Finally! I have read a quote from a money manager that seems to understand how markets really work. In a Bloomberg piece about the tumultuous Turkey shoot, he comments about the record pull-out of South Korean investments in Turkey: This has more to do with market sentiment than credit risk.
Folks, markets have everything to do with market sentiment- and especially credit risk. You can throw all sorts of clever mathematical manipulations at market data (and today’s economists certainly don’t hold back in this department), but the bottom line is this: How people perceive credit risk depends on how they feel. Some may feel bullish and some will feel bearish (and some neutral) – and the overall sentiment will drive the markets either higher or lower.
Of course, the money manager really doesn’t acknowledge the pervasive effect of sentiment. he only penned that because he could find no rational reason for the pull-out of investments. It’s the standard answer from those who believe the news drives the markets but couldn’t find any news to fit. Despite all evidence to the contrary, they still cling to that belief in a semi-religious zeal – and long may it continue, as it provides us with terrific waves on the charts that we can play!
Let’s take a simple case of a big data point, Say the US unemployment rate comes out at 3.9%. Would you consider than a bullish, bearish or neutral number? And would you use any historic data points to arrive at your judgement, or would you choose based on how you feel after reading a few MSM articles full of quotes from prominent gurus? If you are feeling bullish and your analysis suggests a bearish stance, you would be conflicted, so what would you do?
You see, a data point is just that – until it is interpreted by human intervention and that will be determined by how traders feel (sentiment). At market lows, a ‘bad’ data point is often considered ‘good’, and vice versa. A high GDP number is often considered bearish at market tops because most believe this will provoke the Fed into raising interest rates (bearish). At market bottoms, it would be considered bullish.
So where are we – at a market high or, as some believe, just about to take off?
Although all paths for a market are possible, not all are probable – and I would set the ‘about to take off’ stance at the depths of the improbable category.
Today, I believe may well go down as a Red Letter Day (for the bears). That is a pretty bold statement as the day s not yet over! Nevertheless, not only do I have complete five waves of many time scales in all of the US stock indexes, but there are some yawning divergences between several markets.
I pointed out divergences in my 4 August post and noted that when major divergences crop up, they do so very often at major turns. Here is another major divergence – between the stock indexes and Dr Copper. Remember, copper has the reputation of calling changes in economic growth ahead of stocks – and well ahead of the data.
The Dow has been relentlessly advancing over recent years, and here is copper over the same period
From 2016, they both advanced pretty much in lockstep and both topped out in early 2018. But whereas the Dow has recovered strongly, copper has been in free-fall. That has created a massive divergence.
Of course, you might say that the economy doesn’t need so much copper today as the force behind growth is electrons, not metal. But that overlooks the huge amount of copper installed in residential homes – and I see no sign of a diminished appetite globally for more housing.
In any case, the reputation of copper prices as a leading indicator is a strong one and i would be reluctant to ditch it in a ‘this time is different’ rationale.
Another major divergence is the performance of gold and silver.
Gold is not making a new low but silver is (it is down over 40 cents as I write)
We are in the middle of that divergence and gold could join silver in making new lows in the next few days, but my guess is that we are witnessing a selling climax in silver where bearish sentiment is pushing to an extreme (DSI bulls were around 8% recently and should move even lower this week).
If so, the approaching rally will astonish most. I am on high alert for this reversal.
And in the stock markets, there continues a large divergence between the US indexes and just about everything else, especially Emerging Markets. And of course, EM currencies are getting mightily whacked against the surging dollar. EM interest rates are being frantically raised by the local central banks and sovereign bond yields are shooting up.
This is a multiple whammy for those nations who are so loaded up with dollar-denominated debt, there appears no way out. I believe many will take the Argentine Option – and default. When word of that spreads, global markets will be thrown into chaos with lots of red ink.
The exodus of thousands a week from Venezuela is just the start of what I believe will be an even greater movement of people away from the horrors of living in countries with plunging economies.