Markets – Macro – Technicals

Weekend Charts: Song of the Mermaids

carib_mermaidFor years boatloads of investors have been falling victim to the song of alluring mermaids who promise them safe passage on account of wonderful weather and their boats being sea worthy. Yet invariably on the way the weather turns horrid and the boat sinks and mermaids begin their song anew. Their familiar chorus line: Bears are idiots, the weather will be fine. Trust us.

The current state of the market has us hearing the chorus again loudly. Recall last year bullish analysts all announced higher $SPX targets on account of a growing economy signs of which included rising yields, rising oil prices and a healthier consumer.

Well here we are, we’ve reached dry land, but note the chorus seems out of tune . Yields have been shrinking:

10 year

Commodities, including oil, are indicating anything but an expanding global economy, but rather are collapsing on a scale more reminiscent of a crisis brewing:

CL

Last Friday’s complete collapse of anything yield and commodity certainly point to a sinking ship:

Comm yields

And meanwhile the average family, well not so much:

FRED

The mermaids in our story are global central bankers that are fully acting like it is 2009: Sing a song of safe passage.

Consider the Dow Industrial Average. After the powerful bounce off of oversold conditions it has not even had a down day of note since the middle of October. Indeed since then we have had a barrage of central bank intervention and jawboning. The Bank of Japan expanding QE and the Chinese cutting interest rates and the ECB via Mario Draghi talking excessively and constantly about introducing a “whatever it takes” QE program. Not to mention of course the Fed’s Bullard getting the party started with his “QE extension comments” when markets needed a mermaid urgently.

So yes you get a chart like this:

Dow

Multiple unfilled gaps, completely overbought with an RSI north of 77 and unrelentingly higher. Multiple indexes around the globe have increased in value by 14-20% in a matter of weeks. Price movements like this used to be called hyper-inflationary.

If this chorus does have a familiar ring to it let me reassure you: It does. Let me walk you through the historically well documented composition.

Prices rise slowly at first, but then more consistently so and an era of invincibility forms where prices accelerate and people start believing their own narrative: Bears are idiots, prices will keep rising and this time is different (the weather will be great and the ship is sea worthy):

NDX 2000

Then the weather turns bad and the ship sinks:

NDX 2002

But then the mermaids come to the rescue with lower interest rates and push the boat into monthly RSI levels above 70 again and bears are idiots again:

SPX 2007

And then the boat sinks yet again:

SPX 2009

But no worry, the mermaids come to the rescue again, lowering interest rates to 0% this time and pushing RSIs back into the mid-70s:

SPX 2014

Don’t worry, the weather will be fine and the boat is sea worthy. Prices are sustainable after all, get on board and fly the friendly skies:

LUV

All this is to say that the perception of price and value is a very fickle one. Bears have been called idiots many times before only to have been proven very right. As it stands markets have reached dry land completely wet and exhausted from the journey and rescue.

The bullish asset allocation has never been higher as fund managers and investors are all chasing the same asset classes by mermaid induced rescue. The Rydex bull/bear ratio is now at a record low of 0.06:

BUll Bear

Yet money flows and RSIs keep showing underlying weakness:

SPX weekly

And the advance/decline action continues to show a rather unconvincing picture:

NYAD

And despite the bullish new record close headlines prices show little progress outside of central bank intervention. Since China lowering its interest rates we’ve in essence been stuck in a 5 handle range with gap ups being sold into:

SPX 5 handle

In fact one could argue that the entire November journey has been a mermaid driven affair:

SPY Nov

And the $RUT? It hasn’t gone anywhere in 5 weeks:

IWM

For now the vast majority seems to believe in beautiful, benevolent mermaids.  I just hope they are not finding themselves falling victim to the deceiving song of a siren and end up on a deserted island instead of the promised destination.

siren

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