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Goldman: "As In Mid-June The S&P Looks Very Overvalued Relative To Yields"
Even as stocks continue to ignore the broader economic decline, and trade exclusively to kneejerks on one-time items such as Goldman's settlement and BPs pressure tests, the far more liquid and rational bond market is hunkering down. Today, the 2 Year hit an all time low yield, even as the 2s10s tightened by yet another 6 bps to 240 bps. The impact of today's curve flattening alone will have a far more profound impact on Goldman EPS than the latest SEC wristslap farce. And as we pointed out previously, the spread between the S&P and the 10 Year yield continues to diverge. In fact, it is now so wide, that in the latest John Noyce piece, the Goldman Strategist says: "As in mid-June, the S&P looks very overvalued relative to yields. Yields are also beginning to decline again as equities stall." Sure enough the reverse is also true, and bonds may be rich to stocks, but either way, we reiterate our observation that the short stocks-short bonds trade will eventually converge (luckily with the yield on the 10 Y so low, the carry is marginal and the repo rate will likely be a greater burden until the spread recouples).
Here are some additional observations from Noyce.
- This is an update on a correlation chart we’ve looked at a number of times over the last few weeks.
- It shows U.S. 10-year yields in green overlaid with the S&P in blue.
- The correlation between the two has turned increasingly positive over the last couple of months.
- At this point a similar setup appears to be developing to that which came together during the second half of June (the numbering below refers to the stages highlighted on the chart opposite):
- The rise in equities stalls and yields again begin to turn lower
- Yields continue to drop, and eventually equities also turn down, re-coupling with yields
- Overall, the S&P now sits just below significant resistance centred on 1,093-1,112, and a similar yield/equity divergence is developing to that seen during mid-June. We should begin to watch very closely for signs of equities peaking and again turning lower.
Noyce also has some bearish non-correlated technical observations on the S&P. Specifically, he sees the 1,093-1,112 level as a major resistance in a Right Shoulder formation. Also, a comparable bounce off lows into the 55/200 DMA was last seen in November 2000, when the market proceeded to subsequently drop notably as the tech bubble burst.
- There are two main points to make with regard to the price action seen on the S&P over the last week;
- The market has recovered sharply from the lows of early-July close to 1,000. The bounce has been similar to that seen following the comparable negative 55-/200-dma cross-over in November ’00, as a structural top was in the process of forming. 1,093-1,112 should now act as strong resistance and the easy part of the bounce could well have run its course. An update on the historic comparison chart is shown on the following slide
- Assuming the market is currently forming the right shoulder of an H&S topping pattern and that the time period taken to form the two shoulders should be similar, the current consolidation could run until mid-August, and likely remain within an approximate 1,100-1,000 range.
- In conclusion, a deep and sharp recovery over the last couple of weeks, but one which is currently within the constraints of what can be considered as part of a larger structural top forming. The topping process could be considered to have another 1 to 1.5 months to run given how long the left-shoulder took to form. The historic comparison with November ‘00 does however argue we should be near the top of the range, with 1,093-1,112 good resistance.
- The last time a –ve 55/200-dma cross over took place (55-dma falling through an already declining 200-dma) was in November ‘00.
- It was an important signal from a LT (multi-month) perspective, however, the averages were re-tested as resistance before the market again fell away.
- So far things are playing out similarly this time around. The negative 55-/200-dma cross over is in place and the market has come back to test the moving averages as resistance (the downtrend from the April highs and 55-/200-dmas being converged 1,093-1,112). While the market need not fall away again immediately, the similarity of the current setup to November ‘00 is quite striking. Another eventual down move does still appear the most likely outcome.
Then again, in a market in which Hurst Coefficients are approaching one, precisely the opposite of what one expects to happen, happens. Although for those who wish to gamble, a safe decoupling has just occurred between S&P futures and the AUDJPY. After tracking each other perfectly all day, the two have diverged notably after hours. Buy the AUDJPY, sell the ES, wait for convergence number 18 in a row to occur, and pick some free non-taxpayer subsidized points from your broker.
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Best indicator I've seen yet as a buy signal.
can I trade CDS on Markit.com on you?
Sure!
By the way S&P and the AUDJPY chart since Jan 09 is amazing!
Jan 08 if u r looking for trends
The correlation is no longer valid if something or "someone" is distorting it by holding the S&P... I am not joking
http://img249.imageshack.us/img249/9844/ready2r.jpg
Hehe...
Has anyone done a study on the average annual % return from fading Goldman's advice?
Thanks, I needed that.
bookmarking your comment for later fun.
I've have/seen the entire doc. Have you? shorting "Muir" via SPY gonna play out big.
Same here... even tho "Muir" does generally have some insightful comments
None of this matters because all us sheeple need to buy-and-hold. We are all long-term buyers. Everything will be better in another decade...unlike the last decade.
holy crap... i feel like i agree with GS... on everything...
do i cover?
Damn, time to go long :( Bears are screwed.
I'm convinced. I'm going all in tomorrow....LONG.
strange I make more money going short the market.....
ETF's
REVERSE ENGINES!
You: go long equities
HAL9000: SELL
You: short equities
HAL9000: BUY
Your move.
Goldie got a slap on the wrist by their friends at the SEC.
I'm sure drinks were flowing and steaks were sizzling at Del Frisco's.
Goldie promised to do better from now on.
This is the new Goldie and I think we should listen.
I am no longer in the "we printed enough money to hyper inflate the market to the moon" camp. I can clearly see we paid more lip service to Keynes than we acted on his advice. This market is going down hard and fast and it will take time to get a real dose of cash into the system. We gave money to the banks and no one else. The banks are still broken and the money that was left in the system got sucked into Fed deposits along with the bailout cash. Throw China into the mix and the Japan scenerio looks like our best case outcome.
10-year and S&P divergence is twice as large now as it was in June. The path of least resistance for S&P is down.
The correlation is no longer valid if something or "someone" is distorting it by holding the S&P... I am not joking
http://img249.imageshack.us/img249/9844/ready2r.jpg
LOL.
Ben activated the liquidity pump and Geithner ordered JPM to mark up ES futures.
Can you post the entire document?
This is the most interesting analysis I've seen today.
My 401k is 100% allocated to long AUD/JPY.
"the Hurst exponent vary between 0 and 1, with higher values indicating a smoother trend, less volatility, and less roughness."
http://en.wikipedia.org/wiki/Hurst_exponent
No Shit!!!!...all I got to say!
Time the sell the last remaining put options and go all in.
never sell puts bc the PPT may have to go on summer vaca and have but sex
Tyler, foregt about shorting bonds and stocks at no risk. Short stocks and go long bonds, and get the heck out of Dodge. This farce of a market is in imminent collapse mode. The Fed can't buy every asset on earth, and the currency markets are too big. Eventually these morons will be crushed.
Relative to yields, the SP500 looks terribly undervalued. Either earnings of equities will collapse (in the near term) or bond yields will have to rise.
that is under the naive presumption that risk stays constant... and that estimated earnings actually hold credence.
ALERT::::may be another false flag attack and stock market sell off....see this ...
strange trading going on with this power company in the gulf.......just like before 9/11...
http://beforeitsnews.com/story/102/476/ATTENTION_FALSE_FLAG_TERROR_ALERT.....
can someone explain about the influence of these companies a little better...
1. Stock market sold off in Q2 going into earnings with exception of the July oversold bounce.
2. Technicals have deteriorated, as it appears all the major market averages are in intermediate-term down trends.
3. Markets have bounced such that they are at the upper channel line of that downtrend, and could break out to the upside, but, would be doing so from short term over bought conditions, so this is not to be trusted. Also, although the markets are trading below potential resistance of the 50 and 200 DMA, which have crossed, the 200 DMA has not turned down yet.
4. The market could trade up in anticipation of large Republican gains in the house and senate in November, as this would put a kill switch on obama's legislative agenda.
5. If Republicans gain control over the house or senate, they would gain control of the crucial committee chairs and launch investigations into all sorts of suspicious activity going on in the executive branch. Congressional hearings. I fantasize about drawing up articles of Impeachment but life isn't that sweet.
6. All things being equal, if we do get the Doug Kass summer rally, and parts of the credit system start to fall apart in the fall, such as Europeon banking or sovereign debt, then we could have ourselves a new low for the year.
7. I have been impressed with how vigorously good earnings news has been SOLD. JPM? sold. INTC? sold. CSX? sold. Minimal moves after earnings with hefty volume. That's distribution and not a good short term sign.
8. I remain bearish, noting only that the market is being propped up by the tactical buy programs at the end of the day and a lack of vigorous selling except into news.
Time for Benny to raise rates, no two ways about it.
Or OMG the unthinkable...
Equities could rise????
Now this is on a 3 minute chart? I don't understand why this divergence play is always given in different time frames. 1 minute, 5 minutes, now 3 minutes?
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