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TMN

Top building process - Copper will lead the way

Clearly at an important point at the moment: Copper. In USD terms as well as against Gold, Copper is at extremely crucial points with regards to the short to medium term. The recent sideways action will result in some kind of larger move either way. 

TMN has been making the case for a major top building process being under way and therefore still favours selling rallies in 'risk'.


Oil and Silver will find a top at some stage, just like they did in Summer of 2008. 


TMN believes firmly that there will be at least a temporary break to endless liquidity provision and markets are starting to look at this now. 












This sobering process is likely to show quickly in the real economy. Purchasing prices are already hurting some it seems.

Volatility has bounced off the 16 area on multiple occasions over the last 2 years and it seems that now it is attempting to gather some steam for a significant advance into summer.

The easy money tide is about to turn!

As everyone who has not suffered brain damage will understand, stock markets, for the last 2 years, have been fuelled exclusively by the availability of cheap money. The tide is about to turn. It is a process and it will not happen over night. The markets however will be anticipating the action in advance. TMN has called for a pause in the decline of the bond market a few weeks ago and we have seen a decent bounce since then. In order to achieve a breakout on the top USH1 needs to rise above 122-09. 

As per TMN's last post a couple of weeks ago, "risk" is topping out and especially TRAN has not been looking good lately. In fact, the TRAN are very close to a bearish monthly key reversal.

The USD saw some pressure last week but recovered on Friday. On the weekly charts it is pretty clear that major support is coming in now. TMN is confident that it will hold and bounce off there. 81.44 remains the key level that will turn the USD view of most participants upside down once it trades.

And finally one of the most important big picture charts TMN can think of:

Bonds will take a decision here - "Risk" topping out

TMN has called for a decline in Bonds a while ago and gradually lightened up on the position. Every time the equity market has been as annoying TMN the most bonds seemed to feel the pain and started/kept dropping. We have been through some kind of consolidation now since December and lately bonds decided to break below the recent range albeit not by much. In yield terms this has led to a touch on the down trend line from some years back. It happens to be just at the 50% fib level between the 2007 top and the 2008 bottom. 

Obviously a decision is coming up shortly. What is likely to happen? Hard to say. The bond market is the lifeblood of all bailout policies. 

Easy money's unintended consequences are making their way into politics now, as events in  Tunisia, Egypt, Algeria, Yemen, Jordan, Syria and Pakistan impressively show. In a way it is a H1 2008 replay, as inflation fears at the time were also widespread. If TMN is not mistaken it was all to go the other way shortly after the inflation scare:

Bonds are threatening to put an end to a 20+ year bull market, commodity prices, especially soft commodities are threatening to hit vulnerable nations, this makes TMN wonder how much longer western politicians will let this bailout brain damage go on?! Precious metals, widely recognized as a good hedge against inflation, have stopped their advance a few weeks ago. Gold, in fact, looks a bit damaged unless it trades up and above 1394 soon again. The Gold/Silver ratio however has been dropping ever since QE2 talk started relentlessly. Should it reverse, the top in "risk" will be nigh. Silver has started showing some cracks recently, too:

It's all about easy money in the end and it might just come to and end... Be sure the markets will let us know!

Cross roads across markets

Generally speaking the market has been lining itself up at a cross roads and this applies for most asset classes. It is still the same old story between USD vs anything else. TMN has been leaning towards the side of the USD in the medium term and gold for the long term whereby it has been difficult to be long USD over the past two weeks. TMN however believes that a major buying opportunity in USD is unfolding in front of our eyes and most other asset classes' behaviour is backing this view up. 


TMN is amazed with the number of charts that look horrible after this past Friday. We could show them all if you have a week... Below you will find a small best of collection that shows that the current crossroads could be linked to something larger. The run up to this cross roads felt like it lasted forever but now we are here and TMN believes the trading opportunities coming up will be immense. 


Since 2007, VIX has given 3 SPX related sell signals, and all 3 were generated whenever VIX bounced off the 16 level . Additionally, we also had two extreme SPX sell signals that were generated with a VIX weekly close above the 38 level; the first being just before the Lehman collapse and the second one in May last year. TMN believes that the extreme selling last May was also averted/contained  in some way by the usual suspects.


So far VIX has bounced off the16 support level, initiating in that way another SPX sell signal. It has also closed above the mid-BB, and as a result, a trip to the 23 level and the upper-BB is in the cards to start with.

Also 1 month vol over 3 months speaks for itself

One of the two has to break down. So far it has been very hard to understand if the mkt has identified a long term trend there. It seems that everybody will again be looking to the government...

With obvious results elsewhere...

..and as expected small caps are underperforming...

Crucial for all of the above to play out as expected is the USD.

A weekly close above 80.16 seems a first realistic target, achievable quickly, and thereafter TMN will be looking for the long awaited breakout thru 81.44. Once that is achieved the general perception on the USD might shift meaningfully in a sense of people will be starting to see higher lows from 2008 on this chart. 

Credit Crunchy China

We start with China and SSEC. An interesting point that TMN would like to show is the symmetry, in terms of points gained, after the long holiday break in 2009 and 2010. As it can be observed in the chart, SSEC opened with a gap up and gained exactly the same amount of points in 2010 as it did in 2009. If the 2010 pattern unfolds similarly to the 2009 one, then we should see further losses on the index going forward.

Furthermore, liquidity in the Chinese markets seems to be giving alarming signals. The 1 month SHIBOR has been going up for some time now and is hitting levels that we experienced back in October 2007, when the US stock markets topped out.

Staying on the Chinese markets and taking into account that the Baltic Dry Index has been falling apart, makes TMN to believe that there is something brewing in China, its liquidity health, and demand for commodities.

Finally, divergences in the US stock markets are all over the place.


TMN's volume indicator is exhibiting a huge negative divergence similar to or even greater to the positive divergence at the beginning of 2009 that ignited the rally off the March lows. Looking at the more short term indicators, percentage of stocks above their 50/200 moving average and the NYMO the picture does not really change.

So what is really going on? Last week we saw the Spanish and the Greek stock indexes rallying like there is no tomorrow......and yes, TMN thinks that there may be no tomorrow for those two countries but on a negative tone and not a positive one as the indexes signalled last week. Maybe this was similar to the short squeeze the markets experienced back in September 2008 just before the Lehman Brothers collapse.
TMN also believes that municipality bonds will affect the stock markets sooner or later; and combined with the European sovereign problems and the apparent Chinese liquidity problem will lead to a very nasty outcome in the near future.

USD ahead of the crowd again?

Well, TMN would like to believe yes as many growth negative set ups are coming together. The main driver seems to be the USD and it is looking higher. A weekly close above 81.44 would be a hugely bullish signal. This would get a large part of the market suddenly seeing higher lows from 2008 on this chart. 


Gold bounces back versus copper coming back from the QE2 related decline. There is never any trouble in asset markets without this ratio not only participating but usually leading. 

Do we want to trust the government? See below 30 year bonds versus SPX.

In the very short term risk seems to be rolling over

See also small caps:

For a while TMN has been going on about Spain and the IBEX and it ain't looking pretty at all! In fact its close to a massive break on the weekly charts. 

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.

Bonds might get a breather here - taking some profit on the short 30y bonds

TYX has had a good run since recommending the trade about 7 weeks ago. However, there are some tactical issues that make TMN think it might be a good point in time to pocket some right here. The advance in yields has been pretty furious and almost one way traffic, even politicians and central bankers have spotted it. Even worse, the markets are starting to show their dislike, too. In this case the example is taken from Germany's Bund auction, which is really the next closest asset class to US Bonds. In terms of general direction there is rarely much difference between the two.


Failed auctions are not something politicians in the US or Germany can tolerate, therefore, be sure, they will do their best to deliver a "reason" for buying this paper again. Display of power helps in such cases and it is pure coincidence of course that the American aircraft carrier 'George Washington' is headed for Korean waters anyway these days. Russia coming closer to the "western democracies" militarily also helps the case naturally. The Germans for their part have been beating the drum about haircuts which is surely short term bullish news for German Bunds. 


TMN is absolutely certain that politicians/central bankers will deliver the next gaffe (thank you Mr Weber, you are full of surprises, NOT) that will send bond yields higher again but in the short term, possibly into early 2011, bonds could find some support and retrace part of the lost ground. TMN will remain focussed on the emergence of buying opportunities in TYX / selling opportunities in T-Bonds. 

Sell off likely to continue.....

Since the last post on 15/11, when SPX was trading at 1197 and TMN argued for a continuation of the sell off ,things have not changed much regarding TMN's target of 1150-1130.

The NYAD chart seems right on track for the reckoning day; are we going to bounce hard from the lower trendline (marking wave 4) or are we going to experience a breakdown? TMN believes that current events around the world certainly do no support the notion of the lower trendline providing support, but for the time being its target remains at 1150-1130.

Other charts supporting the continuation of the sell off are that of the percentage of stocks trading above their 50 and 200 moving averages, and TMN's NYSE volume indicator. On the upper panel of the chart the percentage of stock trading above their 50 moving average has already given a sell signal (pink vertical lines).
On the same note, the percentage of stocks above their 200 moving average (lower panel) exhibits a negative divergence since Oct. 2009, and once again, it hit resistance on the downward trendline.

Regarding TMN's volume indicator it seems that after the March-April spike it is now quite clear what the trading levels for the indicator are. Having hit resistance, it is now headed to the first support level. TMN believes that all the above ingredients support its call for a continuation of the sell off.

Finally, on 8/11 TMN suggested a possible wave count for the Spanish IBEX. Certainly the European periphery problems  will most likely continue, with counties like Portugal and Spain following the Greek and Irish examples (TMN also thinks that Belgium is another candidate and it will analyse this in a future post). Back to the chart of IBEX now, it can be seen that the wave count so far looks good, with possible wave 1 of (iii) of [3] almost done. Of course, wave 3 of (iii) of [3] can unfold in a different manner than that suggested by TMN, but it certainly looks like IBEX is heading towards big trouble.

Sell off has more to give....next possible target SPX 1150-1130

Since the "bull" phase of the market that started back in March 2009 one candidate that has excelled in all tests is the NYAD.

Starting in March 2009 all the moves in the NYAD have unfolded in a 4 wave fashion. Waves 1-3 mark the upward trending of the stock market indexes, with waves 2-4 being the corrective ones so far.

Currently, it looks like wave 3 is completed and all that remains to be seen is if wave 4 will bounce on the lower trendline; otherwise, something bigger is in the cards for this sell off.

Another ability of the NYAD, thus far, is that of predicting bottoms, tops or breakouts (bold blue vertical lines). For instance, it has captured the bottoms of July and November 2009, as well as, the bottom of July 2010. It has also captured the break out of March 2010 that led to new highs and recently it has caught the top.

The way that NYAD looks at the moment says that there is more room for the sell off to continue; and when it reaches the lower trendline, TMN believes that we either fasten our seatbelts for a wild ride to the downside or we continue as normal and start another leg upwards.

USD Index strongly up - Euro periphery issues: suggested IBEX wave count

The USD produced a strong up day today vs most other currencies. The commodities bloc is showing more resilience for now, however, with Oil failing one more time at $87 this resilience might be short lived. TMN has been looking at the USD as a medium term buying opportunity and it seems like this will be the start of a nice journey. 

The IBEX closed again in the red today. TMN believes it will join the Dublin and Athens indices in the land of darkness soon. Please see the chart below for a suggested wave count. 

European Periphery Trouble Round II

In May 2010 it was labelled a "bailout of the Euro", which it clearly was not. Markets anticipated a US style QE which is what put pressure on the Euro back then. In reality it was a bailout of European banks that were and still are large holders of Greek, Irish, Portuguese etc sovereign debt. As immediate debt monetization was avoided, the Euro rallied vs most currencies in the aftermath throughout summer 2010 and has hit its best levels last week on the back of the FED's QE2 announcement. TMN has come to the conclusion that after all the timing of QE2 might have been picked in a rather clever way by ZimBabaBen and the 40 thieves. With the pressure on the Eurozone mounting again, as sovereign spreads are blowing out, the focus of the market's attention is likely to shift away from the USD. As TMN has been pointing out for a couple of weeks now, a major turn in the USD seems more and more likely. The technical set up has been the strongest in years. The European periphery troubles might be the catalyst that finally will push the USD higher and international equity markets lower.

The Greek stock market index has been consolidating on low levels for a while and now looks ready for the final push into the land of darkness. TMN is expecting a hefty decline that will probably last into mid 2011. It is TMN's deepest conviction that it would have been best for Greece to default long time ago and default within the next 6 months remains TMN's base case scenario for Greece. German officials have spent most of last week managing market expectations in anticipation of what's coming next. 

Of course it is not only Greece that is in trouble, Spain is where the big trouble will come from, trouble that has a good chance to impact availability of finance across Latin America severely.  The IBEX chart below looks clearly broken.