The Long Term LAMPP is on the verge of turning red, possibly as soon as next week. The LAMPP index has descended right to its 78 week moving average. Crossing below that moving average would turn the signal red.
The short term LAMPP remains on red for the 8th straight week, in what was at least a premature signal, but not necessarily a wrong signal. In my short term trades list in the Wall Street Examiner Pro Trader Market Update there are now more shorts than longs and the shorts turned more profitable than the longs in the last week. Those are signs of a market in intermediate transition.
And that at least partly validates the Short Term LAMPP red signal. The market averages have been rising on an ever narrowing list of participating stocks. The averages are masking spreading technical weakness in an increasing number of stocks. Air pockets have developed in many names as they report worse then expected earnings. You may have seen this in your own portfolio over the last two weeks. The market averages rarely tell the whole story, and sometimes, like now, they tell a misleading story.
In the next week or couple of weeks the LAMPP will cross below its 78 week moving average. That will be a red signal. It will be time to get out of stocks. Tops take months to roll over, so there’s probably no urgency to “sell everything,” but we should stay on a systematic program of regular sales to build a substantial cash holding by March of 2018. I’m looking at 60-70% of a portfolio in cash. Your goal would differ depending on your personal needs. As an older person, I might want to hold an even higher percentage of cash.
I also think that it’s probably ok to start shorting the market now by shorting the SPY, or buying inverse ETFs. I would not use leveraged ETFs or puts unless you are an experienced technical trader, or are comfortable with a third party timing service such as the Wall Street Examiner Pro Trader Market updates.
The Long Term LAMPP has weakened in the past several weeks because Treasury supply is increasing, just as I had forecast….
Here’s How the November “Treasury Flood” Will Drown the Stock Market
It’s not rocket science. The TBAC (Treasury Borrowing Advisory Committee) had told us in its quarterly report to the Treasury that supply would begin to increase in the second half of October, and will increase even more radically in November and December.
Why is this bearish? Because dealers and investors who buy those Treasuries must pay for them, obviously. And the Fed is no longer buying, and is in fact redeeming some of its holdings. Under QE, the Fed bought enough paper to fund every dime of the following week’s Treasury issuance. Now it’s funding virtually nothing, and it has even begun withdrawing cash from the system. It will do that in increasing amounts over the next 12 months.
That means that dealers and investors must absorb massive increases in Treasury supply over the next 2 months with no funding whatsoever for the Fed. That will require at least some liquidation of other paper at the margin. Buyers of the Treasury paper will almost certainly liquidate at least a small measure of other holdings, whether bonds, stocks, or both, to raise the cash to pay for the new Treasury paper they are buying. It will put downward pressure on bond prices, and therefore yields will rise.
At the same time, it will start to put downward pressure on stocks as some players opt to sell stocks to buy the Treasuries.
As the Fed drains more and more cash out of the banking system, going from $10 billion per month now to $50 billion a month in October 2018, the supply/demand balance will only grow more bearish.
There’s one vast worldwide pool of money available for purchasing financial assets, aka “investments.” Buyers can choose to purchase bonds, stocks, or a variety of other assets. Stocks and bonds are of course preeminent. Their markets are unimaginably immense. But only a tiny percentage of that is traded, and some of it is traded repeatedly and constantly. Prices come from those marginal trades. Those prices at the margin are then applied to value every single financial asset in every portfolio in the world.
But think about it. What would happen if everyone wanted to sell? They would be unable to. There would be no market. So in that sense, stock and bond portfolio values are completely imaginary. Even a tiny shift in demand for financial assets could massively affect these imaginary values. The markets create only the illusion of wealth. If a few more dealers or investors need to liquidate something, then suddenly all portfolios are worth less.
Here’s where macro demand analysis comes in. If we see signs that there’s even a subtle shift in demand for Treasuries, that could influence not just bond prices but also stock prices.
More Treasuries Plus Less Cash Will Pop The Bubble
When the Fed was buying everything in sight to the tune of $100-150 billion month under QE, those shifts didn’t matter. They were invisible. The Fed created more than enough money to drive demand for both stocks and bonds, not to mention housing, and even commodities for a time.
But the Fed began to slow QE in 2014, and mostly ended it at the end of that year. The first market to take a hit was commodities, which got crushed in 2014-15. They have never fully recovered.
And nobody in the mainstream has talked about this, but bond prices were never higher, and yields never lower, than they were in 2012, and then again in mid 2016. The secular bull market in bonds has ended. With increasing supply and demand curtailed bond prices will fall and yields will rise. Nobody on Wall Street or in the media has said it yet, but we’re in a bear market in bonds.
And that is despite the constant inflow of money from Europe and Japan as both the ECB and BoJ have continued to print money hand over fist and pump it into the worldwide liquidity pool. The ECB will drastically cut that pumping in January 2018. They haven’t said when they’ll end it completely but it doesn’t matter. They’ll be pumping a lot less. That means that a lot less cash will find its way to Wall Street and the US stock and bond markets.
The BoJ should follow suit next year.
It’s especially bad news because the US Treasury is radically increasing the amount of Treasury supply now, and will continue to increase supply in 2018. That’s because the Fed is now telling the Treasury, “PAY ME! I WANT MY MONEY BACK!” That’s a radical reversal of the previous policy of “Here! Take my money, please!”
The mainstream media and Wall Street pundits everywhere seem not to get the significance of this reversal. Either that, or they do, but they want you to stay on the buy side, so that they can dump their inventory on you at high prices. So they keep telling you that yields will stay low. Some even have the audacity to tell you that yields will even decline. Don’t believe them. They are telling you that the Law of Supply and Demand doesn’t apply to the bond market. I’m saying that it does.
I’m telling you, wake up. Don’t be a sucker. Don’t be a bagholder. Just say no! The Law of Supply and Demand still rules. The Treasury will need to sell more debt to redeem the paper held by the Fed. So it will add supply while at the same time pulling money out of the bank accounts of the buyers of the paper. The Fed will then take that money back from the Treasury and it will completely disappear from the banking system.
That will reduce the money available for future bond purchases. This is the exact opposite of the process that happened under QE, the process that drove this, the greatest financial asset bubble in the history of the world. We must recognize that reversing this process will probably have devastating results, particularly since the ECB has confirmed that it will reduce its purchases, and the BoJ is likely to follow. All the while, the Fed will be pulling cash out of the system.
Here’s an illustration of just one aspect of the problem. While Treasury supply is in the process of turning up after years of decline, Treasury demand has been declining for years, and continues to decline. That’s a recipe for lower prices and higher yields. As the Fed starts shrinking its balance sheet this month, it will cause both an increase in Treasury supply, and a reduction in the cash available to buy it. The imbalance will only grow worse as the Fed increases its withdrawals of cash from the system over the next 12 months.
This chart illustrates the long term decline in demand for Treasuries. It shows the total amount bid at the bi monthly auctions of Treasury notes and bonds.
Since bonds and stocks compete for available investment funds, it’s not good news for stocks either. When the Fed was doing QE, there was enough cash for both stocks and bonds to rally simultaneously. Lately, there has only been enough cash around to support a rally in one market but not the other. Stocks have continued to rise, while bonds have faltered.
Treasury auction demand fell off a cliff in the second half of October. The plunge in demand looks alarming, but it is a scheduling anomaly. Supply was very light in the end of month round of issuance so there was also less bid. The light coupon supply and the appearance of weak bidding is misleading because the Treasury is simultaneously issuing a $50 billion CMB that will mature on December 8. Plus it is adding another $21 billion net in new regular weekly short term bills this week. Bidders on the notes and bonds clearly set aside some money for the massive amount of new T-bills on the docket this week.
So it is not as bad as it looks. But the long term trend of declining demand for Treasury bonds and notes is intact. It appears to be reasserting itself after leveling off for the past 18 months. That should get even worse as the Fed pulls money out of the banking system at an increasing pace over the next year.
This data won’t tell us when stocks will turn down. It can only tell us that it will happen within the foreseeable future. I use technical analysis to pinpoint the specific timing for short term trading in the Wall Street Examiner Pro Trader market updates. If you are an active trader, I think that you will find value in that service. There’s a 90-day risk free trial so that you can check it out.