One Year To Nowhere

[OriZ 3,157]

I wanna add something to the comment above via a chart. The blue bands on this chart are called bollinger bands. It is a volatility indicator. Basically the more the bands narrow - the closer we are to a sharp move. This tool doesn't give you a direction, it just tells you something big is coming. It could be up or down, but when combined with all the other indicators right now, some of which we've discussed, it raises the chances significantly that it is going to be lower. Also worth noting is the fact that once the bands begin to widen, it oftentimes signals the direction if you have price pressure on one of the bands causing the "opening" or widening of them. In this S&P chart for example, you can see the bands getting narrower in 2000 due to the trading range back then, but price started to put pressure on the lower band, "opening" it, till price accelerated to the downside. The second circle shows the opposite - price pressure was upwards as the bands were opening and we got many years of a rally. And lastly 2007, narrowing + downward pressure. Right now the bands are narrower than they have been in any of those cases(the circle on the right).

Now observe the NYSE Composite, where it seems the bands are already starting to widen again, and to the downside, with much heavier selling pressure than in the S&P500.

[OriZ 3,157]

As far as interest rates go, I wanna show why I think the FED usually follows what the bond market dictates. This chart compares the timing of the Fed's interest rate decisions with the yields on US treasury bills from 2001 to 2005.

The black line is the US T-Bill yield, set by the free market. The red line is the Federal Funds Target Rate, set by the FED. Take a close look and you'll see that the bond market moves first, and the FED follows.

Still don't believe me? Lets zoom out a little.

Lets zoom out a little more:

So history clearly shows that the T-Bill market moves first, and the Fed's interest rate changes follow.

What about dramatic periods of double-digit rates? Here are T-bill rates and the Effective Federal Funds Rate (a weighted average of the Fed Funds rate across all banking transactions) from 1978 to 1984.

T-bill rates (lower line) peaked four times in 1980-1982. Each of those peaks occurred a month or more before subsequent, reactive peaks in the Federal Funds rate (upper line). Yet Paul Volcker, the Fed Chairman at the time, is widely credited with ending stagflation by raising the Federal Funds Rate to record levels. It was not him who raised them, it was the market.

Also notice the Fed’s rate also lags at bottoms, as clearly shown on the chart at the lows of 1980, 1981 and 1982-3.

So the reason that a couple of weeks ago I said bonds are finally signaling a hike, is because of this:

http://www.marketwatch.com/investing/bond/tmubmusd03m?CountryCode=bx

For the first time since 2009 T-bill rates spiked over 0.25%. That is what the FED was waiting for and it was time for the Fed to follow. Why did I then say, that for now it is done, despite the fact that the expectation at the moment is for 4 more hikes in 2016? Because t-bills have not shown any follow through, they have actually fallen slightly, down to 0.19% as of today. I will not be expecting a hike until t-bill rates are closer to 0.50%. I don't care how many people do.

Edited December 20, 2015 by OriZ

[Expat1 971]

You definitely agree on gold where? Short/intermediate/long or all?

I just think right now it's beyond oversold. But I still think it hasn't seen the lows yet.

As far as the S&P - a day here or a day there doesn't do it for me. The way I see it is the index is in a very wide trading range, between the May high around 2130 and the August/Sep 2015/Oct 2014 lows around 1820-1880. As long as it's in this range it's basically trading sideways. Eventually of course it will break out one way or the other and I think it will be to the downside. Once it does that it will confirm and establish a long bear market IMO.

I believe you said that there may be a short term "safety" bounce and i think we will see that. In a rising interest rate market, i believe we will see, as we have see through this year, gold falling on a reciprocal basis to the dollar along with falling demand in Asia, implying intermediate term fall, which I believe you also said. Overall gold has been following demand in Asia and the price should pick back up as their markets and currencies stabilize, but i dont see that until the dollar backs off. Either way i just buy it and toss it in a drawer, fire and forget, and if i need it that means things went really, really bad and i'll take what i can get for it.

S&P? I still hold belief that the correction is imminent however I am quite happy with wait and see. My valuation box is nowhere near where it needs to be an I dont see any sign that the denominators show any chance of improving.

[OriZ 3,157]

Yes we are on the same page with gold.

As far as interest rates rising see above - don't believe it will happen till t-bills move towards 0.50% and above.

[Expat1 971]

Yes we are on the same page with gold.

As far as interest rates rising see above - don't believe it will happen till t-bills move towards 0.50% and above.

The economy is booming. Until they adjust the growth numbers 3 months later.

[Expat1 971]

I wanna add something to the comment above via a chart. The blue bands on this chart are called bollinger bands. It is a volatility indicator. Basically the more the bands narrow - the closer we are to a sharp move. This tool doesn't give you a direction, it just tells you something big is coming. It could be up or down, but when combined with all the other indicators right now, some of which we've discussed, it raises the chances significantly that it is going to be lower. Also worth noting is the fact that once the bands begin to widen, it oftentimes signals the direction if you have price pressure on one of the bands causing the "opening" or widening of them. In this S&P chart for example, you can see the bands getting narrower in 2000 due to the trading range back then, but price started to put pressure on the lower band, "opening" it, till price accelerated to the downside. The second circle shows the opposite - price pressure was upwards as the bands were opening and we got many years of a rally. And lastly 2007, narrowing + downward pressure. Right now the bands are narrower than they have been in any of those cases(the circle on the right).

Now observe the NYSE Composite, where it seems the bands are already starting to widen again, and to the downside, with much heavier selling pressure than in the S&P500.

The market wants to correct. All the prop-up handles are being turned. Next spring. That's my call.

[OriZ 3,157]

The economy is booming. Until they adjust the growth numbers 3 months later.

Well leading indicators are already showing early signs of a possible recession. The fact that employment numbers are good right now has alot to do with the fact that employment figures are always the ones that lag the economy the most. So yeah not only do I expect growth numbers to be adjusted/revised downwards and also simply decline several months out, I also expect employment figures to decline about 6 months after the peak in the economy(which is right about now I believe).

The market wants to correct. All the prop-up handles are being turned. Next spring. That's my call.

Definitely by next spring we will have something.

The only question is - will it be a 5-10% correction, or will it be the beginning of something bigger?

[X Factor 1,111]

So far the Santa rally/ bounce has been on low volume

Edited December 24, 2015 by X Factor

[OriZ 3,157]

So far the Santa rally/ bounce has been on low volume

Keep in mind that the whole rally since 2009 has been on declining volume, so that doesn't always mean anything in the short term.

[Expat1 971]

So far the Santa rally/ bounce has been on low volume

This is the screaming "tear off your face" rally that we were supposed to buy into last week

[OriZ 3,157]

This can cause quite a headache, but very interesting nonetheless.

http://www.hussmanfunds.com/wmc/wmc151221.htm

[X Factor 1,111]

This can cause quite a headache, but very interesting nonetheless.

http://www.hussmanfunds.com/wmc/wmc151221.htm

Yes very interesting

[Expat1 971]

We are sort of interested in real estate right now. We are looking at the new developments (2, 3 bedroom condos) in South Jakarta and at land on Lombok. Lombok is in the Island chain near Bali but not developed at all.

[OriZ 3,157]

Yes very interesting

The current week's commentary, also interesting:

http://www.hussmanfunds.com/wmc/wmc151228.htm

shares alot of the same views as me, and I've learned some of them from him(although I have my own systems to identify market internals and especially technicals).

[OriZ 3,157]

We are sort of interested in real estate right now. We are looking at the new developments (2, 3 bedroom condos) in South Jakarta and at land on Lombok. Lombok is in the Island chain near Bali but not developed at all.

I know nothing about real estate in Indonesia. All I know is I still wouldn't go near real estate in the US. Despite the bounce in recent years(which coincided with the bounce in the stock market) I do not believe the market has hit a final bottom. Once that nasty brown stuff hits the fan I don't think people will be buying houses.