Robert Prechter on the radio - Summary

Today Prechter was on the radio which I captured below. Most of it is the same ole same ole, however his comments at the end struck me as interesting. He said that making finance the center of a family's life may be the biggest social mistake humans have made in a long time. He suggests not following the markets 24/7, to step back, take breaks, don't focus on your family's finances all the time...basically don't get burned out in the markets. He also makes reference to the markets practically being 24 hours a day with a lot of movement lately overnight (which I have noticed recently). The rest of his conversation was basically his same ole same ole. He admits to being early on this rally but is sticking to his guns expecting a big selloff.

Summary Notes on the fly:

-Most extreme Optimism in NAII, extremes in put/call, Not necessarily a signal of the top, but a warning
-"Don't want to listen to people telling you good earnings, europe is fixed, unemployment, etc"
-"We are bearish...However, I have been thinking short for last 50 s&p points, so I may not be the right person to talk to right now chuckle....metals may have ended their rally this morning...91% daily sentiment bulls on gold"
-deflationary...central banks continue to struggle keeping bad debt available...conquer the crash called it yaddy yadda...bond run has gone on so long though def want to stay on short end of the curve...so close to switchover in bond yields
-bonds should be good for intial decline of stock market but will be bad once it gets going...
-Volker years completely different environment today...yields at opposite extremes
-Despite optimism the last 3 years, borrowers still havent come out of woodwork=deflationary
-Deflationary drop Prechter sees is larger than the one most others are expecting...a little early to be talking about bull market on other side
-Socionomics... waves of social mood direct societal actions and thus news
-Europe in late 90's form union, was not a cause, but was a result of the extreme positive social mood of the 80s/90s...always thought it would fail b/c it was a result of not the cause of social moods therefore when social mood falls EU will fail as a result
-Asia is starting to show similar social changes...relatively extreme optimism in the 2000's
-If we were at an extreme bottom already we would see extreme pessimism...but we are at the opposite end of the spectrum
-Bottom will be like 1942 or 1972?...that's what we will loook for
-A lot of things/companies wont be standing (junk bonds/companies fail)...wait til people are disgusted and dont want to talk about the markets anymore...great buying opp
-Between now and that bottom expect riots and protests to continue and get worse...there will be hotbeds that trouble will come from...incidents will increase in volume and intensity....unsure where it will occur, just need to watch those areas that pick up
-Very difficult to predict in 1920s where WW2 spark would have come from...similar to today...easier to see in the 30s...unsure where to pinpoint hotbeds
-"Im a broken record...short term debt, Swiss govt, New Zealand, Singapore....stay away from Junk/munis/stocks...not a commodity buyer....2008 was high....62% correction (fibo)" cash is good too
-Time to buy latin america is when they are in trouble not when things seem rosy, thats when prices are highest
-Weve done a lot of studies on elections...as stock market goes, incumbent will remain in power...right now looking good for Obama...if market falls (is more likely) then he might be in trouble
-"Be safe, be worried, dont let the markets wear you out"
-Running finance into the center of everyones life I think is one of the worst things our society has done
If would have done that in the 20s and waited had it much better....cant do that at these price levels.

I missed a few things due to bad internet connection, but got most of it above...one thing seems for sure, they are very good at not being scared out of positions.

MTA webcast series summary: Intermarket Relationships

Below is an email summary I prepared of the latest MTA webcast presentation by John Murphy from October 19 2011.
__________________________________________________________________

Hey all. Today I attended a webcast presentation by John Murphy (of stockcharts.com & MTA). John has been around a long time and is famous for his intermarket relationships analysis (one of which is required reading for the CMT). http://en.wikipedia.org/wiki/John_Murphy_(economist)

If you are at all interested in the macro environment or economics and how it ties to the stock market, then his intermarkets book, may be for you. It is great at tying together the financial markets, business cycle, and technical analysis all together.
http://www.amazon.com/Intermarket-Analysis-Profiting-Relationships-Trading/dp/0471023299/ref=sr_1_1?ie=UTF8&qid=1319048257&sr=8-1

I have attached the slides, which are pretty self explanatory and an easy flip through to see what's going on with a lot of different markets (contact me to obtain). You likely have already recognized some of them, but it helps to put correlations in easy to read charts. Below is a short summary of the slides in pretty much order with the presentation...

Intro: "You have to go back to the 30's to find similar correlations as today". Most "traditional" relationships have broken down in the last decade (starting with the Asian Crisis). The reason behind this is the deflationary theme we are currently in compared to the primarily inflationary period of the past. He cites 3 major deflationary events recently, the Japanese bubble bursting (1989), the asian contagion, and the US property bubble burst.

Slides 4&5: There was a paradigm shift around the time of the Asian Crisis. Bond yields and stocks started to move together. He cites a deflationary environment as the primary reason. He doesn't expect this relationship to revert back to the "norm" until deflation is out of the picture. Slide 5 shows that same relationship in 2011. In august 2011, bond yields didn't confirm the rally, which gave a hint stocks would see new lows.

Slides 6&7: Stocks and Commodities are positively correlated (extremely). This has not occurred since the 1930s. There is no other real good example in history and is one of the reasons he sees us in a deflationary environment. Commodities, like yields, seem to be leading stocks. He comments simply that Bernanke wouldn't talk about it so much if it wasn't a concern and prevalent.
One of the most reliable inverse relationships is the dollar/commodities; Recently a similar relationship has occurred between the dollar and stocks.

Slides 11&12; Stocks peak when energy outperforms...This occurred through the summer 2011. Rotation into safety, also has occurred...too early to tell if rotation into safety is over and downturn is "complete", but that cycle is longer term. Stocks are in red on slide 11 and the business cycle is in green.

Slides 14+; US stocks outperform foreign stocks when the dollar rises; however, they both fall. The Euro is something like 56% of the US Dollar Index and the majority of the 5 components.

Euro stocks are leading the US stocks right now

Ratio charts are a great way to see what is really happening and driving prices (I agree).

Q&A session...
-A China revaluation would result in inflation in America & decline of the dollar

-Use the 10 year bond when comparing across countries because most others don't have 30 year bonds.

-Expects "deflationary environment to continue until proven otherwise". Will look at bond/stock relationship to help tell.

Take care everyone and good luck! Let me know if you have any questions.
Chad

Time to Overweight Bonds?

This chart helps show good times to change weightings between stocks and bonds. Right now the markets are at a critical juncture and if the downtrend line gets broken to the top then that would be a confirmation signal that treasuries should be overweighted and stocks underweighted. This would be set until a confirmed trend can be established at which another trendline could be used to help show the next flip flop.

Good luck! Click on the title above to see a live updated chart.

Long Term Bond Prices

As the previous post highlighted, the long bond looks to be falling in price. The attached chart is a very long term strategy that will help show when the drop in price is more than just a simple pullback.



The chart has a moving average ribbon of 110, 115, and 120 months. Notice this moving average has provided support 3 times in the past in 1994, 2000, and 2007. Bond prices have not dropped below this moving average since the early 80s bottoming process. Also notice that bonds have dropped the last 6 months in a row. This is not unprecedented, but has rarely occurred in the rally of the past 30 years.

If the moving averages do not hold as support over the next few months, then the long term bond market may indeed be set to fall (yields rising).

These moving averages will become important as the year progresses!

The Long Bond

The long bond looks poised to rally once the next pullback ensues.

Looking at the chart, it seems we had a 5-3-5 move up off the ultimate '08 low to the June '09 high (in blue and red). This is not impulsive, but rather is corrective since it is only 3 moves to the upside. However, the move was huge and likely is the beginning of correcting the ~30 year downward move in yields. As the chart lays out, once that 5-3-5 completed in June of '09 a relatively long sideways retracement brought it back to its almost exact 61.8% retrace in August 2010. From there it has started to rally again in a 5 wave move which looks to be close to completion.

This next move should see the 30 yr topping for a short term (red 1) and pulling back in a 2nd wave retrace before a powerful 3rd wave up again (in red on right of chart). This move at least should take yields over the 5.1% at a minimum.

There is a chance that this chart is more bullish than I have labeled (if for instance the 2010 top was really where Black A should be labeled), but that won't matter for a year or so from now and both counts provide similar results.

In the meantime this means that the long bond yield's risk is to the upside and may mean to target shorter duration products and or take some profits on bonds.

Why the Dollar Matters Most

In the attached chart you will see how the dollar and the stock market are tied at the hip. Except for the late 90's (an anomaly in so many ways), the dollar and the stock market lead each other inversely.

Even more than the stock market, the dollar is tied to the debt market (which also leads stocks). The reason is interest rate parity, or lack thereof.

When a country has a high interest rate, other people in countries with lesser rates will park money in the higher rate country. This raises the price of that currency (demand up) and thus lowers the rate of their home currency (demand down). When the lesser rate country returns the money back home, its fx rate is now weaker and it wins on both accounts (higher int. rate and gain in currency). If you are familiar with the carry trade that was so popular in the 2000s, then that is similar. This market "arbitrage" also goes against the interest rate parity theory that states that countries with higher interest rates must have lower future currency rates to offset that gain.

People flock to currencies with high interest rates and that is why the dollar hit its peak in the early 80s (as interest rates peaked) and is now at an all time low (as interest rates are at an all time low). During the early 80's stocks rallied hard (the 80's bull was actually bigger than the 90's as the dollar fell 30-40%). The chart above explains why, and I will explain in an example as well.

Most items are sold "in US Dollar terms". This means that the price (denominator) is the dollar. The toy you buy your kid for xmas can be translated as toys per dollars to come up with what it will cost you to purchase it. If you could trade a blanket for that toy it would be denominated as toys per blankets to come up with its value. The same is true for the stock market.

If the stock market's earnings in 1985 were $10/year and people were willing to pay 10x for those earnings then it is priced at $100s per 1 S&P500. This can be translated as $100/1 USD (with the "1" meaning 1 US Dollar which happens to be trading at an all time high of $1.65). Assuming earnings and multiples stay the same, if the $USD then weakens to $1.00 (which it did), then the real value of your stocks just jumped 39% (translating $1.65 down to $1.00), and in order to remain whole and offset that change, the S&P500 would go to $139, just by updating the reporting unit!

An easier way to think about this is thru inflation. When the value of the dollar falls, one way to conceptualize this is to think about there being more of them out there representing the same one thing, aka now worth less per dollar. This is basically inflation. If the denominator falls, the numerator is now instantly worth more (going from 10 toys/2 blankets=5 unit cost down to 10 toys for 1 blanket=10 unit cost).

The practical way to think about this is to replace the $USD with something more tangible like milk, or a house, or a gold bar! Why measure wealth in the $USD anyways? The $USD is only as good as its purchasing power, so why not replace it with something of more consistent purchasing power? If you replace the denominator with the more tangible asset like the price of gold (which many people do), you will see that stocks have actually lost a ton of "real" value since the 2000 top. At that top stocks were worth about 5.6x an ounce of gold. Today they are worth less than 1 ounce. Chart attached below. So basically you used to be able to sell your stocks for 5.6 ounces of gold but now it will only buy less than 1 ounce of gold. Assuming an ounce of gold today has the same utility as an ounce of gold in 2000, stocks have fallen in value significantly. You can do the same with oil, commodities, water, shelter, or any other valuable, measurable necessity. Most of them will show a decline in the value of stocks over the last decade. Chart of the S&P priced in Gold, below.



The key takeaway is that stock prices are only one component of their worth (numerator). Don't forget the denominator piece (the US Dollar) as that is just as important in establishing a stock's true value. Thus, if you can get a sense of where the dollar is heading then you are 50% of the way to finding out what your stock's true value is. Another takeaway is that as long as the dollar is falling, then items priced in dollars should be going up in price, stocks included...and viceversa.

Supple this to my previous blog post on the bottoming US Dollar and we might be in for a beating in the stock market depending on the size of the move. There haven't been that many periods since the early 80s where the dollar has risen in value (except the bubble 90's where everything went up - stocks, bonds, dollar), but there are many when the dollar has fallen hard...and most of those times saw stocks rally. We got a glimpse of what a dollar rally can do to stocks in the early 2000s as well as 2008. We also know that the dollar rallied with interest rates in the 70's and early 80's when stocks were flat to down. In 2005 the dollar rallied and stocks stayed relatively flat (compared to surrounding years when the dollar fell hard and stocks rallied hard). The math also works to support this thesis. Right now (previous blog post), the dollar is looking ripe for a rally. It will be interesting to see what effect that has on stocks.

Pay close attention to that dollar!

2007 versus 2010 Update

I have updated my 2007 versus 2010 chart for the recent market activity. There is a lot going on so it's probably easiest to just go top to bottom. Not much has changed from the long term perspective, though. Wave 3 is imminent and the end of this wave 2 bounce is quickly approaching (if not finished this week).

The key takeaway is that if the bottom of wave 1 was in fact in early July instead of early June as initially thought, then that means we should expect an even larger sell off than that of 07-09. I compare the top of 2007 with the top of 2010 on the chart and there is a significant difference in the size of the first waves down. These moves in theory are of the same "degree" both kicking off a wave of similar nature and "size". Wave 3s are always the largest in their degree, so at the least we should expect this wave 3 to be larger than 2010 wave 1's 21% down. 2007's comparable wave 3 was 20% from Dec 2007 to Jan 2008. This would theoretically put the S&P below $950 from today by the time this next sell off is complete.

Another thing of note, which I have spoken of plenty before, is the low volume on all the up moves since the 2007 top. Again we are in a low volume move up. I am just waiting patiently with my TZA for the sell off!

See my bond post below as well and click on the title to see an updated chart. Bonds (price) continue to rally (yield falls) and the 10 yr is now ALMOST 2.8% from a 3.8% high just a few months ago. This is a SIGNIFICANT move in bonds in such a short period. And, by the way, the bond market is way smarter than the stock market! It knows something the stock market doesn't, perhaps that inflation is a term we won't talk about for a long long time???

Now, I am just waiting for the dollar to start to rally for all the pieces to be in place and the selloff to start and pick up steam.

I will work on a post for a good hedge against your shorts during this market sell off. I for one am surprised at what I am going to say ;-)

Good Luck!

Bonds leading stocks?

Aug 3 2010 Update: Stocks have rallied 11% and bonds haven't moved. I see this as another warning that the bond market is not confirming the stock market rally and short is the better play than long... This same thing happened at the 2007 top as can be seen in the chart.



Markets are all interrelated, including the stock and bond markets. In the world of assets these two securities are the most popular with many 401ks, savings, etc invested in each. Many people make investment decisions choosing between the two in a zero sum game.

Over the past 10 years there seems to be some correlating relationship between bond yields and stock prices. As the chart shows they pretty much move up together and down together. This makes sense since there is that zero sum game trade off between the two. There is a very interesting scenario at market turning points. Bonds look to turn before stocks.

In the 2000 top, bonds topped in January and stocks in March. At the July and October 2007 stock top bonds peaked over a year earlier in June 2006. At the 09 stock market bottom, bonds had already bottomed in Dec 2008. And now, at the April highs, bonds have peaked at about the same level 4 times since May 2009. All of these situations set up divergences with the stock market. Bonds signaled turning points ahead of the stock market turning points!

What this means now is that bonds will need to make a new high above the 3.8% level in order for the stock market to have a chance at taking out its April highs. In fact the sell off since April in bond yields has been hard and fast more similar to 2007 and 2008 than any other time in the past 10 years. This is cause for concern and may tell us that the market is likely to fall from here rather than rally and make new highs. This also supports my general theory that the market is likely to continue to fall hard from these levels.

What this also means is that we should look for an upturn in bond yields before we get too excited about any stock market rally.

Good luck!