Status...
Quo or No? By
Gary Tanashian http://www.biiwii.com http://www.biiwii.blogspot.com April
15, 2007 Maybe the title should be 'Go or No Go?' or 'Proceed With Caution?'
but what today's market status should not be called is 'All
Signs Point to [fill in the blank]' because if the current
environment is characterized by anything, it is mixed signals.
I will try to illustrate that point by highlighting various markets
as follows. Bonds The
bond market is characterized by rising interest rates on the longer
end of the curve even as data moderates in manufacturing, retail and
especially housing and outright tanks in the notorious sub-prime
sector. On the other side of the coin, commercial real estate,
M&A and global consumption remain buoyant. We are of the
opinion that the economic activity that remains positive is the
result of scared money (aka Franken Money, Funny Munny) that has
been inflated into existence looking for a home, any home
besides the US Dollar or Japanese Yen. Hence our stance that
the global bull markets will go as far as Dollar devaluation and the
Yen Carry will take them. Back
to bonds... the yield curve is giving strong signals toward a major
change in the making. Remember that a rising yield curve,
contrary to what optimists who celebrate an end to inversion may
think, is a signal that the bond market is withdrawing liquidity relative
to the stance the Fed is taking. Although it cannot be seen on
this monthly chart, the spread is potentially making a double bottom
(see daily chart December 1 & March 1) in the short term.
Even more interesting is the potential major double bottom
dating back to the end of 2000. We have noted this before and
will continue to do so since that time frame certainly did mark major
changes in many markets. Note the bullish PPO divergence in
force for over a year and the bearish one in force from 2000.
Bear in mind that a rising curve will likely signal an oncoming
contraction and a falling curve will signal once again that there is
excess liquidity in the system and the appearance that
inflation is under control will not be widespread. So which
will hold sway, support or resistance... bullish or bearish
divergence? 
Stocks Is
this not a picture of Funny Munny trying desperately to denominate
itself in something, anything other than what it is, USD or
Yen denominated debt? This Munny appears to believe the
Shanghai meltdown was a one-off, the Yen will remain contained and
the USD is heading straight to hell. OBV for the Dow is
desperately strong even as oil remains in an uptrend and curiously,
the Trannies hold their own as well. If
the Dow and other indices are able to clear the short term
resistance noted by the top green line, it is off to a test of the
highs. Sure, that looks like a bearish rising wedge but as
vintage 2006 bears know, that may not count for much with Franken
Market. It is notable that the major indices did not even
register a break of the 200dma's before reversing course and
lighting up the shorts, including yours truly to to the minor degree
I was short. Desperate money indeed. Also notable is that bearishness was on a hair trigger as bulls far and wide
couldn't give up the ship quickly enough. Perhaps the next
time a negative market event takes place it will be accompanied by
more bullish confidence which of course would be a potential bearish
signal just as persistent bearishness was a nagging and negative
asterisk to alert bears on this last go round. 
Commodities It
is getting harder and harder for we holdouts in the contraction
camp, clinging to our rising yield curve as little evidence emerges
that things are changing for the worse for the global casino.
Note that base metals ($GYX) are actually at their highs of the
entire bull market. Meanwhile the Fed does nothing more than
allow various talking heads to admonish that inflation may still be
a problem even as it quakes at the prospect of being forced to once
again attempt to slow this train down. 
Currency What
more can be said about the currency market? Everybody knows
the USD is worthless, the BOJ will never step in and
support the Yen and Europe is home of the future world reserve
currency. Everybody knows that China is in ascendancy
and will continue sucking up global commodities in uninterrupted
fashion, supporting the likes of the Aussie and Canadian
dollars. Everybody seems to know these things except me, a
lowly market watcher and trader who simply wants to be right in the
end and not predict the future. Incidentally, not shown on the
chart below are bullish divergences for weekly USD by RSI, MACD and
PPO. They are about all this paper has going for it outside of
major support around 80 that has very long term implications.
This is support one should not expect to be lost without a fight. 
Gold
& Silver For
the contraction case to become more solid, gold would likely need to
reestablish up trends vs. silver, oil and industrial metals.
At the beginning of 2007 it was indeed showing strong signs in that
direction as contraction appeared to be a given. This was
punctuated by the strong rise in the Yen and stock market mini
panics the world over. In the short term however, gold has
gone back to its its most common stance since 2003; underperformance
vs. silver and other commodities and out performance vs. stocks, as
one look at a long term chart of the Gold-Dow ratio would clearly
show. 
Conclusion Since
gold offers upside protection in a speculative environment where
inflation expectations are rising and downside protection in a
fearful environment when economies are slowing and central banks are
pressured for easier policy, it is a unique asset class. I am
watching closely however the relationships I have tried to
illustrate above. My current stance - very heavy on gold
miners - would be compromised with strong out-performance by the
gold miners' cost inputs (commodities) vs. their product
(gold). However, if the opposite holds true look for an HUI
moon shot coming to a screen near you sometime soon. So what's
it going to be? Let's let the market tell us.
© 2004-2007 Biiwii.com
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