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Monday, July 21, 2014

Daily update 7/21

Friday was an inside day of Thursday's big down move and today was inside of Friday.  Here is the daily SPX chart.

SPX has been doing a lot of testing of its 18 SMA.  So far it has been holding, but if it does not launch pretty soon it will fail.  We had 97 new highs (22 in SPX) today.  Weak numbers this close to the highs, but what else is new.  There was a lot of talk of how resilient this market is.  That talk always cracks me up.  There have been many resilient markets in the past and the resilience has always ended.  I don't think anybody really believes the market will never have another bear market ever again.  One common characteristic of a final move up in a bull market is that it ignores bad news which is also known as a resilient market.  Sometimes they end with just a normal correction or a prolonged sideways move.  Sometimes they end with a new bear market.  The point is they always end some time and rarely with a big sign that everybody can read.  Lets have a look at the futures chart.

The futures tested below the trend line this morning, but held once again.  We have a pattern of declining tops though.  Price seems to be forming a triangle now.  The lines are coming together so we will break one of them tomorrow.  With price apparently winding up the last two days it should lead to a good move.  All the divergences we have should mean the market ends up going down.  However, this resilient market ... 

IWM waffled around its 200 DMA quite a bit today.  It closed above it, but it is not clear to me whether it is ready to bounce or not.  I think whichever way it decides to go will take SPX with it.   Will it bounce or break? 

I want to revisit the supposed bond bubble for a minute.  I think most market pundits think bonds are in a bubble.  When rates surged last year after Bernanke mentioned tapering QE Bill Gross said the secular bull market in bonds was over.  Many people were predicting higher rates this year and in the future.  They said the same thing in Japan way back in the 90s.  Shorting bonds became known as the widow maker trade.  Check out this chart of nominal GDP and corporate bond rates.

Up until 1980 GDP spent most of the time above the interest rate.  It wasn't until inflation got totally out of control in the late 70s that rates got consistently above growth.  After the FED made a concerted effort to break the back of inflation the situation reversed.  Growth rates have been consistently below interest rates ever since.  Could this be what has put downward pressure on rates?  The drop in growth can easily be explained.  We have had consistently higher oil prices, government and private debt, and greatly reduced manufacturing.  All these factors have been historically proven to be a drag on growth.  I suspect we won't see a true long lasting upward shift in rates unless we get significantly stronger growth.  Is that likely to happen in the next few years?  The movement of manufacturing overseas has slowed down, but neither of the other two factors are improving or expected to improve any time soon.  I suspect we are nowhere near any major sustained up move in rates. Time will tell.  Also notice nominal GDP has never been this low without being associated with a recession.  Strange times we live in these days.


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