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US interest rates ratchet ever higher

Yes, and one day the exuberant stock market will take note.  Here is my updated chart of the 3-mo T-Bill yield

Remember, this is a market-driven rate (as opposed to the Fed-imposed Fed Funds rate – the only rate they really can control, and they follow the market).  T-Bill yields have risen 50% in only four months – a staggering increase.

And the crucial 10-yr T-Bill yields have likewise been rising sharply.

From the July 2016 low of 1.3%, the yield has doubled to the current 2.6% – and climbing.

Meanwhile, The Dow has moved up from 18,000 to 26,000 – a gain of 44% in the same 18 months.

I find that astonishing.  The world is awash with debt, including US corporations, and a rising interest rate environment is never conducive to increasing profits.  Of course, the received wisdom is that a rising rate scene is no sweat since rates are still historically very low and the Fed would never let things get out of hand, would they?  Stocks go only one way – up, or so the narrative goes. But that attitude is a symptom of the overwhelming manic bullish sentiment that pervades all asset markets today.

Just last week, one more indication of extreme bullishness emerged: the venerable Investors Intelligence survey of professionals shows the number of bears at a 32-year low at 13%.  The bears have thrown in the towel (these are traders who provide a pool of buyers who temper the severity of declines as they take profits covering their positions).  But without bears, any wobble could well turn into a rout.

And in January alone, the 5-day average of the Daily Sentiment Index (DSI) of bulls on the S&P 500 reached the nosebleed level of 92, the highest reading in the entire 31-year history of the index.  And last week, the DSI on the Nasdaq tipped the scales at 96 – the highest ever.

We are truly in historic bullish territory.

We know that these sentiment readings are not accurate timing tools for trading purposes, but they do shout loud and clear that manic bullishness is extreme and savvy traders need to keep a sharp eye out for an historic reversal.

In terms of rout, we already have one in the bond market, which is in a bubble of its own. I managed to identify the absolute top in 30-yr T-Bonds in July 2016 at 178 and rode the waves down as hedge funds were falling over themselves liquidating their massive pile.  It now trades under the 150 level for a decline of 28 big points (16%).  And there is a lot more on the downside.

This basic scenario means only one thing: a massive train wreck is approaching in stocks.

But when? We may know the answer very soon. If the US government shutdown persists, it may signal the start of a downturn in bullish sentiment.  After all, a nations’s government reflects the mood of the people (eventually) and the US population has been split into pro-Trump and those opposed for over a year.  Will this deep division come to a head over the shutdown?

If it does, The Top in stocks is not far away.

Naturally, I am monitoring the short term waves for clues (you can get my daily analysis with a Free Trial to my VIP Traders Club).

But to appreciate the sheer scale of the bull market here is the weekly Dow off the major January 2016 low:

In all manias, such as in Bitcoin, or Tulips or South Seas shares, the slope of the advance grows ever steeper as everyone down the pub is talking shares (or Bitcoin) – and this Dow chart fits the bill perfectly. For the past few weeks, the slope is almost vertical.  To me, it is only a matter of time before it blows off in spectacular fashion.

 

Has crude oil topped?

Last time, I showed the bullish chart of crude and noted the market had punched up past the upper wedge line in wave 5 to a high above the $64 level.  But last in the week, the market pulled back and traded below that line – and that means we have a likely ‘overshoot’, which is a bearish sign.

This is the updated daily chart showing the potential break below the upper blue trendline.  This is one option, but if crude can push up one more time above the 64.80 high soon, it means the final wave 5 would be extended.  There is an outside possibility my original $70 target can be approached, but with COT data so stretched (see last COT data), I consider that at low odds

But when the final touches to wave 5 are in place, I expect a decent correction down of several tens of $s.  And after that, a new rally phase to my $70 target?

 

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