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Friday, September 30, 2016

Daily update 9/30 Deutsche Bank liquidity


SPX closed right at the 50 SMA, but sold off pretty hard going into the close.  The futures kept going down after hours also.  This is the third test of the 50 SMA since the 9/9 big down day.  Curiously we have a white bar this time.  The other two tests had green bars.  Theoretically this makes it slightly easier to reverse.  Breadth was +68%.  New highs were over 100 again at 117.  New lows were just slightly less then yesterday at 21 (a bit elevated for a gap up day this close to the high).  The volume was higher then yesterday. 

The futures stuck their head above the upper trend line, but sold off pretty hard going into the close.  The good news is the lines are getting close together so a break out is coming soon.  The bad news is a downside break looks like it might have higher odds.  A rejection at a line this close to the apex usually means it is going to break the other way.

Despite the strong day the green count barely increased.  However, the red count dropped enough to get below the green.  This is not a strong looking positive cross though.  The damage done yesterday was clearly not repaired today.  Two days ago the green count was 65 now only 35.

The 10 DMA lines are showing a slight negative divergence, but look at the MCO.  It is showing a triple negative divergence with the three tests of the 50 DMA.  It has been a long time since I have seen one of those, but they give pretty good reversal odds.

The short term lines are showing a similar divergence to the green count line.  The intermediate lines are negatively crossed.  The long term lines while still positive are really close together.  They could cross easily.

I have not had the occasion to show this chart in years.  Notice there are negative divergences in the number of stocks above their 10, 20, and 50 SMAs.

This being the third test of the 50 DMA I would expect a lot of selling if the market turns back down again.  I think that is the most likely scenario.  Today looked more like quarter end window dressing then strong buying.  The last two days sure left the market with a bunch of internal negative divergences.  Of course they will be meaningless if we continue up.  On the other hand, if we turn back down the market could do so with a vengeance.  The upside seems limited to me given the already low VIX.  Oct. has the well deserved reputation for volatility.  It looks like that could happen again.

Here is a pretty good article on the liquidity shape of Deutsche Bank.  This Is How Much Liquidity Deutsche Bank Has At This Moment, And What Happens Next  They don't seem to be in an emergency situation based on the numbers the bank gives out.  Which begs the question why all the commotion.  Does the market know something the bank is not saying?  It is a curious situation to say the least.

The market and status pages have been updated.  Have a great weekend.


Thursday, September 29, 2016

Daily update 9/29 IMF's SDR change on Oct. 1

The market was doing its recently normal version of struggling after yesterday's up day when news of Deutsche Bank hit the wires.  Deutsche Bank shares drop after report that some hedge funds have reduced exposure  That sent stocks tumbling.  The IMF says Deutsche Bank may have the most systemic risk in the world.  Officials are coming out of the woodwork saying everything is just fine.  That sounds a lot like the "subprime problem is contained" remarks from Bernanke.  The stock has cratered to all time lows.  When the stock of a company as old as Deutsche Bank hits all time lows you have to be at least a little worried that there are big problems.  While I don't believe they will let the bank totally fail it seems likely there will be haircuts to be distributed around.  Some of those haircuts could also cause trouble.  The pundits on TV were out saying not to worry it is not like 2008.  The problem is that when Bears Sterns failed in March of 2008 and had to be gobbled up by JPM people said not to worry.  That turned out to be a domino that ended up with the Lehman failure.  While the world looks extraordinarily calm at the moment all hell could break loose in the near future.  Dollars seem to be in major demand in Europe suddenly.


The comment is not mine.  However, it looks like it applies doesn't it.  Maybe everything is not wonderful.

SPX rallied off the low, but is back below the 20 and 50 DMAs.  It closed slightly below yesterday's low.  The breadth was -78% so there was considerable selling.  New highs were 100.  There was an urgency to get out as a look at the 1 min NYSE tick chart shows.

The red bars show when the tick reading was -1000 or below.  Most days there are no red bars.  Notice they were still selling right into the close.

The futures poked their head below the lower trendline this afternoon, but came back in.  After hours they are down a bit more and are below the lower line again.  I wonder where they will be by morning.

The red count crossed above the green, but remains below 50.  The bears are trying to take control again. 

The bulls need to show up tomorrow or the bears will probably take control back.  The bank news hit after Europe was closed so markets over there did not get a chance to react.  Will fear spread across the globe overnight?  It certainly could.  I believe there is cause for concern.  If there is a run on the bank it won't last long.  I am lousy at predicting human behavior so I can't really say whether that will happen or not.  Keep in mind Oct. is coming up and we all know how markets can panic that month.  I think we will know a lot more tomorrow after we see what happens around the world.

A reader noted I had not discussed the IMF's SDR change in the blog and was curious if it was important.  I had read a few things on it, but I do not know much about currency markets.  I have seen a few doom and gloom ads lately claiming the demise of the dollar on Oct. 1.  I believe the exact opposite will happen.  Lets take a closer look.

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. As of March 2016, 204.1 billion SDRs (equivalent to about $285 billion) had been created and allocated to members. SDRs can be exchanged for freely usable currencies. The value of the SDR is currently based on a basket of four major currencies: the U.S. dollar, euro, the Japanese yen, and pound sterling. The basket will be expanded to include the Chinese renminbi (RMB) as the fifth currency, effective October 1, 2016.

Notice the total value of SDRs in circulation is only about $285 billion.  There are many trillions of dollars in the global economy.  SDRs are a drop in the bucket.  The announcement of the change to include the RMB came on Nov. 30, 2015.  Lets take a look at the dollar chart.

The announcement caused a big move down in the dollar the first trading day.  The market has had plenty of time to adjust.  I suspect this adjustment is what has been holding the dollar index down.  I think this could be a case of sell the rumor and buy the fact.  The volatility of the dollar is declining in recent weeks indicating positioning is likely complete.  The 500 DMA has been solid support since first touched last spring.  Instead of the dollar crashing as the gloom and doom crowd is suggesting I expect the dollar to continue its bull market.  The selling involved with the weight change looks complete to me.  However, there are still $9 trillion (or more) of dollar denominated foreign debt that should be a constant demand still out there.  There might be a down day on Monday as the news of the change hits the wires, but shortly after that I think the dollar will rally and break out above that down trendline.


Wednesday, September 28, 2016

Daily update 9/28 Global trade

Rally day, but...

SPX closed above its 50 DMA.  Now the but.  We started out slightly higher and SPY closed the 9/26 gap down shortly after the open then the selling started.  The market took a pretty good tumble until rumors of an OPEC agreement surfaced.  Stocks and oil started to rally.  They really took off in the afternoon when Reuters reported OPEC had reached an agreement on production cuts.  The catch is they will decide who cuts at the late Nov. meeting.  That certainly sounds solid.  It sounds more like a stroke of genius to me.  OPEC will get the price higher for the next two months without actually having to cut production.  If the deal falls apart at the last minute so what.  Breadth was a strong +70%, but was negative earlier in the day.  New highs increased a bit to 106.  Before the oil news hit the same old pattern of morning strength being sold was present.  SPX climbed above yesterday's high and came to a screeching halt.  Since the 9/9 gap down there are only two days with afternoon highs and those were both news induced. 

Today's bounce has the futures approaching the upper trend line.  We are getting close to the apex so something will happen soon.

The green count shot up today, but remains a bit below overbought.  Another up day would likely get it there.

What happens now?  The overhang of sellers was clearly visible before the oil news today.  While I am totally and completely skeptical any deal will actually happen what do the majority of investors think?  This is why I really hate the computer headline scanning computers.  The algos clearly pushed the market higher without any human traders.  That makes it really hard to judge whether news is actually important for more then a few hours or not.  If there was a fundamental shift in investor perspective the constant selling into morning strength will subside.  Until I see that actually happen I can't say we are ready to rocket higher.  The first step for the bulls is to get an upside break out of the triangle on the futures chart.  If we break out the bottom instead then we have our answer that today's news was not important.

One of Trump's talking points has been our trade deals.  There are many people defending globalization.  They talk about all the jobs created and that it benefits everybody.  My problem is they never show any actual data.  I can see actual data that says it has not benefited the U.S.  Large trade deficits are a negative.  I never hear anybody actually argue that, but they still claim we are benefiting.  Here is an interesting table from World Economics with some GDP numbers. 

NAFTA came along in 1994.  GDP in that decade for the Americas increased .8% so there probably was a benefit (just not necessarily to the U.S.).  I don't know if NAFTA had anything to do with the drop in Europe in that decade or not.  However, neither the Americas nor Europe had growth as strong as the 60s and 70s.  China entered the WTO in 2001 and it was a dramatic change.  The GDP in the Americas was cut in half.  Europe benefited because of increased trade with China.  Asia-Pacific and Africa were the biggest beneficiaries.  The Americas and primarily the U.S. got the shaft.  The globalists can make all the claims they want about how lower prices benefited consumers.  The real truth is the jobs lost hurt way more then lower prices helped.  Huge trade deficits are a very bad thing.  They are at least partly if not majorly responsible for our debt going from $5.6 trillion in 1999 to $19.5 trillion today.  Thank you globalists.  I am not against trade.  Fair trade is beneficial to both countries involved.  What we in the U.S. have is free trade, not fair trade.  There is a huge difference.


Tuesday, September 27, 2016

Daily update 9/27 “Negative Growth” of Real Wages

Bounce day.

SPX closed just above the 20 SMA.  Interesting that SPY has a bullish engulfing bar today.  Breadth was +57% which is not particularly strong.  New highs increased a bit to 82 which is also not particularly strong.  This morning SPX retraced back to where the FED announcement move started and buyers showed up.  Probably the same people that piled in after the announcement.  The trouble began when SPX got above yesterday's high mid day.  The rally came to a halt and the market traded sideways into the close.  The overhanging offer again. 

The futures ended the day about where they were at 2 AM.  They are back above the 50 and 20 SMAs.  It looks like a triangle may be forming here.  Breaking the lower trendline would likely bring out more selling. 

The green count picked up a bit, but remains below 50. 

This market is struggling.  Whether there is any upside follow through to today's bounce is hard to say.  The triangle pattern forming on the futures suggests a trip to the upper trendline might be in order.  However, there was clear resistance at today's high.  It is not clear how significant it was.  It could always be insurmountable at this point in time.  Market internals are weak, but slightly favoring the bulls.  However, one strong down day would change all that.  I have no idea what happens tomorrow.

The U.S. media is not saying much about what is happening in Europe.  European bank stocks are tanking again and their CDS prices are rising.  Deutsche Bank's stock hit all time lows.  Another German bank Commerzbank announced it was cutting 9000 jobs or about 18% of its workforce.   Germany is the strongest European country and even its banks are in trouble.  This situation looks exactly like U.S. banks in 2008.  A blow up could happen at any time.  I don't know what you do with that information, but at least you will not be surprised if some morning you find out all hell broke out in Europe.

Interesting read.  “Negative Growth” of Real Wages is Normal for Much of the Workforce, and Getting Worse: New York Fed


Monday, September 26, 2016

Daily update 9/26

Downside follow through.

SPX pulled back to test the Aug. low which was resistance after 9/9.  This could be a test of that resistance to give it a chance to be support.  The breadth was -70%.  New highs dropped way down to 53. Volume was pretty light the last two days on this down move.  That can be a good thing or a bad thing.  In a bull market it is generally good as it shows a lack of profit taking.  In a bear market it is a bad thing as it indicates a lack of buyers.  The intraday price pattern clearly looks like a lack of buyers.  Several months ago I noted what felt like an underlying bid in the market after the Feb. low.  That was like a bull market.  The last couple of weeks I am starting to get the feeling that underlying bid may have changed into an overhanging offer.  That would be bear market like.  Something to keep an eye on.

The futures went back down through the 50 SMA, but held right at the 200.  Possible support here.

The green count slipped some more, but is still above the red. 

The bull pressure chart is a bit mixed up.  The short term line are positively crossed (slightly) while the intermediate lines are negatively crossed.  The long term lines are still positive, but are getting pretty close again.

This is a bit mixed up.  SPX has turned its short term trend back to sideways.  However, R2000 and COMPX are still up.  Market internals show the bulls may still be in control in the short term.  Tomorrow could easily come down to the debate tonight.  From listening to people on TV it appears to me there is a pretty strong perception that a Trump election will be bad for the market.  There is has also been a strong consensus on Wall Street that Hillary would win.  If Hillary is perceived to be the winner the bulls probably come out.  If Trump wins the debate it could pressure the market tomorrow.  Ironically based on studies I have seen the more the market goes down between now and the election (when no incumbent is running for president the opposite party tends to win) the higher the odds Trump gets elected.  The market looks vulnerable to a sell off and intraday action clearly acts bearish.  However, there is not enough technical damage at this point to say with any confidence it is a done deal.  The bulls need to show up with some enthusiasm or it will be.


Friday, September 23, 2016

Daily udpate 9/23

Buyers remorse?

SPX reversed to close back below the 50 SMA.  Breadth was -66%.  New highs were down considerably to 80.  This is probably not good for bulls, but bears need to see downside follow through on Monday.

In yesterday's excitement the futures got above the 100 SMA.  However, they failed to stay there today.  They never confirmed the upside break so theoretically it was bearish to fall back below the 100.

The green count took a considerable hit all the way back to 50.  That is not particularly good.

The market may be rolling back over already, but we need to see downside follow through next week.  Despite yesterday's big gap up and really strong breadth SPX made its high in the morning and its low in the afternoon.  That happened again today and is clearly the dominant pattern of late.  That is a correction/bear market pattern.  Since the pattern showed up again right after the big FED induced move it suggests this market still wants to go down.  The bulls need to show up on Monday and keep the upside pressure going or we are likely to head for a retest of the recent low.

I think I forgot to mentioned the monthly doji in Aug.  Here is a look at the monthly chart.

A montly doji bar is pretty rare.  It shows indecision and after a big rally it could signify a top.  A monthly close below the Aug. low (2147) would be a bearish confirmation.

The market and sector status pages have been updated.  Have a great weekend.


Thursday, September 22, 2016

Daily update 9/22 This is Why the Job Market Stinks, but No One is Talking about it

Buying panic.

SPX closes above the 50 SMA and closes the 9/9 gap down.  Breadth was +80%.  New highs spiked up to 157.  The volume the last two days is a bit light relative to the size of the move.   Compare it to the volume coming off the brexit low back in June. 

The intraday futures chart shows they closed the 9/9 gap just after 10:30 and that was the high of the day.  The action was sideways the rest of the day.  A lot of people got caught with their pants down on the big gap so it makes sense there will be resistance there.  How strong that is remains to be seen.

The MCO hit the overbought level for the first time since early July.  In fact it has rarely been positive since the middle of that month. 

The green count shot up to almost overbought today.  Like the MCO this is the first time it has been this high since mid July.  The weakness in these two indicators over the summer will be very important if the market starts to really sell off.  This could be a sign of some significant distribution after the break out to new highs.  That really seems odd on a break out after more than a year without a new high in SPX.  Instead of the big boys piling in it really looks like they were selling it.  There may be more downside risk then most people are currently thinking.  Just keep that in mind should things get a little rocky going forward.

In the days leading up to the FED decision I heard several money managers on CNBC say they thought the FED would raise rates.  I really do not understand why they thought that, but it is possible they had hedges or some shorts in place just in case.  Very few traders and money managers I saw today said they were buying.  It is possible this move is largely short covering.  I think it is safe to say there are a lot less shorts and hedges in place now then two days ago.  That is only important if the market rolls over again.  From here we have the high at 2193 and the 50 DMA at 2169 to watch.  Closing back below the 50 might not be good given that the 20 DMA is already below it.  The VIX is already down below 12 so it is not clear there will be a desire on the part of the bulls to keep buying a short term overbought market.  There also could be significant resistance between here and the high given the nature of the trading range in July and Aug.  If SPX makes a new high it might be tough to stay there.

Today turned the short term trend up in SPX and R2000.  That has sometimes been the kiss of death for the bounce over the last couple of years. 

Regardless of what happens in the next few days I suggest keeping an eye on the election.  There is a strong consensus on Wall Street that Hillary is going to win.  The first debate is on Monday and who knows what will happen.  Should Trump do well it could cause a pullback.  Most presidential election years see a pullback in Oct. anyway.  If the polls are close that seems likely this time. 

This is a pretty interesting article.  This is Why the Job Market Stinks, but No One is Talking about it

In light of all the racial trouble going on these days I found this piece of data pretty interesting.


The media fuels the flames in this matter every chance they get.  They often print lies about what happened.  I do not understand why.  One possible consequence of this situation is likely to be fewer qualified people wanting to be cops.  I think that is already a problem in some cities already.  It seems likely to get worse from here. 


Wednesday, September 21, 2016

Daily update 9/21 U.S Economy Remains Vulnerable

Ah, Janet saves the day by doing nothing and sounding confused in her press conference.

SPX closed above the 20 SMA and slightly below the 50.  The oversold condition has been completely worked off now.  Breadth was a strong +83%.  New highs picked up a bit to 71, but that is obviously still way low this close to the highs.  New lows were 20.  SPX is coming into a couple of months of potential overhead resistance.

This is a 60 minute chart of the futures with just intraday data to show the gap.  That big gap down day happened to be the day SPY went ex dividend which messed up the gap on that chart.  The futures came within .5 points of the high of that gap down day marked by the red line.  That could be resistance.  The 200 SMA is just a little above which could also be resistance.

The futures made it up above the 50  SMA and ended the day just below the 100.  Another sign the oversold condition has been worked off.

The green line crossed above the red and is just slightly below 50.  Yet another sign the oversold condition has been completely eliminated.

While SPX closed above the key 2147 level there is a lot of overhead resistance up here.  The 20 DMA has crossed below the 50 which is a sell signal to some people.  What happens in the next couple of days will tell us a lot.  Will the bulls keep the upward pressure up?  Will the bears strike back?  Over the years there has been a tendency for the market to reverse FED day moves although that has not been the case as often the last year or so.  Since we are at potential resistance that is a possibility.  I don't think the recent sell off was in fear of a rate hike since expectations never approached anything close to that being a reality.  Therefore, it is hard to say if the sky has cleared.

Today turned the short term trends to neutral in SPX and R2000 and up for COMPX.

I don't really know what to say about the BOJ action.  The currency market had a lot to say as the Yen was up big against the Euro and the Dollar.  Since the BOJ has been hell bent on devaluing the Yen that probably did not set well with them.  It is clear the BOJ is getting more and more desperate.  They have been printing money for 15 years to no avail.  Well I guess maybe pinning the 10 year rate to 0 will be the magical cure.  I don't think I will be holding my breath. 

A good look at a bunch of economic charts.  U.S Economy Remains Vulnerable

These are just a few indicators in a battery of twenty-one that we examine, and whilst there are no alarm bells yet, the aggregate composite of all 21 indicators shows the US economy the most vulnerable to exogenous shock since this expansion started:

This is what I have been saying.  The economy is really, really weak.  Whether it tips into recession or not remains to be seen.


Tuesday, September 20, 2016

Daily update 9/20 U.S. Household Finances – It Only Looks Like the Good Life

 This appears to sum up the week so far.


The strong start/weak finish pattern repeated again.  SPX tested up into the 2147 resistance area again and was turned back immediately.  Breadth ended -54%.  Are we running out of dip buyers?  New highs came in at 31 while new lows ticked up to 25.  The consolidation continues.  The bulls are giving it a good try, but to no avail so far.

The futures popped out above the upper trendline again today, but the result was the same.  This time they closed back below the 200 SMA unlike yesterday.  This looks ready to go down now.

The red count started up today despite SPX ending flat.  This looks like the down move is ready to continue also.

If the central banks don't save the market tomorrow I think we are ready to head down again.  While the FED is not expected to raise rates there seems to be a lot of questions surrounding the BOJ.  Maybe tomorrow will move us out of this consolidation one way or the other.

This is an interesting read from a former FED insider.  U.S. Household Finances – It Only Looks Like the Good Life  The intro from the author's web site is pretty interesting also.

It is with great pride that I introduce MONEY STRONG. After nearly a decade at the Federal Reserve, I find myself compelled to help educate large and small investors alike about the inner workings of the institution that so captivates the media and Fed watchers. My goal is to shine a bright light on how policymaking within the Fed directly affects not just those on Wall Street, but every citizen of this country, and for that matter, the world.

We stand today at the precipice. Will the Fed ever normalize interest rates? What of other central banks trying to counter any potential tightening? Will there be consequences for this $12 trillion global experiment?

Perhaps what resonates with me most is that nearly 30 years on, since the birth of the Greenspan put, so few lessons have been learned. Money is strong when grounded in investment in the future. But it is weak when built on the shaky foundation of cheap debt.

We’ve been told to look away from the mystery of the Fed. The assumption is that the best interests of the country are safeguarded by this enigmatic group of brilliant academics. But our very destiny hinges on resolving to understand how Fed policy allows our politicians to abdicate their commitment to make the hard decisions that keep the country on a sustainable path to prosperity.
Public pension systems at risk, unaffordable housing, malinvestment, rampant financial engineering by America’s companies, stagnant wages, skyrocketing student debt, millions who have dropped out of the labor force, chronic asset price bubbles. All of these ills lay at the feet of the Fed, which has essentially become the fourth, and most powerful, branch of the U.S. government.


Monday, September 19, 2016

Daily update 9/19 Industrial Production (IP)

Strong start, weak finish.  This is correction/bear market type action.  It has been happening quite a bit the last several weeks.

The market started with a gap up and 80% of stocks positive, but found its high within 45 minutes of trading.  The breadth ended at +66%.  New highs perked up a bit to 57.  The action is a disappointment to the bulls.  SPX ended the day well off its high and well below the day's mid point.  This chart continues to look like a consolidation at the lows.

The futures got above the upper trend line of the triangle this morning, but failed to stay there.  False break outs usually lead to break outs the other side.  We already had higher odds of breaking down because of the triangle.  Now it would appear today might have increased those odds somewhat.

The red count dropped out of oversold today.  That happened without much of a bounce to speak of.  The market is burning off the oversold condition in consolidation which normally means we break down from here eventually. 

The equal weighted SPX has already failed its summer break out.  Is this a warning sign for the cap weighted index? 

The charts look like the market wants to go down more from here.  However, we have the FED and the BOJ to make some noise on Wed.  Do the sellers take it down before that or do we sit and spin?  Will one of those central banks do or say something that ignites a global stock rally?  Now where did I put that crystal ball.  We have resistance at 2147 and support at 2120. 

The latest IP data did not follow through on recent increases.

IP took a sizable drop and is back below the 12 month MA.  This is a very unusual pattern of ups and downs.  It normally does not do that for so long.  It is too early to say if weakness is returning or if it is just a 1 month pullback.  However, IP has been trending down for over 18 months so odds probably favor more weakness.  At any rate the economy did not continue in the positive direction it had in late spring and early summer.

The YOY chart shows we have never had this many months being negative without being in a recession.  This is extremely odd.  The services part of the economy has been holding things up, but remember the latest ISM non-manufacturing number took a tumble this month.  It is possible things are about to get worse.


Friday, September 16, 2016

Daily update 9/16 Correlation and leverage make for potential problems

No upside follow through today.

It was an inside day for SPX.  It might have been pinned for option expiration.  Breadth was -63%.  New highs came in at 35 near where they have been.  New lows were 18.  The consolidation at the lows continues.  Support held this week.  That is about all we can say at this point.

The futures appear to be forming a little symmetrical triangle.  Those are most commonly a continuation pattern, but in the markets nothing is 100 percent.  The trend lines are pretty steep so it won't be long before we break out one way or the other.

The short and intermediate lines on the bull pressure chart are showing a good bit of separation.  The long term lines remain positively crossed.  The internals are getting somewhat weaker.

I keep saying the dollar is going to go up and it keeps not doing it.  The down trendline and the 500 DMA are getting pretty close together now.  A resolution on whether this is a consolidation to go higher or a top should be coming soon.  DXY has been very good at finding support at that 500 DMA so a break down below it would greatly increase the odds it is forming a big top.  Today's strength was largely at the expense of the Euro.  I think what happens here is important so I will keep watching it.

Next Wed. is another FED meeting.  The current rate hike expectations for that meeting are 15%.  A rate hike would be totally and completely shocking.  What happens next week could depend on what bonds do.  The economic data has been very weak lately so further selling in bonds would likely have little to do with the economy.  Stocks are short term oversold so there is always a chance for a bounce next week, but the price pattern points to higher odds of a break down.  It is possible the support we saw this week was option related (it was certainly helped by the big move up in AAPL).  If that was the case it would be gone next week.  If this is going to be a short term bottom then I think the bulls need to show up right away on Monday. 

This is an interesting chart.

Stock correlations go up during sell offs and normally down when going up.  This cross market correlation chart is showing markets moving in coordination.  Unfortunately there is not a lot of history on this indicator.  We can see it was rising in 2008 when markets were tanking which makes a lot of sense.  It rolled over and headed lower as the bull market in stocks really got going.  The sharp turn higher in 2014 seems unusual.  Why are cross market correlation getting so high?  We saw last Friday both stocks and bonds getting hammered.  Which brings me to something that might cause problems for markets.  I had seen some talk about risk parity funds, but I really did not know what they were about.  Then I ran into this little interesting piece of info.  Source

Wall Street just loves to engineer investment fads and take them to unsustainable extremes.

Portfolio “insurance” in the 1980s … dot-com stocks in the ’90s … and subprime mortgages before the 2008 crisis … are just a few of the fads that ended badly.  Well, the latest fad on Wall Street is something called “risk parity funds” and it’s destined to end badly too.  A risk parity fund is a type of hedge fund that takes highly leveraged bets by going long stocks and U.S. Treasuries at the same time … on super-margin.  In theory, an investor is hedged because oftentimes stock and bond prices move in opposite directions … when stocks slump, bonds rally and vice versa, so you’re hedged.  That’s nice in theory, but the reality is stocks and bonds don’t always move in opposite ways!  These funds have $400 billion in assets, but they routinely leverage anywhere from two- to three-times that amount … for a total investment of over $1 trillion today … and it’s a ticking time bomb.

That $1 trillion number really struck me.  Bonds are clearly in a bubble and that kind of leverage in a bubble cannot be good when it pops.  With stock valuations so high with the refrain it does not matter with low rates.  What happens if the bond bubble pops and rates are no longer so low?  If there was ever a situation where stocks and bonds good sell off together for more then just a day or two this is it.  These funds thinking they are hedged could end up getting hit with a double barrelled shot gun.  The unwinding of leverage is the number one cause of market crashes.  The problem is figuring out when the bond bubble has burst far enough ahead of the crowd to keep from getting run over in the rush to the exits.   That might be pretty tough.  It could be happening now or not.  Maybe we still have a long time to go.  With trillions of dollars with negative rates there is absolutely no question whether there is a bubble or not.  That makes no rational sense whatever.  A bubble anywhere tends to cause problems everywhere when they burst.  The global bond market is way bigger then global stock markets so this time will be no different.  It is just a matter of time before things blow up.  How long is anybody's guess.

The market and status pages have been updated.  Have a great weekend.



The information in this blog is provided for educational purposes only and is not to be construed as investment advice.