Pizza, Bonds, Burgers and Yen
By Frank Barbera CMT. October 28, 2008
In last week's column we stuck our necks out and made the highly unpopular call for an approaching peak in the Dollar Index. So it is with major market turns that very often you end up sweating bullets waiting for a market to change direction -- even with good timing. So it was in the last few days, as I am now most definitely a few pounds lighter with some extra sleep deprivation to boot. I, for one, (and I am sure I will have a lot of company) will be grateful when the mining stocks stop dropping like rocks and begin a new bull move, as staring at these large percentage losses is getting tedious. Of course, after suffering for the last few days, it appears that “the turn” we were expecting has at last come into full view.
In today’s trading, the Japanese Yen plunged by nearly 4.35% and is now more then 6.5% off the recent high. More likely then not, the steep downside reversal in the Yen is a sign that for the time being, hedge fund carry trade unwinding has stabilized, likely with a lot of help from the Bank of Japan. Certainly, global stock markets sensed this move in the offing as over the last few days, a lot of positive divergences have appeared on the short term charts with foreign markets posting strong reversal sessions last night, and of course, the US market posting a monster gain in today’s session. A time out on carry trade unwinding is good news for equity markets, as it means a reduction/cessation in forced liquidation.
Above: The Japanese Yen finishes a five wave advance and begins to reverse lower in today’s session.
As can be seen in the charts above and below, each and every advance in the Yen over the last few weeks has produced sharp declines in Natural Resources stocks in sectors such as Oil Services, Gold Mining, Oil and Gas, Coal, Natural Gas, Uranium etc. By contrast, as shown in the yellow rectangular boxes, each decline in the Yen has triggered recovery rallies in these sectors which are at present ultra, ultra oversold. In this context, it would seem as though Wednesday’s action by the Fed could likely be accompanied by strong coordinated action by a host of central banks. Quoting one central banker from this weekend, “we either all sink or swim together.”
To this end, a recovery rally in the resource sector should attend a further downside break in the US Dollar, which in my view remains very vulnerable to a major trend reversal. Dovetailing with the trend change in the Yen, and shortly, the more dramatic trend change in the greenback, is the massive oversold condition which now prevails throughout the arena of resource stocks. In the next chart, we show the GST Stagflation Index and its Medium Term Advance-Decline Ratio. At present, the A/D Ratio is among the most oversold daily values ever seen. The Index includes over 150 natural resource stocks, with many very familiar names from sectors such as Gold and Precious Metals, Oil and Gas, Oil Services, Uranium, Base Metals, Steel, etc. In my view, the catalyst has now been found for a reversal in these badly depressed names, many of which have fallen off the proverbial cliff. For the broad stock market, a recovery in the mass of these stocks will do a great deal of good for the major averages, which so far, have been getting clobbered (over the last few weeks) as sectors like Energy, and Base metals move relentlessly lower. In my view, ‘enough is enough,’ and “the turn” has now been reached.
Above: GST Stagflation Index with Medium Term Advance-Decline Ratio at massively oversold values.
Above: Freeport Copper and Gold (includes the old Phelps Dodge) decimated… Can this really stay this low for long? 50% Bounce is back to $50.
Above: US Steel down from $196 only a few months ago to $30 just recently – a one third bounce is $50. Decimated – ya think?
Above: What? BHP Billiton down almost 70% - this is pricing in a Great Depression and maybe then some? Too much, too far, too fast, BHP = high quality merchandise temporarily on the bargain counter. This could be a good buying opportunity in resource stocks for years to come.
While the prices of most quality resource stocks are presently bombed out and through the floor, and hence appear to be primed to explode off the lows, the other market which looks ready to explode, perhaps upon itself, is the market for Government bonds. Anyone see the chart on the 10 Year Bond lately? Talk about a scary looking chart. The 10 Year looks like the double bottom of all time, complete with a huge positive divergence on the medium term MACD. In my view, as stock prices slowly begin to firm over the next 2 months and carve out a longer term base, the odds are high that the next primary bear market will be besieging the bond bulls. For the 10 Year, any move above 4.30% is the kiss of death and would signal a long term secular uptrend in bond yields getting underway, and if inverted on a price basis, a breakdown from a major top. My view, watch out for a downside reversal in the Dollar and a corollary movement up in Bond yields. That’s the recipe for Re-Inflation, and perhaps down the road a bit, hyper-inflation, and could be the ultimate negative path ahead. The veritable ‘road to perdition’ as it were, complete with pizza prices changing every 30 minutes. I promise, when and if we get there, (and I hope we don’t) we will have technical gauges (RSI, MACD etc…) tracking Burgers and Pizza so that we can all “time” our entry points for where and when to buy lunch. I plan on launching that as an entirely ‘new’ newsletter service, the GST Pizza and Burger Tracker with individual analysis of the entire range of Pizza products from Pepperoni to Italian Sausage (just kidding).
For those in the ardent deflation camp, it must be quite troublesome to see this unreal Dollar strength and stock market anxiety -- all of it -– virtually unparalleled since the 1987 crash, with Bond yields stubbornly refusing to make new lows. The late Louis Rukeyser always used to talk about the ‘ghouls in the bond market” and how bonds loved bad news for the broad economy. On the eve of Halloween, we suggest the Bond market adherents (US Dollar deflation bulls) stop and take a long look around, cause in my view, if yields can’t go down on all the bad news --- and we have seen nothing but a steady stream of relentless bad news in the weeks just past -- then something is very wrong in bond land. For the long-range outlook ahead, the falling Dollar, rising Bond yield trade may be the scariest news of all.
Above: the 10 year Bond with a huge double bottom.
That’s all for now,
© 2008 Frank Barbera