Top Building a la Hindenburg

TMN has been calling for a top in the making in equities for a while now and it has not been a pleasure watching the daily chop. While the calls on the USD and on Bonds have been working out as expected, stock markets, with exception of the European periphery and selected emerging markets, have been puzzling TMN quite a bit. The deterioration of the quality of the advance has been one obvious feature of this market and it is only a matter of days until we will see an initial signal for a Hindeburg Omen on the NYSE. It is striking indeed that there are so many new 52w lows during a period when American stock indices are gunning for new highs on a daily basis. However, a closer look tells the real story, the issues scoring new 52w lows are almost exclusively listed trusts and funds that are heavily involved in Muni Bonds. A large number of US states are about as bancrupt as certain European countries and the market for their bonds has been declining strongly for the last few months now.

Who knows, maybe the US government will seek an extension of the 'Build America' programme, although at the moment it does not look like it. This is politics though and therefore we know that things can change quickly...


Possibly TMN is getting caught here and is missing the point. Is it true that the market has developed a taste for privately owned enterprises over anything that is government owned? Could be, given the fact that also federal bonds have been under strong pressure lately. Let's double check:

The above chart shows that there is still a battle going on. Obviously income seekers are not having an easy time these days, the choices available are simply horrible. The Feds have done a pretty good job in pushing people into stocks, commodities etc etc as the chart below shows:

Even one of the poster boys is showing signs of deterioration, see below charted versus the USD:

In any case, TMN remains highly suspicious of current price action and believes that the same old issue, namely CREDIT, will derail this advance soon. If so, then the chart below will have to turn up asap:

TMN concludes that, as the entire advance out of the 2009 lows has been built on the thesis of credit not blowing up (for now), it should have an extremely negative impact on equities when credit actually does start blowing up! One of the next few down days on the NYSE will certainly trigger an initial Hindenburg signal. TMN fully expects the government and the FED to launch a counter attack (QE+N or an extension of the tax fun on muni bonds) as soon as this happens, which likely will produce another great selling opportunity for government bonds. It's not only income seekers who are trapped in this market it is to a rapidly increasing level also the government and the central banks. Public service has likely seen its peak, from now on they will have to work for their money or feel the consequences.

Is a big surprise for the stock indexes around the corner?

It looks like that everytime the market cannot move upwards purely due to buying power/interest then either the FED, the ECB, the IMF or the US and German governments will do the trick. First we had the QEII, then we had the Irish bailout; the ECB followed by buying bonds that nobody else wants to hold, and yesterday we had Mr "O" extending the bush tax cuts.....ohhh, and the news that the European bailout fund will not increase in size (and its TMNs opinion that size does matter these days) was just thrown in the rubbish bin.
TMN believes that no matter how hard they try, the boat will eventually sink. Some European stock indexes already look weak but the US and German stock indexes present a different story. For instance, Italy and Spain have seen the top a year ago, with Belgium showing some weakness lately and not following the recent rally.

So what about the recent rally in the US? TMN has discussed  previously the advance-decline index and anticipated a touch of the lower trendline at (4) where the market would either bounce or breakdown. TMN favoured a break of the trendline but that did not materialized. As a result, the bounce off the lower trendline has produced a rally that took us to new highs since March 2009. Nevertheless, TMN would like to be cautious as the index has not  made any new highs yet to confirm the recent new highs in the stock indexes.

Additionally, there are some other indicators that show negative divergences for quite some time now, thus, making the recent new highs a bit suspicious. For example, TMNs volume indicator shows a negative divergence as, for the moment, it has made its high back in April. The longest negative divergence appears at the percentage of stocks above their 200MA; this index has seen its high a year ago and it looks like the downward trendline still provides good resistance. Similarly, NYMO shows negative divergences for about 6 months and its very close to zero. All the above makes TMN to believe that there is a great possibility that the market is due for a big surprise. Of course, a breakout of the advance-decline index and volume indicator will mean continuation of the recent rally, but for the time being TMN will stick with the negative divergences.

Quick note on NFP and recessions since 1950

TMN has quickly checked how well the 6 month percentage change of Non-Farm Payrolls can capture/signal whether the US economy is about to enter in recession. The chart is self-explanatory where the shaded bars denote the US economic recessions and the black line is the 6 month percent change of NFP.

Looking at the chart, TMN would like to point out the abysmal effect of QEI on the employment situation. What remains to be seen is how the QEII will affect the employment situation. Is this time going to be different? TMN believes that the employment situation is not going to improve anytime soon and will rather deteriorate going forward.