U.S. equity indices recorded a classic key reversal sell patterns yesterday. A classic key reversal sell pattern includes opening above the previous day’s close, moving higher than the previous day’s trading range, closing lower than the previous day’s close and moving lower than the previous day’s trading range. Higher volume is a confirming indicator.

Key reversal sell signals for equity indices are rare. When they happen, they usually are a reliable indicator that equity markets are about to move lower in the short term. U.S. equity indices could easily fall back to break out levels that occurred on May 3rd when the last monthly employment report was released.

Trigger for the key reversals was news that the Federal Reserve is considering the possibility of reducing the size of its Quantitative Easing program as early as June. That means the Federal Reserve will purchase fewer Treasuries and Mortgage Backed Securities. As expected bond prices also responded strongly to the downside on the news.

The VIX Index spiked on the news.

The U.S. Dollar move higher and the Canadian Dollar virtually collapsed on the news.

Economic sensitive sectors were notably under pressure. Their performance relative to the S&P 500 Index has started to deteriorate, a typical seasonal pattern at this time of year. Note that all charts below also recorded negative key reversal patterns.

Not all markets and sectors moved lower yesterday. Notable strength was recorded by the Russian ETF and the Grain ETN. The latter is being influenced by problems with planting the grain crop on a timely basis due to weather (cold spring, tornado season)

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S5HOME INDEX Relative to the S&P 500

Stocks, bonds – everything – at risk

As the global equity and bond markets grind ever higher, abundant signs exist that we are once again living through an asset bubble – or rather a whole series of bubbles in a variety of markets. This makes this period quite interesting, but also quite dangerous.

With equity and bond markets at or near all-time record highs, with all financial assets consistently shrugging off bad – or worse – news as the riskiest of assets continue to find consistent upward bids, we find ourselves in familiar and bubbly territory.

I can summarize my thoughts in one sentence:  How could this be happening again so soon?

In times past, it took one or more generations between bubbles for people to financially recover and forget the painful lessons before they would consider doing it all again. Yet here we are, working our way through our third set of bubbles in less than two decades, which must be some sort of world record.

I will confess to my biases right up front: I have always been deeply skeptical of both the practice of running up debts at a faster pace than income (the common practice of the entire developed world over the past several decades) and the idea that the solution to too much debt is more debt, enabled by cheaper money courtesy of thin-air money printing.

In short, instead of seeing central banks as sophisticated stewards of intricate monetary policies, I view them as serial bubble-blowers and reckless debt-enablers whose only response, when confronted with the inevitable consequences of their actions, is to serve up more thin-air money at an even cheaper rate. And when that doesn’t work, then they simply try even more of the same, but in larger quantities.

While I think central banks are populated by earnest people with impressive credentials who have rationalized their actions as being necessary and in service of the greater good, I also think that the biggest ones hold an entrenched set of institutional views that are dogmatic, fail to incorporate the idea of economic and resource limits, and are seemingly immune to healthy introspection.

Somewhere along the way, I would have hoped they might have noted that each new crisis is larger than the one before – necessitating an even larger response that begets an even larger crisis next time, etc., and so on. A corporate bond hiccup in 1994 led to monetary loosening that enabled the development of the Long Term Capital Management (LTCM) fiasco of 1998, which was followed by the tech bubble, and then the housing bubble, and here we are with a now global equity and bond bubble that is larger than all the prior bubbles combined. Much larger.

It was famously said that the market can remain irrational longer than you can remain solvent. And if the trading maxim, don’t fight the Fed, is worth heeding, then surely one should absolutely not take on all of the central banks at once, either. So, the risk I run here in seeing things through my ‘common sense’ filter is that perhaps this time the Fed, et al., have got it right, and a true and lasting recovery is at hand.

With that caveat, in this report I lay out the five most worrisome signs that horrific market losses await the unwary, the careless, the reckless – and those who possess all three characteristics (i.e., your average central bank).

These are not normal times. The degree of separation between reality and today’s financial markets is extreme, which means they have a tremendous degree of potential energy stored up that could erupt in a downward cascade at any time.

While we can’t predict the exact time or trigger of a market avalanche back down to reasonable levels, I can definitely advise that you do not want to be standing in the valley when it happens.

Four Signs That We’re Bubbling

HERE are the four things including charts that convince me that we are in truly bubbly territory: