Is the Panama Affair a great big sell signal?

One of the best macro signs that a bear market has started is the uncovering in the MSM of past misdemeanors and crimes that were covered up or excused in the previous bull market.

And when the Panama Papers ‘leak’ (aka theft) was revealed this week, I knew this represented a sea change in social mood (the driver of stock markets).

Despite mounting evidence that the rally was living on borrowed time, it has managed a magical levitation act. This is not the first time – a few years ago during the dotcom bubble, valuations were getting more and more Alice in Wonderland, yet the rally continued for years – until it didn’t.

So just jumping in and shorting the market based on a ‘gut feel’ is no reliable trading technique, as many have discovered. That is what happened in February – the rallies since then have been propelled by massive short covering from an extremely bearish sentiment picture.

And as of a few days ago, bullish sentiment is now back up as investors/gamblers have taken Janet’s word that rate increases will be put off some more.

But under the surface, US consumer price inflation is creeping up as evidenced by the TIPS market (Treasury Inflation Protected bonds)

The Golden Cross is a strong signal that US consumer price inflation will pick up smartly. When TIPS are rising in value, it is normal for Treasuries to fall and yields to rise. This is not yet happening. Here is the 30-yr T-Bond yield

This is puzzling. One of them is wrong, but which one? Note that the above chart does not sport a Golden Cross with the blue line crossing down while the red line is still rising. So technically, odds favour the T-Bond yield chart will give way to the inevitable.

Meanwhile, there is still a flight to a yield, even if it is less than 3% over 30 years, that is a lot better than EU negative yielding bonds, is it not?

So I expect the T-Bond price chart to begin descending at some point in the not too distant future.

If this is correct, then with rising inflation above the 2% core target, I believe the Fed will announce a tightening very soon – perhaps as early as this summer. That would spell the likely end of the stock bull run, if it hasn’t ended already. Not many expect this scenario, and that gives me confidence it could occur.

This is the 15-min chart showing the decline off Monday’s 18,844 high. It is a classic textbook five down followed by an A-B-C up to the Fibonacci 62% retrace on a momentum divergence. This is the setup I love to trade because we are now in a third wave down – and these have been spectacular in the past.

This could be the start of a 1500 pip decline – here is the daily chart