb higher, the $US would rise in value, but the chart above would argue against this. $Gold, an alternative form of money, and the dollar tend to be inversely correlated, also shown above.

Correlations work until they stop working, but at the moment they offer some clarity and are working together.

 

 

 

Investment Markets Overview — W/E 15th May 2015

Pablo Picasso’s painting,”Les Femmes d’Alger,” or “Woman of Algiers” sold for a record price at auction this week, at $US179.4m, $160m + $19.3m commission, having been originally acquired as part of a series back in 1956 for $212,500 and last sold in 1997 for $31.9m. “At auction” is emphasised as it’s rumoured that a private sale record of $US300m was paid earlier this year for a Paul Gauguin. The auction at Christie’s New York this week also set a record $141.3m paid for a life-size sculpture by someone called Giacometti. The purpose of mentioning these fine items isn’t that yours truly has any new found interest in art, but more about the timing of such sales and in respect of the interpretation of “liquidity.” On the timing front, record price sales, whether they are accorded to Art, Wine, Cars and trophy real-estate, tend to accompany market tops for financial assets in general. Warning one! Secondly, a well-known financial market commentator was asked to comment on the aforementioned sales on BBC radio, to which he answered, “it’s symptomatic of too much money sloshing around, created by the Central Banks.” He is partially correct in respect of the CB’s, but the actual amount of money created is but a fraction of the leverage employed to it and it is this leverage (debt by a fancy name) that has driven up financial assets of all stripes, art included. Leverage, however, is a double-edged sword.

15 May 2015

Subscribe to the Full Investment Markets Overview Newsletter which contains the following:-

Additional Commentaries:
•US economic data . . .
•Euro-Zone . . .
•The UK . . .
•Out East . . .
•The $US index . . .
•Within the commodities complex . . .
•Economic data due next week includes . . .

Investors’ relaxed a little this week as Greece successfully completed its latest €750m debt repayment to the International Monetary Fund ……

Charts:
1.  Indices Weekly
2. US Business Inventories Monthly V Year on Year
3. UK House Prices V RICS Sales-Stock Ratio
4. Japan Exports V South Korea Exports
5. Commodity YTD  Moves

Table:

13 Indices, 11 columns of detailed information, for accurate analysis

“The End of the Road Appears to be Very Close Now.

Click Here to view Details of the full version of this Newsletter which includes full text and detailed

Debt Bomb

 Our early March commentary, “Watching the No 2’s,” showed a chart of 2-year Government bond yields for the US, the UK and for the Euro-Zone, reminding investors to, “forget the myth that central banks control interest rates, as the market does this job and sometimes with a vengeance, particularly when the market ends a long-term trend.” We could have added, “particularly when they have been so distorted.”

 Fast forward a short few weeks and the vengeance appears to have started to set into the more important 10-year lending rate, the rate to which most peoples mortgages are tied, as can be seen below:

 14 May 2015 Blog 1

More than $US 450BN has been wiped off the value of global bond markets since mid-April as yields jumped higher. Of the three shown above, Japan is leading with a 38% jump, which contrary to popular belief is deflationary, as the carry-cost of the enormous debt loads bear down on economic growth.

 Even more startling has been the reversal of the German 10-year bond yield, which briefly went negative before spiking by 830% as shown next:

14 May 2015 Blog 2

It also reminds of the relationship between bond yields and stocks, hence stocks will not fair very well in a secular bear market for bonds.

 A 2014 Mckinsey report, “Debt and Deleveraging,” confirmed that total Global debt has increased by 40% since 2007, to $US199,000,000,000,000 or $199 Trillion if that looks better and the cost of servicing it is starting to go through the roof. Furthermore, thanks to the their “not so smart” QE antics the Central Banks have cornered the Sovereign bond market, in fact they are the market, plus they own a fair amount of the junk MBS market, where yields will rise even higher.

 By mid-April nearly a third of the euro area’s $US6 trillion of government debt had yields below zero, which means that buyers of these bonds are guaranteed to lose money if they hold them to maturity. Furthermore, star hedge-fund manager, Stanley Drunkenmiller, observes that whereas in 2006/2007 28% of debt being issued was B-rated, today that figure has jumped to 71% of the debt that’s been issued over the past two years.

Tick tock, tick tock…you can almost hear the Boom approaching!

 

 

 

Investment Markets Overview — W/E 8th May 2015

David Cameron, the UK Prime Minister, must have thought that Christmas, his Birthday and just about any other good days of his life had arrived in one, as his Conservative party swept to power, unencumbered by any minority support from other parties which just about every pollster had forecast. Most were predicting a coalition between the Labour Party and the Scottish Nationalist Party, the latter who cleaned up North of Hadrian’s Wall, whilst In the event the majority voted with their wallets on their perceived understanding on who is best for the economy. Socionomically this had an element of probability! So, as David glowed, unprecedented resignations were forthcoming from the leaders of three parties, Labour, the liberal Democrats and UKIP, albeit that the latter party actually did quite well whereas Labour had its worse result since the 1940s and the Lib-Dems in its history. Now the hard part starts for Mr Cameron as the UK is no longer united, it is effectively split three ways, Labour in Wales, the SNP in Scotland and the conservatives in England. Furthermore, the polarisation over austerity, EU membership and electoral reform remain, which will make for a difficult balancing act to govern with such a slim majority.

8 May 2015

Subscribe to the Full Investment Markets Overview Newsletter which contains the following:-

Additional Commentaries:
•US economic data . . .
•Euro-Zone . . .
•The UK . . .
•Out East . . .
•The $US index . . .
•Within the commodities complex . . .
•Economic data due next week includes . . .

A closer look at the abysmal US trade deficit suggests that the more recent data has been affected by ……

Charts:
1.  Indices Weekly
2. US Trade Deficit V US Imports & $US
3. Euro-Zone Manufacturing PMIs
4. China Imports V Exports
5. Commodity YTD  Moves

Table:

13 Indices, 11 columns of detailed information, for accurate analysis

“There are Statistics and then there are Damn Lies or Pure Guesses.

Click Here to view Details of the full version of this Newsletter which includes full text and detailed

Election Echo

 

With one day to go until the UK Election Day, the latest opinion poll(s) have Britain’s Conservative and Labour parties tied at 33 percent of the vote, which has barely budged in the two months of campaigning. Further complicating the maths are the Scottish Nationalists, who are poised to trounce Labour north of the border, whilst the anti-EU UKIP appear set to take a lot of Conservative votes in England.

With neither party on course to come close to an outright majority in Parliamentary seats, both will have to negotiate with the other smaller parties to see who can win enough support to form a government. At least that is what the book-makers and the pundits are saying.

Before going out on a limb with a forecast, it’s worth reflecting on the “Socionomic analysis” in respect of politics, as set out by the father of Socionomics, Robert Prechter of Elliott Wave International fame:

The stock market is the best available gauge of how the country is feeling, “because investors can act swiftly to express their optimism or pessimism,” and as an increasingly positive social mood produces a rising stock market, which increases the votes for the incumbent, an increasingly negative social mood produces a falling stock market as well as votes against the incumbent.”

As such, researchers at the Socionomics Institute found a solid connection between the stock market’s direction in the three years leading up to Election Day and the election results. Gains of 20 percent or more for the Dow nearly assured victories for sitting Presidents. Drops of 10 percent or worse got them tossed out.

So let’s have a look at the UK’s FTSE All Share Index for any clues:

 6 May 2015 Blog 1

As can be seen, the Conservative party under Baroness Margaret Thatcher & Sir John Major held power over an 18-year period which coincided with a secular bull market for stocks, albeit it that the ousting of Major in 1997, in the midst of a raging bull market appears to be an anomaly. We would add, however, that UK house prices, which may actually be an equally important barometer to collective social mood, had fallen by 30% during the early 1990’s recession and remained dormant until 1997.

Enter the Labour party, under Tony Blair’s leadership in 1997, with the economic “stewardship” of the state entrusted to Gordon Brown. Between them they held three terms in office, covering a 13-year period, with Blair wisely exiting the hot seat in 2007, lining up Brown to take the flack of the impending financial crisis.

Whereas Major was “unlucky” in respect to the social mood, Blair was able to bask under the late 1990s TMT stock bubble in 2001 and the property bubble that took him through until 2007.

2010 ushered in the first coalition UK Government in decades and this is partially explained by looking at the FTSE All Share in “real terms,” the red line below:

6 May 2015 Blog 2

You will observe that it peaked in late 1999, ushering in a “secular bear market,” of which 2000/03 and 2007/09 are parts of it. This explains a host of Socionomic observations, such as the increased polarisation within society, politics included.

As such the current Conservative/Liberal Democrat coalition enters this election after a 6-year bull run for the All-Share in nominal terms and for 3+ years in real terms, which suggests a repeat of the 2010 result.

In other words an echo of the last UK election outcome looks to be good odds?

 

 

 

Investment Markets Overview — W/E 1st May 2015

The two main economic events of the week were the US FOMC meeting and the preliminary Q115 US GDP numbers, albeit that some would suggest the Bank of Japan’s comments on Japan’s GDP and inflation forecasts were of equal importance. Meanwhile, the UK coalition government enters its final few days in power ahead of the most uncertain general election in decades. The polls are suggesting that neither of the two major parties will obtain a majority to govern hence, after weeks of rubbishing each others policies, bridges will have to be built to enable a working coalition to rule. The economy is at the heart of the debates, with the majority of the runners disparaging any attempt to reduce the Nation’s staggering debt to GDP and the budget deficit which is interestingly worse than that of Greece, a country nearing the point of default. Economic data is a difficult topic to understand, particularly when a growing number of the electorate are having difficulty in actually knowing who the Prime Minister is.

1 May 2015

Subscribe to the Full Investment Markets Overview Newsletter which contains the following:-

Additional Commentaries:
•US economic data . . .
•Euro-Zone . . .
•The UK . . .
•Out East . . .
•The $US index . . .
•Within the commodities complex . . .
•Economic data due next week includes . . .

Total Global debt has increased by 40% since 2007, according to the McKinsey Global Institute, to $US199,000,000,000,000 or $199 Trillion ……

Charts:
1.  Indices Weekly
2. US Personal Incomes V US Personal Spending V GDP
3. UK Home Ownership V Rest of Europe
4. Japan Earnings V Japan Unemployment and CPI
5. Commodity YTD  Moves

Table:

13 Indices, 11 columns of detailed information, for accurate analysis

“Never Have So Many Been Deluded by So Few.

Click Here to view Details of the full version of this Newsletter which includes full text and detailed

Debt Denial

Q115 advance US GDP was released today and it was a dog, coming in at 0.2% annualised against the 1% consensus forecasts by economists and at only 9%, or -91%, of the 2.2% reported for Q414.

The newswires, predictably, have been stumbling to explain the slump, citing the recent “inclement weather and its effect on shopping,” despite the fact that three of the last four months of US weather has been above the seasonal norms, or blaming the collapse in Oil prices and its effect on exports, which surely is more than off-set by higher disposable income in a country where 70% of economic growth is reliant on consumption.

So what’s caused the slump?

At its simplest, debt levels, which act as a drag-anchor on economic activity, as can be seen below:

 29 April 2015 Blog 1

The red-line is the US statuary debt limit, which at $18,000,000,000,000 only represents a part of total US debt, but it does show the inverse correlation against US GDP, represented by the blue and red histogram bars. Lower debt levels in the 1960s, the golden era of economic growth, were followed by ever-increasing debt of all stripes, personal, corporate and government and despite the zero-interest rate environment of the past few years, increased debt has suffocated economic activity and also pushed the US into the “negative-inflation club!

So, there is no inflation relief on debt servicing, which is what policy-makers said QE and stimulus was all about, whilst increased market interest rates, which commenced three years ago, will crush economic activity further and not just within the US.

As stated within the February 2015 post,” Deflation Denial:”

 

Those who cannot remember the past are condemned to repeat it.”

 

 

 

 

 

 

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