Market Analysis

Diamond in the Sky

diamondA month ago I made a case for shorting the Trannies via the $IYT north of $145. As it squeezed above $148 I triggered another trade for an average position of $146.6. The case for shorting the trannies was based on an extreme deviation from historical moving averages suggesting a reversal trade in the works. As cash continues to be forced into any yield generating assets it can find, profitable or not, large dislocations are occurring all over the place and I’ve been pointing them out at length. The trannies represent one of these dislocations:

TRAN monthly

A curious thing has happened though in the month of June as markets advanced relentlessly with barely 3 real down days to speak off as the trannies basically traded in a tight range producing a bearish diamond formation:

TRAN daily

There it is shining like a diamond in the sky with a negative RSI divergence to boot. Now the airwaves are filled with people that deny the existence of bubbles despite the existence of charts like the $TRAN and many historical monthly and weekly deviations never seen before on many indices. The pack of deniers is led by “no inflation, no bubbles” Janet Yellen who seems desperate to want to appease markets with her continued efforts to deny the obvious.

Tonight’s surprise annual release by the global banks’ central transaction clearing house B.I.S in Switzerland is calling Janet Yellen and her ilk in essence liars. A curious event as she is sitting on the organization’s board. At best the very clear warning and direct statement has to be viewed as a slap in the face:

An organization representing the world’s main central banks warned Sunday that dangerous new asset bubbles were forming even before the global economy had finished recovering from the last round of financial excess.

Investors, desperate to earn returns even as official interest rates are at or near record lows, have been driving up the prices of stocks and other assets with little regard for risk, the Bank for International Settlements in Basel, Switzerland, said in its annual report published Sunday.

The language in the 2014 edition was unusually direct, as was its warning that the world could be hurtling toward a new crisis.”There is a disappointing element of déjà vu in all this,” Claudio Borio, head of the monetary and economic department at the B.I.S., said in an interview ahead of Sunday’s release of the report, which he described “as a call to action.”

Well there you have it. Two completely different versions of reality. One which claims that trillions of dollars of liquidity and record low interest rates (including now negative rates) that force everyone into the same asset classes (including central banks buying stock directly) is not resulting in bubbles and one reality that clearly states that it has already done so.

It is refreshing to see that some people in the central banking world have finally decided to call a spade a spade right at a time when there’s a diamond in the sky and it shines bright. Let’s see what happens.

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