The Market Ticker

Well well well..... what an interesting day.

I expected a breakout (or breakdown) in the SPX, and it didn't happen. What we got was this:



Ok, if it wasn't an asymptote yesterday, it sure as hell is now! We've got a point, and the closing occurred for all intents and purposes right on it.

Amazing stuff.

Or, if you prefer..... perhaps the S&P is pushing down the channel boundary, extending its ability to run in there for a few more days?



The Nasdaq, on the other hand, broke the nascent downward channel



And in fact did so quite decisively.

Or did it?



That's interesting. The bottom of that nascent downward channel fits exactly with a downward depression of the bottom part of the wedge. In other words, it flattened - but did not void - the pattern.

The Nasdaq also posted a meet on the Acquisition/Dispersion today (towards the upside) as well, cancelling the SELL posted the other day. So now we're on a "sideways" signal on the Nasdaq, waiting for confirmation; the Stochastics show a buy, but the MACD has not yet turned.

So what do we have here? Good question. On a pure chart basis, it looks like the SPX has every intention of testing the old all-time high, which is just a few points above. In fact, I would bet we take a run at that on Monday.

But before we get all giddy about the rally being confirmed out of the wedge, you need to take a look at this chart...... this is a friend of mine, and its veerrrrrry important.



I apologize for this being wide, but it has to be to make the point. This is the 10 year bond yield, which is found on Stockcharts and other places as "$TNX".

The 10-year bond controls what you pay for your mortgage or car, what corporations pay to borrow, and what you pay for your credit card interest. In short, this is real interest rates, not what the Fed charges a bank overnight.

And in both of the last two serious declines the market suffered, both last summer and the spring plunge this year, the bond had ticked over 4.80% about a month beforehand, and the further up it ticked, the more serious the plunge was. Even more important, the "little headfake" in November was presaged by an excursion over the 4.80 level - even though it was just a transient pop!

In fact, in each and every decline in the SPX since the 2000-03 tech wreck, this indicator has accurately presaged the decline, with the proportion of the decline being directly related to the spike in this indicator. 2004's downtrend, while fairly long in duration, was shallow in depth - as was the incursion over the magic 4.80% rate. The summer doldrums last year were quite sharp and were led by a significant rise over the 4.80% rate, which persisted until the market blew out. And this February's plunge was presaged by this as well, yet the spike, while sharp, was narrow - and so was the plunge.

Now we've got the bond rate ticking up again HARD; in fact, it has risen more than 2% in two days. That's very significant and on a technical basis more gains are expected. MACD is rising, ADX is strongly positive and widening, and RSI is rising. It is reasonable to expect that we will see it breach the 4.80% level decisively Monday, and within a week it may reach 4.90%.

If it does, even if it then heads downward, so long as it does not decisively break below 4.80%, the indicator is flashing a major warning sign. In fact, since technically the indicator is over 4.80% now (4.804) it is possible that the warning light is already on!

I would not be surprised to see this indicator peak over 5.0% in the next couple of weeks. If it does, we've got a potentially very serious situation setting itself up for the timeframe from June into July. There are other reasons to believe this is serious, of course - including the economic picture and housing - but when the market starts piling on high-reliability technical indicators you have to be very careful not to get headfaked into believing that a breakout to the upside will hold as at least an intermediate-term trend.

The bond market is important to watch precisely because rising real rates threaten liquidity and the market from the start of 2006 onward has been running not on fundamentals, but rather on liquidity.

Rising real rates are never good for equities but they are particularly damaging when a rally is fueled not with fundamental strength in the market, but rather with M&A deals and speculation as we have today. Even small pullbacks in liquidity can lead to very steep declines, since with no "greater fool" there are no buyers - and the house of cards comes tumbling down.

When you hear people talking about the market running on pure M&A speculation, as I did today in several interviews on CNBC, its time to wonder if you should take the money off the table - or at least set some very tight stops under your long positions!

I was expecting that we might take a run at the S&P record today, break out to the upside, and for now, the bear case simply wouldn't have any legs - fundamentals be damned. But this indicator is one that I cannot ignore, despite the fact that the DOW remains in a parabolic ascent and the Nasdaq broke the channel and pushed down the wedge (although the Russell did not come along - it is sitting on the top of the downchannel, but the channel remains intact, and it again pinged the 50DMA!)

There are other technical theories (including Elliott Wave Theory, 4-year Cycle theory and Fibs) that suggest that trouble is just around the corner as well, but while they seem to play out a good part of the time it is embedded indicators, especially those that are in the credit markets, that really get my attention. This is because as I've said before all serious plunges in the equity markets have been initiated by dislocations in the credit environment!

If bond yields continue to tick higher be very, very careful in the coming couple of weeks. I'm going to be on vacation and only able to post occasionally next week, and not at all in the week following - I've set my stops and if I wind up back in cash so be it. The risk of a hard reversal within the next two to three weeks is very, very real - and should not be ignored.

If I see the Russell break the channel AND the 10 year fails to penetrate 4.80 level, then on a short-term basis (as a tight trade, NOT as a long or even intermediate-term position!) I'll take an additional long position on the SPX, likely via the options market for June. But.... if that bond continues to tick higher, and on a technical basis it sure looks like its going to, I'm going to be waiting with dry powder for what has been reliably signalled for the last several years to happen, fully-prepared to short the market into it.

Now let's add a few more nuggets to the mix. Gasoline, for one. Supplies are mentioned as "constrained." Ha. If people would only use their brains. GDP growth in Asia are up over 10% for the last five years, but retail tax collections in Asia are up over 20% annually for the last five years! You can't hide sales tax receipts; while "command economies" can massage GDP numbers, its impossible to play with retail sales tax receipts.

This is simply a supply and demand problem and supply is being destroyed as we continue to refuse to develop our oil fields off the coast of the United States and our shale out west, while we burn up the other supplies that have been found and developed. We also have serious constraints in the refining space, which threatens to get far worse - and we've brought that upon ourselves too by refusing to permit a new refinery for the last 30 years.

Oh, and did I mention that NOAA expects a "more active than normal" Hurricane Season? With La Nina turning on this year, that will tend to target Hurricanes into the Gulf - which isn't good from my point of view (I live on the Gulf!) but is particularly troublesome for our fuel price outlook. Put one hurricane in the Gulf this summer and you'll see not $3 gasoline but $5 - in a day.

I've already been over the Consumer Credit Debt spike - 9.2% last month - which is an excellent recessionary marker. If you've been reading the blog for a while you know that I've been pinging on these markers for the last couple of months - no need to go back through every one of them again (just read back through the blog!)

If you distill it all down, this is what I expect:

Next week we are probably going to see an assault on the old S&P500 high. This will, technically, speaking, likely break the channel to the topside. Stochastics say it is unlikely to be Monday (the short-term is pegged at 100!) but the MACD is crossing back upward and the histograms are coming back, now at neutral. The RSI is headed back up to the overbought range.

So for the rest of May, we may well see a higher market. In fact, I expect that we will, for the next week or two. Beware being suckered by this rally; you will see the cheerleaders on CNBC and elsewhere talking about "record highs", trying to suck in the retail investors!

I see this as an excellent opportunity to purchase PUTS for June and July, especially on the broader indices. I will be looking for the opportunity towards the end of next week to put on a second vertical spread (I've already got one open) for June or July, and will be fully prepared to roll those forward when we get a couple of weeks from expiration as required.


This is not going to be a little blip either. The Consumer is in trouble and the MEW door has been slammed closed. Gas prices are a big problem and likely to become a really big problem as hurricane season starts to develop. Inflation - real inflation - is running well north of 5% with Food and Energy inflation over 10% on an annual basis over the last year - this will sap discretionary spending and redirect it towards necessities - food, fuel and utilities. Now add into this higher real interest rates due to the bond yield increases that I noted above and you've got all the ingredients for major trouble ahead.

So, in one sentence: Next week, expect the S&P to assault and likely break the all-time highs. Use this opportunity to lighten up and get nimble rather than buy into the rally.

If we do get a big correction (e.g. 20% or more) I expect the Fed to be forced to cut rates.

When that happens it will be a good time to buy for a short-term trade, possibly through the '08 elections. But again, you must remain nimble, because a cut in rates won't fix the problem, especially if we don't get the full correction in the Housing Market, or worse, if big dollar devaluation is triggered by an interest-rate cut - and the latter is very likely.

Extreme caution - and not a long-term "buy and hold" view - will be required to profit from that environment, as it is a near certainty that down this road leads higher taxes, belt-tightening on consumers, and the more excess credit that gets created in an attempt to defray the problem the higher the risk of a market implosion rather than taking our medicine and working through the issues.

Have a great weekend!

Updated Saturday at 1:34PM