Ok, the Swiss team’s latest insightful technical comments below.
As a summary they are sticking to their call that this remains distributive. A key plank of their argument is that until we get a rotation into cyclicals and away from defensives the theme remains distribution. This is a classic analysis and is historically correct. Cyclicals wise the semi conductor index has broken out and the wider tech indexes, like the nas100, has also broken out. The Dow transports have bounced but not broken out. Housing and finance did both score a breakout again but its weak thus far with little through as yet. The defensives of health care and consumer staples remain over bought. The key cyclicals of energy, materials and industrials have bounced but remain weak.
The team have been in stretch mode for the last few months in making their near term correction call. So this week i want to make a few observations of my own in an attempt to cross examine the ‘distribution’ call. I partly make these observations as in my view, its touch and go here now as to whether this remains distribution or is in fact the start of yet another wave higher. We should acknowledge here that the market internals have improved for the bulls recently. We should at least record these as market facts here and i say this as someone who until a week or so ago had hedged a portion of my own book for protection.
The bull case would importantly sight the cyclical sox breakout, nas100 breakout as well as the high yield bond rebound confirming the compression in yield across all asset classes.
Here a chart of the S&P500 with the US high yield debt index.
Back at the end of March the historic positive correlation between the two had broken down adding much weight to the bear case. This weight has since evaporated with the high yield index scoring a higher high confirming the S&P500’s own higher high. The two are back in unison and we need to recognize this and understand what this tells us, in terms of the hunt for yield, across the capital markets. It would be wrong as well to ignore the european debt markets. Piigs debt has seen significant yield compression. The Italian and Spanish debt yields are seeing positive capital inflows with new high highs for their debt, lower yields. This is significant and would usually imply a tail wind for yielding equities and euro finance.
As a general comment, we must all be honest with ourselves on these various indicators. We are playing probabilities here, that is all. Models come and go as human and policy actions drive capital towards and away from asset classes. We must listen to market indicators and events and no try and force our reading of events to fit our models. This is the classic technical error. I’m not accusing anyone of this mistake here as the evidence is still unclear but we must constantly question our own practice to ensure we do not fall fowl of this error.
And trying to piece these various debt market instruments together within some sort of marco cycle model. What might these shreds of evidence be telling us?
In my view it maybe is an indication that, with central bank’s so aggressively maintaining negative interest rates as well as their new money creation programs that these actions are having consequences on capital holders. Capital holders fearful of expropriation are leaving cash as a store of value. Capital holders are seeking any positive returns, at any risk, and so driving down yields across all asset classes. We must remember that substantial ‘EM” reserves have been accumulated over the last 15 year as a consequence of the west’s consumer boom. The holders of these reserves are now fearful they are to be expropriated. These are unprecedented monetary times. Historic patterns of sector rotations might see significant stretch before they mean revert would be a reasonable comment to make. Do the material & industrial cyclicals have to score higher highs to allow these indexes to march higher given this search for yield? With yield compression and monetary action so wide spread i’m not sure as the team are in this respect. Especially given the higher high that the high yield index has made in recent weeks.
On the bullion side the team remain bullish as a medium and longer term comment. In my view this market wide theme of expropriation avoidance and a search for a store of value plays perfectly into the bullion asset class. My book remains unchanged other than i have accumulated a large line of option calls on the bullion and her miners. Lower prices have lead to a surge in physical demand. This is telling in my view and is part of the same issue as the high yield index scoring a higher high.
In summary, the line is wafer thin between the bull and bear camps now. Weakness has reduced, in the last 8 sessions or so.
Without more delay here the report at this critical moment in asset markets.
The very best to all
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