November OpEx Update

naufalsanaullah's picture

The S&P 500 remains in its downtrend from October 2007 and its rally from March is getting very extended, as the risk asset melt-up courtesy of the ubiquitous dollar-funded carry trade runs dry of dollar liquidity. Gold powered through to another new high today, breaking the $1148 level, while the Dollar Index rallied to 75.65, days after making a new 2009 low at 74.75. The S&P priced in gold is now back to April levels, having topped out in August at January highs.

 

The Advance/Decline line has been in a channel since March and after its most recent resistance touch, it has made a lower high, implying a reversal at hand.

The liquidity driving the rally, courtesy of the $300B in Treasury purchases by the Fed, has run dry, the last POMO occurring in October. This monetization liquidity has high correlation with the S&P's bullish march since March and with even Obama now considering the possibility of a double-dip, the mean reversion fundamentalists are looking for should be occurring soon.

Short-term T-bills have gone negative and bond yields have been in a steady downtrend since June, indicating the bond market is prognosticating deflation, at odds with equities and commodities markets. Fixed-income markets tend to be much better predictors than stock and commodity markets, supremely evidenced by the credit events since mid 2007, so this is a bad sign for stocks.

The S&P is showing lots of momentum divergences at these levels, indicative of a top/reversal, especially on the daily chart. After making a third consecutive higher high on the 11 (on decreasing volume), the S&P has sold off back below the 1100 resistance level, marking another failed breakout. This week showed unique fibonacci confluence with the S&P 500, as it sold off from its 50% price retracement (around 1120) and also has had a 50% time retracement of the 512 days from October 2007 highs to March 2009 lows, with November 17 (incidentally the closing high of the S&P this year) marking 256 days since the March bottom. The S&P has also completed its retest of the rising wedge trendline it broke down from in late October, and has reached the resistance trendline of the bear market channel that has defined its performance since its October 2007 top, in addition to the long-term resistance level at 1115-1140. This resistance "range", in my opinion, will mark the top of this rally, and with the market now touching the bottom part of that level, it is at risk for reversal.

A big reversal, at that. Liquidity chases beta, as has been overwhelmingly evidenced by the massive outperformance of high-beta names since March, as well as the beta-chasing, momo nature of the rally. Volume entering on the sell-side in these stocks (who have no "natural" or "organic" bid, but have been chased by excess liquidity) should send them tanking just as sharply as they rose.

There have been a lot of price divergences in between indexes and bellwether securities. The Dow powered on to new highs on this last move up and the S&P and Nazzy retested October highs, while the leading small-cap (and higher-beta) Russell 2000 printed a lower high with its early November lower low, confirming a downtrend in that index. Financials led the market into rally mode and seem to be leading it out, as well, as they suffer from significant price divergences from the overall market. The SPDR Financials ETF XLF has printed a lower high and seems to approaching a head & shoulders breakdown. The EUR/USD, one of the primary carry trade vehicles, has found huge resistance at the 1.500 level, with a recent retest of its October highs without breakout followed by selling.

Gold has been powering away since its September 2 breakout from its symmetrical triangle (which ShadowCap had been highlighting for months), but momentum indicators are showing overbought levels not seen since May 2006, which marked an important top in gold, after which gold prices based for several months before continuing higher. Frequent readers know I am both long (in coins, bullion, ETFs, and miner equities) and bullish in gold, although I expect a sharp selloff in precious metals short-term as the dollar rallies on deleveraging, risk aversion, and the unwind of the leveraged carry trade.

 

There's tons of talk of asset bubbles that has now even hit the media. Bill Gross, head of PIMCO, believes “the Fed is trying to reflate the U.S. economy,” while the prescient Professor Nouriel Roubini considered the market being run by the "mother of all carry trades," with the dollar primed for a "snap back" of 20% or more. Perhaps most ironically, the chairman of China's banking regulatory committee, Liu Mingkang, asserted United States monetary policy was fueling a "huge carry trade" that chases "speculative investments" and is having "massive impact on global asset prices".

There remains little volume in equities markets and even less liquidity, and sell-side volume (which has been coming in droves during recent selloffs) poses significant risk to stocks and commodities. The Dollar Index remains in its downtrend, but there is significant momentum divergence with implicit bullishness, and increasing (substantially buy-side) volume in /DX futures and dollar ETFs like UUP & UDN. I have been pointing out on my Twitter I am closely watching /DX's 50DMA as a heavy short trigger on the S&P 500, and a close above it will result in big new short positions to add to the select, targeted shorts already in my personal trading accounts. The Vix and Dollar Index have been important corollaries in this market advance sine March, and the Vix ETF VXX's 50DMA serves as an identical trigger as the Dollar Index 50DMA, as well.

 

The liquidity-fueled, momo, IBD-nature to this run-up has caused market leaders being overwhelmingly high-beta. Lots of high-beta leaders with huge run-ups since March, like DTG X PWRD CFSG EJ STEC YONG, have started showing massive distribution, selloffs, and reversals, also adding confluence to the market top argument. Many of these are Chinese issues, which makes sense with China's massive monetary expansion leading to new equity and property bubbles there.