Interesting TACs of the Week (October 11 – October 17, 2014)


Summary – A top-down review of interesting calls and comments made last week about the flash crash in Treasuries, monetary policy, economics, stocks, bonds & commodities. TACs is our acronym for Tweets, Articles, & Clips – our basic inputs for this article.

Editor’s Note: In this series of articles, we include important or interesting Tweets, Articles, Video Clips with our comments. This is an article that expresses our personal opinions about comments made on Television, Tweeter, and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Macro Viewpoints & its affiliates expressly disclaim all liability in respect to actions taken based on any or all of the information in this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerance.


1. Flash Crash in Treasuries? 

Rick Santelli has seen far more bond action than we will ever see. And he said he has never seen anything like the incredible collapse in treasury yields on Wednesday morning. The 10-year yield dropped that morning to 1.86% and the 5-year yield to 1.10%. Yields sprung back very quickly but the specter of machines frantically seeking to buy Treasuries everywhere thereby creating a violent waterfall in yields will remain with all of us for a long time. The photo in the tweet below speaks eloquently:

  • Toby Nangle @toby_n – 10yr UST intraday yield is one for the photo collection. As whacky as those JGB yield shifts in April 2013 (?)

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What we saw was massive liquidation of wrongly positioned assets. As soon as the liquidation was finished, yields sprung back very sharply. Rick Santelli said on Friday that the low yield levels of 1.86% on 10-yr & 1.10% on 5-yr will hold up for a very long time.

That seems to be the way to bet unless this yield crash behaves like the equity flash crash of May 6, 2010. The Dow fell by 600 points in 5 minutes that day creating a 1,000 point drop intra-day. Recall that the flash crash intra-day low of Dow 9869.62 was broken by the intra-day low of 9774.68 on May 25, 2010 & by the closing low of 9816 on June 7, 2010. A month later, on July 2, 2010, Dow reached its 2010 intra-day low of 9614.32 & closing low of 9686.48.

Will Treasury yields behave like that flash crash during the next couple of months or did we see the bottom in yields for 2014? 

2. Wake up call for Central Banks?

Last week, we described deflation fears as a contagion sweeping the world. The flash crash in yields could be an evidence of the seriousness of the deflation scare in Europe. We have no doubt it woke up the Fed. James Bullard, President of the St. Louis Fed, spoke clearly to Michael McKee of BTV the next day:

  • “I also think that inflation expectations are dropping in the U.S. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target. And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December”

Coincidentally or otherwise, the stock market rallied all afternoon on Thursday with the S&P closing positive & Russell 2000 closing up 1%. The next day, coincidentally or otherwise, Eric Rosengren, Boston Fed President, dismissed talk about stopping the taper and said that QE is set to end during the next Fed meeting on October 29, 2014.

The real question is whether the Fed will raise rates in 2015 or not. Martin Feldstein emphatically told BTV’s In The Loop viewers that the fed funds rate will rise to 1 -1.5% by the end of 2015. On the other hand, CNBC ex-anchor Ron Insana flatly said on CNBC Closing Bell that “Fed is going to do nothing next year.

The big question is what guidance will Chair Yellen provide on October 29? Will she get more dovish by diluting the “considerable period” statement, will she simply stay the course, or will she get more hawkish by removing the “considerable period” statement?

3. Cyclical correction in a secular bull market?

Martin Feldstein said on Friday on BTV In the Loop that he doesn’t see “anything in the foreseeable future that looks like a recession“. Rich Bernstein told CNBC’s Becky Quick on Friday that “economic fundamentals that would normally associate with a bear market or recession are nowhere to be seen“. David Rosenberg wrote on Friday that “Bear markets need a recession and that simply does not look in the cards.” This view is also the oft-repeated view of Leon Cooperman. Larry Fink said on Squawk Box this week that those who can stomach the volatility should invest in this stock market.

Rich Bernstein, Larry Fink, and David Rosenberg have been far more right than wrong in the past. And all three explicitly warned investors in 2007 about the dangers they saw in those markets. Those who listened to them in 2007 saved  themselves a great deal of money & pain. So we listen when they talk.  

4. Signs of something malevolent?

In our September 26 TACs article, we had featured the following chart of Dana Lyons of JLyons Fund Management. He called his chart below The Most Important Trend Line in Equity Land.

The Most Important Trendline In Equity Land: New Highs-New Lows<br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
The problem with trendlines is that they are usually subjective. Rarely are they cut-and-dry. And even when they are obvious, it has become more commonplace recently that breaks of trendlines, up or down, have been false moves. That&#8217;s not too surprising given the tremendous increase in traders and investors adopting technical analysis as well as widespread access to such resources. The more attention that is focused on a particular type of analysis, the harder it is to exploit such analysis. Thus, the exploiters become the exploitees. Whether it&#8217;s the algo-bots or simply the collective market forces that forbid the consensus of participants from profiting from &#8220;obvious&#8221; signals, trendline breaks are now very often fakeouts. As often as not, it seems, prices revert back to the primary trend in short order causing traders to&#8230;draw a new trendline. Thus, the subjectivity.<br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
Therefore, our pick for the most important trendline to watch in the world of equities is not an equity, or equity index, at all. It is an indicator. Whereas equity trendlines are prone to false breaks of late, indicators often conform to truer, more reliable trendlines. But why would an indicator trendline be the most important? Considering this market environment is one characterized by divergences and weakening internals &#8212; perhaps moreso than any time since the 1998-2000 period &#8212; a focus on that dynamic seems more than appropriate.<br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
The indicator we have selected for this distinction is the number of New 52-Week Highs minus New 52-Week Lows on the NYSE. We&#8217;ve discussed the weakening trend of New Highs several times over the past few months, including on September 10, September 2, July 25 and May 1. The reason we chose this particular indicator is due to A) the cleanliness of the trendline and B) the degree to which it has been helpful in the past.<br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
As we have cautioned ad nauseam, the difficulty with divergences is the unpredictability in timing their impact. They can persist for a long time without serious consequences. One way to combat that unpredictability is by using a trendline, or similiar method, to detect when the indicator breaks down (or out). This can signify a point of impact.<br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
For example, New Highs have been declining for some time so we need a way of determining when that trend will matter. Since they do not have much room to break down, as they are bound by zero, we use the spread between New Highs and New Lows. Looking at this indicator, we can see clear, distinct uptrends from cyclical lows to cyclical tops (by the way, we could use simply New Lows but we like the added information of having both series in the indicator).<br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
This analysis was very helpful in identifying major turns in the past two cycles. On the chart, you can see that New Highs-New Lows made a series of higher lows from 1998 to 2000. During the sell off in September 2001, the indicator broke the uptrend, spiking lower. This was a head&#8217;s up that the major trend was broken. FYI, yes the large cap indexes clearly topped in 2000 and had already suffered major damage by September 2001; however, many small and mid caps held up fairly well in 2000 and early 2001 (of course, many of them suffered bear markets from 1998 to 2000). It wasn&#8217;t until until 2001 than many of them broke trend and began their descent into the real carnage of 2002.<br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
Likewise, from 2004 to 2007, New Highs-New Lows formed a similar uptrend. The trendline break was a more timely one this time, occurring in July 2007, just off the top. It was again a head&#8217;s up that more serious damage was to come than the mild corrections of the years prior.<br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
Currently, we see the same condition. While the NYSE New Highs have been steadily declining, the uptrend in New Highs-New Lows is still in force, stretching back to 2011 (and 2009 as well, but we like to start the trend over after the  indicator breaks out to the upside like it did in 2010.)<br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
It has paid and will likely continue to pay to avoid becoming too bearish from a longer, cyclical-term perspective until this uptrend line breaks. It will likely do so into a &#8220;warning shot&#8221; sell off as in 2001 and 2007. That is, it will occur into a sharp pullback that, while perhaps too late to warn of that concurrent weakness, will provide a warning that the longer-term picture has changed, for the worse.<br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
** FYI, despite the recent rise in New Lows, it does not appear as if the New High-New Low uptrend line will be threatened today, as the statistics currently stand.<br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
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More from Dana Lyons, JLFMI and My401kPro.

 This Thursday he UPDATED the above chart as BROKEN.

UPDATE: The Most Significant Trendline In Equity Land = BROKEN<br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
On September 25, we presented what we termed, The Most Important Trendline In Equity Land, namely the NYSE New Highs minus New Lows. While the divergence in New Highs over the past year was transparent and concerning, the lack of expansion in New Lows countered the concern. And as long as the well-defined trend of higher lows in the difference in New Highs-New Lows continued apace, the potential risk associated with the thinning of the cyclical rally remained at bay. Only when the uptrend in New Highs-New Lows was broken, would such &#8220;potential&#8221; risk become a realization. As of yesterday, that trend is unambiguously broken.<br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
Now before you start complaining that the horse is already out of the barn considering the on-going near-10% correction, the broken trendline is not a short-term concern. Indeed, such extremes in New Highs-Lows often come near short-term lows. As we pointed out in the September 25 post, the concern has longer-term ramifications. Just as in September 2001 and July 2007, this trend break runs the risk of eventually leading to a more serious cyclical bear market.<br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
So while the market is undoubtedly washed out here in the short-term and will likely form an intermediate-term low within days or weeks, the longer-term cyclical bull has now been dealt a staggering blow.<br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
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More from Dana Lyons, JLFMI and My401kPro.

He wrote in his article:

  • “the broken trendline is not a short-term concern. … As we pointed out in the September 25 post, the concern has longer-term ramifications. Just as in September 2001 and July 2007, this trend break runs the risk of eventually leading to a more serious cyclical bear market.”
  • “So while the market is undoubtedly washed out here in the short-term and will likely form an intermediate-term low within days or weeks, the longer-term cyclical bull has now been dealt a staggering blow.”

Recall that the correction in July 2007 led to a new high in stock indices in October 2007 before the deluge.

Another trader sees a similar pattern evolving. In his article Shades of Grey: 2007 Edition, @NorthmanTrader writes:

  • “But it is the larger structure that has us especially curious as this weeks lows appear to repeat a pattern we have seen before: 2007. … Yet, as the 2007 case shows, this initial violent correction off of all time highs can also produce new highs … In 2007 it took a mere 8 weeks from the initial shock. This shock, incidentally came with a large spike in the $VXO following a long dormant period”.
  • What could we expect on a repeat? A move back toward the middle Bollinger band, new highs and then a vicious bear market into 2015.
  • But it’s just a scenario and we still have to trade what’s in front of us. And this market has shown to be very different than any previous QE correction as evidenced by the deep drop in high/lows which now mirrors that of the 2008/2009 financial crisis period

We urge interested readers to read the entire article Shades of Grey:2007 Edition and study its charts. The above is merely a glimpse into the reasoning.  

Until now, the powerful hand of the Fed has negated serious chart warnings of famed technicians. But now the hand of the Fed is about to be withdrawn and replaced by verbal guidance. Will that be enough to keep negating technical warnings or will the Fed/Draghi push more stimulus to prevent a roll over in the equity markets? 

  • Friday – Jesse Felder ‏@jessefelder Look at this chart and tell me again how the markets trade on fundamentals rather than the Fed  

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5. Short-term Views

It is interesting that both the articles featured in the above section suggest another spike up to new highs. Does that mean stocks are now better than bonds? Yes, says the tweet below:

  • Thursday – Andrew Thrasher, CMT ‏@AndrewThrasher The ratio between stocks & bonds is now ‘oversold’ and has led to prior bounces in in the S&P 500 . Embedded image permalink
No, says J.C. Parets in his article on Thursday titled This Chart Still Suggests Buying Bonds and Selling Stocks with another 2007 reference.
10-14-14 tlt vs spyHe wrote in his article:
  • A chart that we brought up back in May was the US Treasury Bonds vs S&P500 ratio when it first approached the 2007 lows. I think where we stand today, this chart looks even better than it did then. Granted it’s up 10%, but still.So far we are bouncing nicely off this support and call me crazy, but it seems to me like there’s a lot more upside left: So I think the risk/reward still favors bonds over stocks. I haven’t seen any evidence that would suggest otherwise..
 What about large day traders who put their money every day where their thoughts are:

  • Larry Altman, the famed trader, said the following (in summary) on CNBC FM 1/2 on Thursday – “this week’s lows will hold for a few weeks; looking to buy dips“. But his longer term outlook is very different – “I think the S&P will eventually finish at 1600, near 1580 somewhere; I think the bull market is over for the time being until we get back to that old high, that 1580 high & find out what’s there “.
Two technicians argued that the rally that began on Thursday afternoon is to be faded already:
  • Carter Worth on CNBC Options Action on Friday – “Sell S&P at 1900″
  • Mark Newton on CNBC FM on Thursday – “sell bounce to 1900; need TRIN >2 & more fear; but close > 1940 will negate; 2-yr trend line broken; short term oversold; energy made a very good reversal; but weekly momentum to lowest level”

Speaking of the vicious rally in energy, especially XLE-OIH, Larry McDonald deserves kudos for his call and explanation on CNBC Closing Bell on Tuesday:

  • From a trading perspective, after a great bull market run, the great bull market run oils & oil services have had, that first leg down, the rally that you can get off of that can be spectacular;  we have a 7-factor model that measures capitulation, there is a mathematical formula behind it, we are reaching capitulation fatigue;  this may not be the bottom in oil service names & oil names;  but you can easily get a 12% rally in a bear market & then retest these lows again; I am not going to pass up on that”

The stock rally on Thursday afternoon & Friday morning was indeed led by XLE & OIH. To his credit, McDonald took partial profits on the XLE & OIH trades on Friday afternoon. By the way, he is among that rare breed who are bullish on Gold Miners.

To our simplistic way of thinking, the vicious rally off the lows was led by Russell 2000 which outperformed the S&P for 3 straight days.  It was the one major index that was up 2.75% this week. But on Friday morning, it began to lose its rally and actually closed down on the day. And the S&P rally failed at 1900 on Friday and then closed below the 50-week moving average. Is this action worth noting or are we being fanciful? We will find out on Monday.

Until then, those who follow Art Cashin should marinate ice-cubes this weekend while purists like us will drink straight up.


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