David Nichols de hoje July 22, 2003
Enviado: 22/7/2003 19:18TUESDAY a.m.
July 22, 2003
Deflating Financial Assets
by David Nichols
The developing story in financial markets yesterday was universal deflation. Not the kind of "deflation" the Fed has been mouthing off about, but the kind of deflation they really, truly fear -- deflation of financial assets.
Yesterday the stock market, the bond market, and the dollar all declined in unison. That's rare. The bond market in particular continued to get violently pummeled, with deeply oversold readings becoming even more oversold. The bond market can't even get to the surface to gasp for air:
All those "Fed's-gonna-buy-the-long-end" trades have been unwound in a hurry. Foreign buyers too have been fleeing the US bond market in droves, and they have been a main pillar of support.
So what gives? Is this spectacular fall in bonds and jump in interest rates indicating a coming economic boom?
If that were the case, we would expect to see stocks racing ahead. If this bond decline was indeed a big macro-event signaling a coming multi-year bullish renaissance, equities should be breaking out to the upside right now. But it's just not happening.
When I looked closely at the 60 minute chart of the SPX last night, I got an eerie sense of "déjà vu all over again". Check out how the current decline from the high at SPX 1015 looks exactly like the previous decline from SPX 1015.
I'm not sure what that means. I just point it out because it's pretty weird. The market almost never repeats itself so precisely. So we can't expect this relationship to hold up much longer. After another little oversold bounce at this 978 support, it's much more likely this time that the market will break down harder, and test the conviction of the bulls with a trip back down towards SPX 900.
The stock and bond markets have really been hurting badly since Alan Greenspan's testimony in front of Congress last Tuesday. Perhaps the erosion of confidence in the Fed and their ability to engineer a desirable economic outcome is already underway. Certainly this stands to be a dominant investment theme of the coming period.
Turning to sentiment, I spent some time with Phil Erlanger yesterday, and he was very curious to see what the fresh short interest data would say about the prospects for an extension of the rally. Phil told me the market needed a fresh dose of short selling -- equating to widespread skepticism of the rally -- to keep powering higher and potentially change the secular trend out of a major bear market.
Well, Phil reported the new short interest data this morning, and in Phil's own words: "The overall monthly change in NYSE short selling is the largest drop over the past year (see chart). There were 12 sectors that had discernible decreases in short selling intensity (our Short rank), while only 4 had increases. Here's Phil's chart, courtesy of Erlanger Squeeze Play:
With the VIX still very, very low, and short selling dramatically on the wane, then this market has a fuel problem. There's not enough negative sentiment out there to break it out. And the mythical "cash on the sidelines", which is now pouring out of the bond market, doesn't seem to be in any particular rush to rotate into equities.
Another indication a harder pullback is in the works comes from the uncanny leading indication from the Nikkei of ten years ago. Personally, I never tire of looking at this relationship, because it's just so darn accurate. Contributing analyst Tom McClellan updated this comparison chart in last night's excellent Daily Edition of the McClellan Market Report -- which we are thrilled to now have available to 21st Century Alert subscribers.
Now, we know that human nature never changes, and people tend to react to the same stimulus in the same sort of way, but this post-bubble correlation is just ridiculously close. We've just got to work with this road map as long as it's holding up, and right now it's calling for a decline into a bottom in early August. After that, we could see a drifty move back up towards the highs, and then the "big one" hits. Personally I think our "big one" later in the year is going to be much bigger than this Japanese prototype, as our sentiment disconnect from reality is just so abnormally large.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Filled 5 points to 11% full of negative sentiment.
SHORT-TERM: Gave up its advance phase but did not roll into a genuine decline phase. Now neutral.
MID-TERM: Progressed 7 points in its decline phase to 35%. Our Confidence Diffusion Index popped up to 2 (out of 7) gently supporting the slight rise in bearish sentiment.
LONG-TERM: Has been flirting with initiating a decline phase week after week. Confidence in the development of such a decline remains low with our weekly CDI at a mere bearish 1.
BOTTOM LINE: Despite the pullback and the threat the market is making to break support there is (if I may wax paradoxical) a veritable maelstrom of complacency in the market. Sentiment is normally an awfully good secondary indicator. But it is just that, secondary. Price is primary. At this point only a severe decline in Price is likely to throw fear into the hearts (wallets) of market participants. Let's watch for breaks in support and see how sentiment responds. It would be more constructive to see an over-fearful reaction to minimal downside breaks than it would be to see complacency when those breaks come. So far the SPX drop of more than 35 points has filled the tank up to only 11%. This is a stretch, but if the same rate of change were to persist it would take a drop to 682 to fill up the tank to 100%. As I said, that's a stretch, but the dance the market is doing to Dr. Feelgood's Funk & Jive Show has any contrarian worth his salt climbing the walls with anxiety.
July 22, 2003
Deflating Financial Assets
by David Nichols
The developing story in financial markets yesterday was universal deflation. Not the kind of "deflation" the Fed has been mouthing off about, but the kind of deflation they really, truly fear -- deflation of financial assets.
Yesterday the stock market, the bond market, and the dollar all declined in unison. That's rare. The bond market in particular continued to get violently pummeled, with deeply oversold readings becoming even more oversold. The bond market can't even get to the surface to gasp for air:
All those "Fed's-gonna-buy-the-long-end" trades have been unwound in a hurry. Foreign buyers too have been fleeing the US bond market in droves, and they have been a main pillar of support.
So what gives? Is this spectacular fall in bonds and jump in interest rates indicating a coming economic boom?
If that were the case, we would expect to see stocks racing ahead. If this bond decline was indeed a big macro-event signaling a coming multi-year bullish renaissance, equities should be breaking out to the upside right now. But it's just not happening.
When I looked closely at the 60 minute chart of the SPX last night, I got an eerie sense of "déjà vu all over again". Check out how the current decline from the high at SPX 1015 looks exactly like the previous decline from SPX 1015.
I'm not sure what that means. I just point it out because it's pretty weird. The market almost never repeats itself so precisely. So we can't expect this relationship to hold up much longer. After another little oversold bounce at this 978 support, it's much more likely this time that the market will break down harder, and test the conviction of the bulls with a trip back down towards SPX 900.
The stock and bond markets have really been hurting badly since Alan Greenspan's testimony in front of Congress last Tuesday. Perhaps the erosion of confidence in the Fed and their ability to engineer a desirable economic outcome is already underway. Certainly this stands to be a dominant investment theme of the coming period.
Turning to sentiment, I spent some time with Phil Erlanger yesterday, and he was very curious to see what the fresh short interest data would say about the prospects for an extension of the rally. Phil told me the market needed a fresh dose of short selling -- equating to widespread skepticism of the rally -- to keep powering higher and potentially change the secular trend out of a major bear market.
Well, Phil reported the new short interest data this morning, and in Phil's own words: "The overall monthly change in NYSE short selling is the largest drop over the past year (see chart). There were 12 sectors that had discernible decreases in short selling intensity (our Short rank), while only 4 had increases. Here's Phil's chart, courtesy of Erlanger Squeeze Play:
With the VIX still very, very low, and short selling dramatically on the wane, then this market has a fuel problem. There's not enough negative sentiment out there to break it out. And the mythical "cash on the sidelines", which is now pouring out of the bond market, doesn't seem to be in any particular rush to rotate into equities.
Another indication a harder pullback is in the works comes from the uncanny leading indication from the Nikkei of ten years ago. Personally, I never tire of looking at this relationship, because it's just so darn accurate. Contributing analyst Tom McClellan updated this comparison chart in last night's excellent Daily Edition of the McClellan Market Report -- which we are thrilled to now have available to 21st Century Alert subscribers.
Now, we know that human nature never changes, and people tend to react to the same stimulus in the same sort of way, but this post-bubble correlation is just ridiculously close. We've just got to work with this road map as long as it's holding up, and right now it's calling for a decline into a bottom in early August. After that, we could see a drifty move back up towards the highs, and then the "big one" hits. Personally I think our "big one" later in the year is going to be much bigger than this Japanese prototype, as our sentiment disconnect from reality is just so abnormally large.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Filled 5 points to 11% full of negative sentiment.
SHORT-TERM: Gave up its advance phase but did not roll into a genuine decline phase. Now neutral.
MID-TERM: Progressed 7 points in its decline phase to 35%. Our Confidence Diffusion Index popped up to 2 (out of 7) gently supporting the slight rise in bearish sentiment.
LONG-TERM: Has been flirting with initiating a decline phase week after week. Confidence in the development of such a decline remains low with our weekly CDI at a mere bearish 1.
BOTTOM LINE: Despite the pullback and the threat the market is making to break support there is (if I may wax paradoxical) a veritable maelstrom of complacency in the market. Sentiment is normally an awfully good secondary indicator. But it is just that, secondary. Price is primary. At this point only a severe decline in Price is likely to throw fear into the hearts (wallets) of market participants. Let's watch for breaks in support and see how sentiment responds. It would be more constructive to see an over-fearful reaction to minimal downside breaks than it would be to see complacency when those breaks come. So far the SPX drop of more than 35 points has filled the tank up to only 11%. This is a stretch, but if the same rate of change were to persist it would take a drop to 682 to fill up the tank to 100%. As I said, that's a stretch, but the dance the market is doing to Dr. Feelgood's Funk & Jive Show has any contrarian worth his salt climbing the walls with anxiety.