Minyan Mailbag - Assimilation
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
Strictly a technical metric observation with respect to market breadth, but interesting nonetheless. If I recall, John Hussman suggested in one of his recent missives to watch the breadth like a hawk these few weeks, so I am. Seems the NYSE McClellan Summation Index ($NYSI) is an important measure for breadth, so I took a closer look at it using some charts starting w/ this one. I learned and have been following some potentially important data:
1) 6 month chart - peaking as MACD and RSI (very O/B) negatively diverge.
2) Pull it back to 3 Year chart - lower highs since June 2003, then Jan 2004, and Now.
3) Since the May 2004 low in $NYSI, a clear trendline with higher highs (June top, Sept top, and now) and higher lows (Aug. low, Oct 25 low) is in place.
4) Unless my eyes are lying to me (which is possible), EVERY peak and/or trough in the NYSE Summation Index has occurred perfectly with turns in the bond market and/or BKX. For instance, see the May 2004 low - $NYSI, $BKX, and $USB all bottomed together (as u know, $BKX made a higher low in August). To see perfect correlations, change ticker to $NYSI:$USB (30 Yr bond) and $NYSI:$BKX (bank index). They overlay like a glove on the straight $NYSI chart.
5) Since NYSE breadth is skewed by the interest-rate sensitive issues, including the financials and closed-end bond funds, but the four-letter freaks aren't, the comparison doesn't work for beta, right? Well, run the Nasdaq Summation Index ($NASI) correlations over the past 3 years and the correlation is about as good as the $NYSE except the four- letter freaks as we know diverged a tiny bit when they made a lower low in August versus their May low while the BKX did not - this was a key tell back then that the market's low was not confirmed (as was Snoop Tone's Crested Butte presentation that also contained his beautiful jumping jacks and "Elaine from Seinfeld" impression).
6) OK, so what? Well, what if I then told u that (hedge fund) large spec's established RECORD net SHORT positions in the 10 Yr. Note back at the May low ($NYSI, $NASI and US bond market) which was a perfect contrary tell for the path of maximum frustation to squeeze bond shorts as bonds (and the BKX) rallied. But that they now have established RECORD net LONG positions, just as tons of dandruff is flakin' on the short-term 10-Yr Chart (confirmed) and 3-year 10-Yr Note Chart (oh wait, u already know these things), yield indices are breaking out on a PnF basis across the curve, the yield curve is flattening, Citigroup (C:NYSE) faces a PnF bull trendline break IF (HUGE IF) it were to print $44 (quasi-financial General Motors (GM:NYSE) already broke its PnF bull trendline), at that same time foreign central banks (see Russia, Korea, Indonesia, & when will China/Japan blink?) are diversifying dollar reserves out of U.S. Treasuries? Well, strictly by itself and based on the past correlation and the logic above, that doesn't sound overly positive for market breadth going forward.
7) Naturally, the above data and logic chain does NOT mean the U.S. bond market is going to immediately get crushed (unknowable central bank coordination), that the correlation will continue to hold up even if the bond market cracks (eg, if the "higher rates is bullish" theme emerges into a momentum performance-anxiety tape), nor that it even is what really matters (ie, maybe it's really corporate bond optimism that is THE driver as the Horse suggests - Do I look stupid enough to dismiss the Horse? - and rising Treasury yields with rising corporate bond optimism/narrowing corporate bond SPREADS will suit the stock market just fine thank you).
8) The point is that the U.S. bond market is currently throwing off lotsa negative vibes (heck, even Snoop Tone is bearish bonds!) and both Big Board and the four-letter freak breadth have demonstrated nearly perfect correlation to U.S. bond market. I am certainly as aware as the next guy that given the recent powerful thrust off the October 25 low and buying stampede (to use Mr. Saut's term), it would be a perfectly plausible scenario for the market to correct into mid-month before Santa Claus rally time before embarking on a new high into year-end and beyond, setting up a deteriorating breadth divergence and signaling trouble after such a high was put in. That is exactly what happened in late 1972 before the January 1973 peak, which by the way is the only other time in history (along with August 1987) that Investors Intelligence bulls > bears and correction < 20 (going on 3 weeks with that condition now) at the same time S&P/peak earnings multiple >18.
Just as that wise fella named Gula who is 1000x smarter than me and has forgotten more than I will ever know noted last night with his uptrend comments, this is not even close to a forecast, merely an observation for u to consider and provoke thought with all the other structural, psychological, technical, and fundamental inputs that are lyin' there under that thar trading table of yours.
Now go get some sleep bro and get those ears unclogged.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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