Rates Update + SP500 may be getting ready for break higher.

Global Rates

The past couple of weeks have seen some very sharp corrective activity on Rates markets. This corrective phase has occurred in the face of very sharp drops in Government Bond yields over the past few weeks and indeed months. There have been a number of events which have helped contribute to the large drop in yields over the summer, chief amongst these have been 'Flight to Safety' fears regarding the Euro Periphery (PIIGS), Double Dip fears as US economic data disappointed over recent months, poor economic data in other G7 countries, and the increasing belief that Central Banks were going to increase Quantitative Easing in response to fears of further economic pain.  - Is this the beginning of a real turn in the rate environment or a mere correction? - Personally I think this is too early to come to any firm conclusion, however it is something I am going to try and focus on over the next few days and weeks as this is likely to be a barometer of the level of fear and/or confidence running through the global economic environment.

My initial feeling is that this is a correction in rates for now, which probably still has further room to run. - Regarding the issues above, the PIIGS issue has not gone away, Credit Default Swap (CDS) levels remain elevated, though price levels have eased a touch over the past few days. Double Dip fears have eased slightly in the face of marginally better data over the past couple of weeks, (but still remain elevated), stock markets have recovered there poise and QE2 has not yet materialised, though it remains a very strong possibility. - The charts below show US 2 year and 10 year yields, German, Japanese and Australian 10 year yields. --- I have highlighted the Japanese 10 year yield level of 1.20%, this has been a pivotal level for the past few years, the recent collapse in yields across the G7 really accelerated upon the confirmed breakdown through 1.20% in June, and the rebound of the past couple of weeks in JGB yields moved from 0.90% to 1.20% before easing back to current levels around 1.6%

SP500 Index

Last Thursday's 'Shooting Star' candle failed to turn the markets down, with futures levels currently suggesting cash trading around 1118/19, it would appear that this signal is a fail. Unless today's likely stronger opening turns round to produce a weak losing close, then the focus is likely to switch back towards the 1130/32 key resistance area from June and early August.

The chart below shows the patterns which I think are likely to have the greatest influence on the market going forward. I believe the market may be preparing for a breakout higher, I have listed below my reasons for this below. However, as long as the 1130/32 continues to offer strong resistance, and until we see a clear and sustained break over this level, the risk of further consolidation or a move lower remains a possibility.   

Clues as to why a breakout higher may be due soon :

1) The large 'Falling-Wedge' pattern (highlighted above): I covered this many times over the past couple of months, including this posting from the 2nd August (Click here). I am re-posting some work I have done on 'Falling Wedge' patterns below.

 

I have long favoured that we have a Type 2 pattern (as per the above), though I have had doubts, which have led me to question that we may actually have a Type 3.  However the re-test of the breakout, which has held well, does lead me to once again think that this is a Type 2 pattern, which has bullish connotations whereas a Type 3 has a very bearish connotation. - Note: Type 2 patterns usually morph from failed Head + Shoulder pattern, which in its own right is a Bullish pattern.

2) The Higher Low (highlighted in above chart) is another supportive factor.

3) The internal 'Inverted Head + Shoulders' pattern. - I am loathe to actually call this a true 'Inverted Head & Shoulder pattern' as these would normally occur at the end of a sustained trend, however when combined with other signals, these can act as continuation patterns.

4) My own Long-Term trend following system remains in Bullish posture, it failed to produce a sell signal on the May/June sell-off. I posted a blog on this a couple of months ago (can be seen here). This system is not a forward looking system, hence I do not consider it as a trading signal, however it should not be ignored either.

5) 1970's redux. I posted about this in July, the price action since then has actually re-enforced this even further.  Below is an updated chart of the near-term comparisons, note history does not repeat itself, but it does rhyme.  (Click on the Highlighted link at start of this paragraph to see full item for bigger picture).

6) AUDJPY -- This has been one of my main risk barometers over recent months. I have previously highlighted the Symmetrical Triangle on this FX cross. The price appears to be breaking out of the top of the pattern (see chart below), if this is maintained, this would be bullish for the AUDJPY, who's moves have been well correlated with moves with the SP500 over the past couple of years.

Of course, all this will be 'by the by' if the SP500 fails to clear 1130/32, or makes a short-false break. In the meantime, I would not be surprised if selling pressure was to emerge ahead to this key area. 

'The End is NOT Nigh'

No charts today, just some musings and thoughts........

Over the past few weeks we have seen may markets take a serious turn for the worse, global bonds yields have dived (except in Europe's PIIGS countries where they have either risen or soared), and most non-precious metal commodities prices have dropped sharply. - As I read though the weekend press and various on-line news articles it is clear the optimism of late 2009/early 2010 is rapidly abating and I start to see articles referring to where has it gone wrong, what mistakes were made, what could be have been done or what should be done. My feeling is that whatever they did (or do), whether it is the austerity route, or continued fiscal expansion, there is very little that the authorities really could do,, any more than any government could do to protect its coastal region from a Tsunami wave racing towards it..... I wish I could be more positive or more upbeat ( I am a natural optimist - glass half full type person, and have never been a perma-bear) but my reading of the situation does not allow room for optimism right now. -- To continue the tsunami metaphor, we face a huge deleveraging tsunami; consumers, households, governments, municipalities, corporations, all are deleveraging in what I believe is the downside of the long-wave business cycle, with equity markets probably poised for much deeper losses. [The long-wave business cycle is a controversial theoretical concept, originally proposed by Russian economist Nikolai Kondratiev. The existence of the Long-wave cycle has been argued, and debated by economists for many years. The truth is it will take many decades or even centuries before its existence can be truly proved or disproved, in the meantime its existence remains conceptual at best.]

-- I think I'll stop here before I jump out the window, in fact first I'll try and balance things out.....

I am a strong believer in Human Nature, in Democracy, in Capitalism, Free Enterprise and Free Markets, even though all have many imperfections (which is why we need rules and regulations, sometimes we need protecting from ourselves). I think the Central Banks have largely acted in a responsible manner the past couple of years, (even though their total and utter irresponsible behaviour in the recent past has been a major contributing factor in exasperating an already bad situation. - Al Greenspan gets my vote for world's worst ever Central Banker.) - The major world economies are generally in better shape to withstand the next few years than at any time in the past (though I could also post a million caveats). We have strong democratic institutions, political and non-political, open media, a strong humanitarian streak and living standards far better than anything we ever had. -- I keep hearing talk of how the fear is that the west is heading into Japan style deflation. If we are heading for deflation I hope it is the Japanese style. Since the early 1990s Japan has had an abysmal growth record, and has periodically suffered bouts of deflation, though nothing of a serious nature (so far). However Japan's unemployment rate has never yet exceeded 6% and it remains one of the worlds leading economies. I visited Japan a few years ago and for a country supposedly mired in recession it had an incredible vibrancy and its people certainly did not appear downbeat. The fact that equity markets were at levels less than 20% of their highs a decade and a half previous was of little concern. - I am no fool either, I know that underneath the surface there are problems, that its standard of living had not advanced for years, that it has built up a huge government deficit which has since got far worse and has to be dealt with, that it has a serious demographic problem, etc, etc. I also understand how Japanese society is very different from the major Western societies. But it would probably be best if we could ride out the next 10 or so years in a similar fashion to the way Japan has so far riden out their so called 'lost decade'.

I have also read articles that the next global depression (if that is what we are facing) will likely end in global conflict. -- The supposed rationale for this is that the last global depression ended in global conflict. -- That was co-incidence, that is all... --There were many many reasons leading to WWII, I am not going to enter that debate here, though I will add that yes economic hardship was one contributing factor to the rise of the Nazis, but that can not be attributed to the Global Depression. Also to counter this idea, what about the global depression of the 1870s and 80s, did that end in global conflict,,, NO... - Furthermore, conflict either local, regional, or global has been and remains a continuing process ---- Since I have been alive the British forces have been involved or engaged in conlflicts on one scale or another almost continuously, be it Northern Ireland, the Falkland Islands, Kosova, Iraq or Afghanistan or the Cold war (which is much better than a real war). Much the same can be said for the US and to a lesser extent many other countries. A world without war or conflict would be wonderful, however it is probably but a pipe dream. - I do accept that depressions make the world a less stable place, but also wars do not happen because of depressions.

I am not optimistic, but neither do I think 'The end is nigh'. We face a a tough decade or so, statistically we face a 'reversion to the mean' and eveything that goes with that. However, in the long run it is part of a natural process and cycle; Spring, Summer, Fall and Winter, but eventually spring will come again......

TIPPING POINTS ???????!

Overnight markets across the board saw significant moves. Chinese equities dropped sharply, the various indices posted declines of around 4-5%, this has seen follow through in other Asian indices, though not as steep as the Chinese decline. In Europe the move has seen declines of around 2 - 3% thus far, and S&P futures are currently down around 1.3%. Elsewhere global bond markets rallied, leading to a further declines in yields, with the US 10 year yield breaking below 3%. It now appears that Japan, Europe and the US 10 year government yields have all broken key levels... Meanwhile the USD has posted gains versus the Euro and the USDJPY has dropped and is moving close to the spike low posted on the night of the Flash Crash. -- Also worth noting that European spreads PIIGS v Germany have continued to back up following recent declines......
I have posted a selection of charts showing significant markets and the current move in a wider context... FWIW, I believe we are possibly approaching the end of this corrective phase on equity indices, though until the lows of late-May/Early June are clearly broken, this still has the ability to confound me and prove me completely wrong.