QE Stumbles at the Starting Blocks

Global interest rates are rising, which is not what Bernanke had in mind with QE. The US 30-year auction went poorly yesterday, reflecting a change in psychology of the Treasury markets the opposite of what QE is supposed to engender: according to this morning's WSJ, fear of inflation is trumping the Fed's buying power, and rates are rising.

Bond buyers have bought ever-lower yields expecting they could bail out if rates began a persistent rise. The spread between the 30-year and the 10-yr has increased in one of those parabolic curves which tend to end badly:

PragCap observes that this means bond buyers are eschewing the long bond so as not to be locked into rates close to the 10-yr, which means the market is expecting rates to rise and the 30 Year Bond Bull to end. Since the QE pre-announcement at the end of August, the long bond has gone from below 3.6% to above 4.2%, a huge move. Can owners of large positions get out fast enough? This is PIMCO's nightmare come to life.

The Dollar continues to firm while the Euro seems in trouble. The sovereign debt problems of the PIIGS have returned. The Euro is close to $1.365, a level which could trigger a dump of the Euro. The AUD remains above parity after ticking below $1 yesterday, and it too might get a sell-off if it breaks 99.5c. 

To follow this more closely, note that EWI is offering their forex services for free this week. Click here if interested. 

Even stocks are not reacting as Ben expected. Recall that his stated reason for QE2 is to drive stocks up, creating a wealth effect that restores confidence to the economy and spurs more business activity. It is not just that stocks have flatlined since the QE announcement, but insider selling is way up:

• MIsh congratulated Cisco insiders for getting out ahead of the earnings debacle last night, which sent shares initially down 15%: over the past six months, the Cisco scorecard is 6.6M shares sold, 0 share bought
• ZH reports that insider selling hit an all-time record last week:

Contrarian footnote: while insiders are selling and global markets are reversing, bullish sentiment soars! Small investor bullishness is back to 2007 levels! This is what happens around a top. 

Comments

[K.D.]

Run, bears coming!
Big, nasty permabears!
Boy, are they hungry!
Revenge pouring out their ears.
Revenge from all the false predicaments
made since March 2009.
Weeks and terrible long months of suffering.
Now the day has come.
Free honey to all!

[Edwin]

UK and California kids are paying more for their college degree. People everywhere are MAD....Nothing works... Bad news everywhere.

so where are we headed?

[Hank Wernicki]

Small investor bullishness is back to 2007 levels!

This is what happens around a top.

Sentiment can linger for months ...

[JT]

NY Fed will most likely target maturities around 5-6 years for QE-2.

[Roger D.]

The JNK is looking toppy here,but could have one final high to complete it's supercycle top.

Roger D.

http://www.screencast.com/users/fast996/folders/Default/media/eac5a1e2-7d32-4a78-ab29-bf6f8ba59a98

[Sobranie]

Wave Rust, where are you at? I am interested to hear what you have to say about the end of the week and possibly next.

Thanks for all the good advise.

[JT]

FCX hit $108.11 today.
BTU traded nearly $60.00
with WLT at $99.00 and JOYG at $75.00

Poor Perma-Bears.
They've missed the entire move since the July low.

[OracleLurker]

Everything silver related has held up pretty well for supposedly having completed a blow-off top on Tuesday. The action in HL, SLW is exactly what I was talking about when I was arguing for seeking out some alpha. And if the long awaited correction does materialize soon and we continue to see relative strength in these names through a period of weakness in the broad market then I'm not sure what more a signal anyone could ask for...

And as far as what happens around a top - I don't disagree that we are due for one but the more important question is what kind of top? How much money is there parked in the long bond that needs to find an inflation hedge? Do bull markets end with the market just powering higher as indicators reach thresholds that "on average" have marked intermediate term tops? Maybe they can - although this was not the case in Oct '07. Just wondering aloud but it seems to me the market hasn't really given any compelling reason to doubt the primary trend - so the next correction can be bought even if it were only to lead to a slightly higher high or retest of wherever this current move runs out of gas.

[OracleLurker]

Also the next lowest insider net buying/selling score trough on that chart appears to have been in Oct '06, coming nearly a year before the '07 top.

[Wave Rust]

sew brain knee,

was hoping you could tell me. if you make a chart with bars of 3 weeks, it's just one big boring doji.

i guess all is lost if nobody knows.

jack and jill are standing in the middle of the hillside. maybe they will tell us whether they have water in the pail.

then we will know.

wave rust

trading is easy once you figure out the hard part. this is a hard part until it's obvious it really wasn't. :)

[dlu]

China plunges 5%.

[trendlines]

South East Asia back at all-time-highs!

The last time i showed this chart, price was just hanging below the upper parallel line. Since the breakout, we've had a powerful run in SE Asia, led by Indonesia(which has gone on to all-time new highs). With overbought negative divergences across major indices & the dollar potentially rebounding, we could see a pause here before an eventual breakout to new highs. Support is just below the 170 area on this chart.

http://trendlines618.blogspot.com/2010/11/south-east-asia-back-at-all-time-highs.html

[trendlines]

Shanghai Composite Plunges: Was it the Interest Rates?!

"Chinese Stocks Plunge"
"China Raises Rates, Jolting World Markets"

Just google, and you will find a few dozen reasons trying to explain why Chinese stocks plunged over 5% today. The question: Did these websites or analysts help investors GET OUT in time? Nope.

Ok, fine. So did they help investors GET IN, in time for the rally? Here's another 'expert' analyst view in June 2010, with SSEC trading around 2430:

"No upside to China stocks as credit tightens, strategist says"

Subsequently SSEC has gone as high as 3180, a 30% gain! So much for expert opinions.

--------------------------------------------------------------------------------

So who knew about the Rally?

Folks who read up a bit of Elliott Wave Theory & basic Technical Analysis, knew with some degree of probability, that a five wave move in one direction is generally followed by a 3 wave move in the opposite direction (most of the time). This was the basis of the bullish call a few months ago on this blog.

And how about the PLUNGE today?

The extent of the decline (a whopping 5%) was not possible to envision, we sure were setup for a fall. Although i couldn't publish this chart in time, here's three technical observations about the setup (see chart below):

1. Historical Resistance at 3180
2. Overbought with a clear negative divergence on the Daily chart.
3. Overbought on the Weekly chart.(not shown)

And the catalyst (Interest Rate Hike) magically appears at this juncture! For the fundamental folks, this was a classic example of how technicals can help time your investment decisions better.

So what's next?

This move down looks like the back-test of the breakout above the downtrendline. Crucial historical support is also nearby around 2900. If we stay above the line, we may go sideways here for a bit before any attempts higher. I may buy SSEC around the 2900 level, with a Stop at 2850. An unlikely break down here below 2850, changes the picture, and has support at 2700. Watch the volumes on this pullback for clues.

The medium-term target of the previous high of around 3480, still stands for now.

Hang Seng Index - very short term

On a side note, HSI has corrected as well, and seems to be developing a positive divergence on the hourly, indicating potential for a handsome rebound sometime next week.

All the best!

http://trendlines618.blogspot.com/2010/11/shanghai-composite-plunges-was-it.html

[Hockthefarm]

I thought Taleb's analogy of Ben Bernanky's economic risk assessment to the moves of a Bingham Plastic were right on.

The real laugh is the fact that the Prechter's and Dent's of the world are timing stock movements based on their understanding of when the ketchup flows out of the bottle. It can't be done. Period. About all you can say is that it will eventually flow.

This is a day traders world with tight stops and probably will be for several years to come.

Hock

[Wave Rust]

channel cats are bottom feeders and they are starting to buy

sweet treats at 1195-7

maybe better buy on monday ,,, better risk to instant trader gratification/reward

wave rust

[JT]

I'm SHOCKED that the bond and commodity markets have already discounted QE-2 with their rallies since the Economic Summit in Aspen over Labor Day weekend.

Downright shocking!!!
:)

[DG]

Nice reversal. Still within the range I was looking for. We'll see if it sticks.

http://yelnick.typepad.com/yelnick/2010/10/bullish-golden-cross-to-follow-yesterdays-false-break.html?cid=6a00d8341c563953ef0133f53fd2e5970b#comment-6a00d8341c563953ef0133f53fd2e5970b

[Whitebear]

DG, my inquiring mind would want to know why the market would drop back if we're just begining to see the banking sector breaking out.

Notice how the XLF index is now above 200MA and 50MA and both MAs are now trending upwards. I just can't reconcile the fact that XLF is breaking out while the broad market will be correcting.

[Account Deleted]

Dow Jones Weekend update
http://niftychartsandpatterns.blogspot.com/2010/11/dow-jones-weekend-update_13.html

[DG]

Whitebear,

I don't know if the market will drop back bigger-picture, but if it does and the XLF breakout fails, it will fail for the same reason all failed breakouts have failed in the past. It was simply time for the market to reverse. As I said in the post I linked, trees don't grow to the sky. That includes trees that are taller today than they were yesterday.

[George]

yelnick,

From your prior experience how long can this go on:
http://www.avc.com/a_vc/2010/11/storm-clouds.html before a top is in? You are seeing similar in the VC tech world, no?

[Account Deleted]

US Dollar Weekend Update
http://niftychartsandpatterns.blogspot.com/2010/11/us-dollar-weekend-update.html

[OracleLurker]

I would say the XLF hardly even broke out to begin with - it's more important for the leading sectors (resources & tech) to hang on to the bulk of their gains during this corrective period.

[Wave Rust]

Anybody using these glasses?

I might try these.

http://www.superfocus.com/The-Superfocus-Technology

wave rust

[yelnick]

george, fred wilson (A VC) is a great student of the new wave of venture. his newest fund is doing very well from all I have heard. he is talking about the SuperAngel phenom that I have blogged about recently (just click on the 'venture capital' tab at the top of the yelnick blog). capital flows into any promising area until it overdoes it, and the superangel category has attracted a lot of attention.

what his Storm Clouds post refers to are the early indications of a bubblet in these Internet deals. I say "bubblet" since the total capital involved is a drop in the bucket of all the venture money floating around (still). indeed, one strategy of the mainstream VCs to scuttle the superangel movement is to bid up deals, using their capital as a competitive weapon.

your question is whether this is just another market of many that have shown bubblicious behavior recently, and is it also pointing to a top?

the history of venture says no: VC bubbles are of a different sort. call them "good bubbles" vs "bad bubbles". good bubbles are capital flows into areas that are expected to produce high returns; bad bubbles are flows driven by cheap money.

I am immersed in the VC world, and the flows coming in right now do not reflect cheap money; indeed, it remains very difficult to raise a venture fund. the flows reflect the promise of very high returns after a lost decade of venture

As an aside, the cleantech bubblet of the past four years is of a more troubling character. there is a lot of potential in cleantech, but many of the deals are dependent on continued government stimulus and subsidy, and in a period of austerity the subsidies may dry up before the new technologies prove out. the type of bubblet fred wilson is referring to are deals which have completely eschewed government subsidy and are trying to avoid entanglement with government regulations.

[George]

yelnick, many thanks for that. you put this in a perspective that had not occurred to me.

george

[yelnick]

wave, on the glasses, I have seen prototypes. they are tempting to try. The early versions looked very clunky, but the production ones might be passable in polite company.

[Account Deleted]

DG !!

Do u think market has topped out and this whole rally from March 09 has ended and we are in a C leg (of whatever a Triangle or a FLAT).

Can u please post your Latest count on SNP500.

Thanx in Advance
VB