Weekly Wrap

Last week saw an extremely rare event – a negative number for Q1 US GDP ‘growth’ – down a staggering 2.9%.

And because stock markets are in the late stages of a bull market, it was shrugged off with rationalisations such as ‘it was the polar vortex, stupid’. Actually, the USA has suffered many other extreme weather events in the past, and guess what? GDP did not shrink at all, let alone by such a horrendous amount – in fact, there have been so few GDP declines (except for the mammoth credit crunch quarters), you can count them on the fingers of a two-fingered sloth.

So, I don’t buy it.

But the market does! At least, so far. But this state of denial will only carry so far before before the penny drops. In fact, it will be more like the falling anvil of the famous Roadrunner cartoons!

The forecasts are out for Q2 GDP (which ends next week), and they are being revised downwards. Optimistic forecasts are being scaled back, indicating a raising of negative sentiment against a backdrop of extreme complacency (record low VIX, and weak put/call ratios).

The Dow has gained exactly 240 points since the start of the year – a measly 1.5% in six months. One way to view this is to put the anaemic performance down to the Fed’s tapering of asset purchases. There is no doubt that much of these QE funds have been funneled into equities since 2009 – and with added leverage. We know the Fed is set on its course to maintain the taper. And when the house of cards starts to fall down, a deflationary depression will result.

My guess is that the 1.5% gain will look pretty good compared with the next half 2014.

DOW

I have a clear five down on the hourly off Monday’s all-time high:

Nice positive momentum divergence at the w5 low, too. The bounce off the 16,600 w5 low has an a and b waves in the relief rally.

I am looking for a new c wave high to the Fibonacci 62% level and then a big leg down.

GOLD

Is eating through resistance at the Fibonacci 50% level:

I expect a move down in a b wave and then a rally towards my ideal target. The very high momentum is being worked off before this rally can get going.

USD/JY

Is in the early stages of a third wave down:

Market has broken below the pretty wedge and is heading for the major low at the sub-101 level. Breaking that will open the floodgates to way below the psychological 100 level.

Very interesting – and amazing COT yesterday:

Just admire how the hedgies have reduced their long yen positions by a staggering 43% last week! Now, the commercials have over five times as many longs as shorts. The hedgies hold eight times as many shorts as longs. This is about an extreme as I have seen – and a very bearish omen for USD/JY.

I remain short.

T-BONDS

Contrary to popular opinion, yields have been falling recently. That wasn’t supposed to happen! Now the Fed is tapering, where is the demand for these miniscule yields coming from? China is supposed to be dumping Treasuries, the Fed is withdrawing as the major buyer, and opinion is bearish US debt, yet prices rally.

One reason is revealed in the latest COT data for the 10-year:

Hedgies are primarily trend followers, saw the rally and jumped on board with both feet last week, pushing up prices. The swing to the bullish cause was massive – around a 15% swing.

But I believe the rally is about over and a huge collapse is near. I have changed my opinion from short-term bullish.