Weekly Wrap

Market Commentary

The Wall of  Worry just got a few bricks shorter – but stocks continued their relentless climb anyway last week.

Ukraine is suddenly a miraculous haven of peace, thanks to Putin’s Damascene conversion at the cease-fire talks. Greece will get its bail-out in some form or another by month-end to provide the springboard for Phoenix-like economic growth and orderly debt retirement, thus keeping the Germans happy.

And Hallelujah!  The euro is saved!

So all is right with the world – and stocks can continue their stratospheric climb.

But wait – what’s this?  The ultra-safe US Treasury Notes and Bonds are tanking and long-term interest rates are on the rise, steepening the yield curve.  And a steepening yield curve usually foretells trouble in equity-land down the road.  That wasn’t in the script!

And the US dollar lost some of its mojo last week with the euro staging a significant rebound (which I have been forecasting).

So are all systems go for stocks?  Not for the DJ Utilities, which are down 10% in recent days.

Crude oil staged a big recovery last week and the theme that I proposed last week seems to be playing out:

Crude oil up = deflation not yet assured = Treasuries down

One of the crucial factors behind crude’s rally is this chart:

An amazing 10% of energy shares are now loaned out to the shorts – and they are now being squeezed mightily.  It’s the same old story – when too many traders move to one side of the boat, it is in danger of capsizing.

I guess the conventional wisdom that there is too much oil supply/not enough demand isn’t so obvious after all.  Once again, we shall see stories emerge that will debunk that thesis – and when enough of them appear, crude will resume its decline.

It’s the classic whipsaw effect in action – and once a trader understands this, you will not be zigging when you should be zagging.

The same whipsaw action is apparent in gold/silver.  The bulls got excited as gold rallied to $1300 and were dusting off the old $3,000 target.  Then, when many bulls were ensnared, the trapdoor was slammed shut and the market was slapped down to the $1220 level last week.  Ouch.

Reading the runes, I took my profits on my longs at the $1300 level and waited for a suitable opportunity to go long again – which I did last week.  See yesterday’s MW Trader email for my recent analysis.

The Great Rotation is on

In fact, many markets are in or very close to massive trend changes.  I have noted the recent tops in the US dollar and US Treasuries and these are in major reversal already.  I am now short T-Bonds and long EUR/USD.

The last remaining hold-outs are the major US stock indexes – Dow, S&P, Nasdaq, Russell 2000.  But they will be next to turn.

We really are facing a global deflationary scenario, as I have long maintained.

And the rotation between the ingrained decades-old inflation expectations (rising stocks) and the incoming waves of deflation (declining everything) will not be a smooth transition.  Markets will be highly volatile as they make the adjustment.   Most will cling to the business-as-usual inflationary model and will only be forced to change by losses in the markets.  That is already starting to happen in Treasuries.

Last time, I forecast that we will soon see bonds and stocks decline together.  When we do, then deflation will be seen to be in command – and traders/investors will be in shock.

But my readers will know precisely what is happening – and be positioned correctly.

Of course, the politicos and BoE governor Carney have been grabbing headlines desperate to not frighten the horses.  They are stressing that yes, the UK will see negative consumer price growth this year – but that this is temporary and inflation will resume its rightful place in the economy.  So nothing to see here folks, move along.

I don’t know about you, but such assurances from our ‘leaders’ about the future is a clear sign they are very very worried.  We all should be because a sharp reduction in credit will bring the whole steaming pile of debt crashing down (see chart last week).  Maybe the February rise in Treasury yields is the canary in the debt mine?

In a lighter vein…

As an object lesson from the ‘never ever believe what you read’ department, here is a Bloomberg article where a big hedge fund sold 40% of its US shares last quarter.  At the same time, the boss was publicly spouting super-bullish forecasts for US stocks.  What a cad! 

As if you didn’t already know that there are very few pundits that do not speak with forked tongue.

SILVER

I rarely trade silver, but I keep a beady eye on it as the companion to gold.   And it has given me a very bullish signal yesterday:

 This chart has all the hallmarks of a market building to a big rally – as is gold.  I especially like the pos mom div at last week’s low.

GBP/USD

I have been neglecting GBP in favour of EUR lately, but take a look at this chart:

 I have a very convincing Head and Shoulders reversal, and now an upper tramline break.

Compelling evidence, along with the EUR/USD chart that the dollar has reversed and should be in a multi-month correction.  That means long GBP/USD and EUR/USD trades should be profitable over many weeks.

With the dollar reversing, that is putting more deflationary pressure on stocks – and that is why the bull market is on its last legs.

You can follow my trades in my TT Alert service,  Details here.

And if you want to receive my trades in real time as I make them, drop me an email at ttburford@gmail.com and I will send you details of membership in my VIP Traders Club.  I have a few openings remaining.

Have a great weekend!