I last discussed the $10YRYLD in this post. Again, I’m not certain what will happen here, but I sort of expect a reaction, and probably a pullback in rates, and probably a pullback in equities with it. But, just because it’s interesting, the trend line I’ve been pointing out for some time (back here for instance) is exactly where we came to today:
I wish I had a novel insight to provide for you this weekend, but I haven’t much to add. My basic thought on $ES remains intact: I don’t believe this move is finished, and it is a bit of an open question as to just how high it might go and how long it might take from here before a retracement. It might drift in an upward trajectory for a while (noted here) but a case can also be made for it go significantly higher, too (noted here).
And though I have some confidence that $ES hasn’t finished rallying, I have less clarity regarding the other indices. In this last post on the indices, I gave upward targets, and they have all been met, or exceeded, so I don’t have much to say for the moment that is decisive. But regardless, I’ll walk through them each in turn here just to have some assessment of them together all in one place again.
1. My primary assumption for $ES for the moment is that it will tend up and to the right, finishing a series of fours and fives to complete a first aggregate impulse wave. I will do my best to try to identify those fours and fives if they do, in fact, materialize. Of interesting note is that if we do get the arc, it may also give us the appearance of a double top as it crests, so we can anticipate, even now, how the bear argument may not immediately fade from view.
The $10YRYLD is in a 3rd wave advance. I’m sort of guessing here, but this is my expectation: I expect the rally to change its slope of ascent (soonish?) as it approaches that trend line, react off that trend line (broader discussion of what that line is here) and then do…I’m not sure what exactly, but sort of wrestle with that trend line for a while in some way.
That’s when I believe the Naz will begin going off in its 3rd of 3rd minor wave leading to its 3rd intermediate wave (ignore all the giberish, but I mean the most powerful central ascent to its next top). And that’s when some of these rate-sensitive reflation names should consolidate or correct.
This is a long-term view on the $10YRYLD because the pattern that is developing is a very large one. I believe a huge macro inverse is forming, which tells me the reflation trade is hardly over. The target happens to coincide with the 40-year trend line. And it may take well into next year to reach it. We still need to finish forming this shoulder, then take the neckline, then probably retest it, then advance.
I know many people are skeptical that the market can tolerate rates that high, but that may be one reason that they go that high, for all we know. Until this pattern turns into something else, I will continue to listen to it.
Now, Dear Reader, do not get me wrong: yes, I know that the indexes are expensive; yes, I know we are miles above many long-term moving averages; and yes, I still enjoy trying to solve my own psychological problems germinating from my profound unhappiness by watching things burn to the ground.
None of these variables has changed. However, it’s just that those things aren’t always very good predictors of major market tops. Do I think we may be getting close to some delicious corrective action? It’s absolutely possible: and in fact, it’s my preferred analysis. But as far as, let’s say, seeing anything more than a ten or twelve percent decline, I am skeptical of that here and I wanted to share my evidence for that all in one article. And even if we do get some corrective action, that may also still be a ways ahead of us though I am open to the possibility that it could come at any time. Hell, I’d love it if we just fell apart right now.
There are several things I like to watch that very often help us to measure the risk off sentiment of the big players in the market:
- Oil – Obviously as growth slows, energy demand does too, and oil often leads equity markets lower.
- Copper – Same as oil, the decelerating use of copper as an industrial metal will very often lead the markets lower, so effectively so at times, that we’ve come to refer to it as “Dr. Copper” in recognition of this metal’s ability to ascertain market health.
- Yields – Yields falling of course implies that the safety of shitty returns is being highly sought. Since the big boys don’t have mattresses large enough to stick their cash into, they like to park it here.
- The dollar – Though not always perfectly correlated, dollar weakness can often be tied to equity strength.
- Credit – In the great debt black hole that has become the world financial clown show, an expanding economy necessarily requires an expansion of credit. A slowdown in credit expansion (or heaven forbid, an outright contraction of credit) is the canary in the coal mine that can alert us to the onset of Bear Paradise.
- LEI – The Conference Board’s “Leading Economic Index” has an uncanny ability to often, ahem, lead the markets lower and alert us to recessionary forces.
Let’s look at each one in turn.
I have two preferred ways to count $OIL. The first one is as a nested 1-2-1-2 (pink, then orange).
If this count is correct, oil stands to make significant gains over the coming many months. This would imply some admixture of growth and inflation ahead. The count seems to me to have “a good look” in terms of both price and time. But let us not be obnoxiously bullish because that feels silly. And so, we can move a couple of things around and assign a different bullish-but-less-bullish count to oil thusly: