“European Bonds: A Paucity of Corrections”

Posted by Bob Hoye: Institutional Advisors

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Stock Markets

Exuberance and Volatility continue to be the features of the stock markets. This week’s violence suggests that the Resolution Phase has become irresistible. Will resolving the excesses be moderate as in October, or cyclical?

We have reviewed that momentum and sentiment number have twice reached levels only seen at cyclical peaks in the stock market. At year-end the Bulls minus Bears number had increased to 41.5%, which compares to the 45.4 notched in June. Anything above 40 can be dangerous.

The highly-regarded John Hussman has reviewed valuations by P/E and concluded:

“One might as well be investing on a dare.”

Liked the turn of words, but this valuation is high, but not as high as in 2000 and in 1929.

Of course, the “dare” has been that the Fed’s former bond buying program would prevent bad things from happening. This was backed up with Draghi’s boasting that the ECB would soon start the bond buying. We thought that in lieu of actual buying his tout about “buying” would have to be repeated at least twice a day to keep the faithful in.

There are a few salient points that seem to be overwhelming policymaker ambition.

As if on schedule, credit spreads reversed in June and had become very concerning in the middle of December. After correcting until year-end, widening has resumed. This will likely continue and as it does it will remind that the Fed has no (repeat no) control over credit spreads.

There is no official control over the yield curve as well and it seems to have reached a technical excess at year-end. Let’s put it this way – flattening has been a positive and steepening at the end of a bubble has always been a negative.

Another point is that the intention of reckless policy has been to drive commodities up, making business more prosperous. Our commodity index, which does not include gold, set its high at 470 in 2011 and it has set a new low for the bear at 261 this week.

Of course, the charts provide dispassionate adjudication of the ambitions of policymakers, investors and traders.

We have using the NYSE Comp and the STOXX to monitor the big “Rounding Top”.

As noted last week, the pattern for the NYA has been replicating that of 2007. For the STOXX the replication includes 2007 and 2000. The key to both breakdowns was taking out the 50-Week ma at – strangely enough – the end of the year. So far this week and on a Weekly basis the price range is trading both sides of the ma at 3149. Of interest was that the year-end 2000 failure of the 50-Week was followed by a two-year bear. The year- end failure in 2007 was followed by a 15-month bear.

On the first week of the year, STOXX took out the 50-Day and 200-Day moving averages. The rebound was stopped at the 50-Day and could not reach the 200-Day, which is weak action.

The NYA accomplished a modest Rounded Top in 2000 (big action was in the Techs). It took out the 50-Week ma in January of that fateful year and declined to late 2002. The next such failure was in December 2007 and that decline ended in March 2009. The 50- Week is at 10706 and at 10532, the key long-term moving average has failed.

The near-term pattern is similar to that of the STOXX.

For both, taking out the December lows would do a lot of damage and taking out the Octobers lows would say “Game Over!”.

Within the swings the August decline registered a Springboard Buy and subsequent volatility gave two Hindenburgs. December’s decline ended with a Springboard Buy, which has now provided two Hindenburgs.

What could limit the senior stock indexes to a correction of just 10 percent?

Perhaps the limit to the last correction was provided by October’s ability to clear problems? We know that “everyone” was playing the October to May seasonality and that drove equities to another unsustainable condition.

More investors are becoming aware of the full implications of weakening commodities. Last week’s Pivot noted that the plunge in crude was getting overdone and thought that “the action can take a pause”. Which with copper’s plunge getting overdone as well could release a rally in the senior indexes.

Makes intuitive sense, but Ross has noted that crashes in crude have been followed by generally weak stock markets. Some bounces are possible but the financial markets are more precarious than they were in October.

Credit Markets

As noted above, credit spreads changed towards adversity in June which was on schedule. We had thought at some time the curve would also change, but the mania in yields made that call uncertain. However, one rule seems to be coming in. Typically a boom will run some 12 to 16 months against a flattening curve. In 2000 and 2007 the curve inverted, but some expansions have ended without inversion.

December was Month 12 on the count and this places the curve in the window of probable change. So let’s look for change. Using the twos to tens (UST2Y/TNX), flattening has become dynamic with a big swing in the Daily RSI from 29 a year ago to 72. This is the most dramatic rush of flattening since mid-2008.

This could take a little more work, but the curve is now providing a warning on change.

Spreads widened out to 210 bps in the middle of December and narrowed to 197 bps at the end of the month. It is now at 211 bps and providing another warning on contraction.

The seasonal rally for the bond future came through and was enhanced by declines in commodities and equities. We had thought that treasuries could rally up to “ending action” and as the saying goes “Are we there yet?”.

Within the spirit of avoiding precision, we are almost “There”. The Monthly RSI is up to 71 and above 70 has been rare. The last one peaked in November 2008, which was a sharp rally with the worst part of the Crash. This bond rally has been part of the financial party since December a year ago.

Also very much part of the party have been European bonds. Except for those of Russian and Greece. The German 10-year continues to set new lows for the move. Now at 0.408 percent. It is mainly the same in Spain with the yield now down to 1.60% after visiting 1.51% last week. As an example of a mania, the yield has declined from 6.78% with the Euro Crisis that completed in July 2012. There was a brief and modest correction from March to May 2013. Otherwise no correction in almost 2 years.

Much the same holds for other European bonds. A paucity of corrections.


The concept that the Fed can depreciate the purchasing power of the dollar at will seems not to be working.

As determined by the CRB, commodities have declined by declined by 41 percent since 2011. We don’t call gold a commodity so we created our commodity index to not include gold. It has declined 45 percent on the same move.

The sell-off is becoming impetuous with the Weekly RSI on the CRB down to 11. On a chart back to 1980 it has never been this low. Perhaps a brief rally will correct the excesses.

The main depressant has been crude oil with a big weighting and a big decline. The Weekly RSI is down to only 9. Last week’s view was that the decline could “take a pause”.

Oil stocks (XLE) registered an Upside Exhaustion in June. The high was 100 and the low has been 72 in December and 71.7 yesterday. Crude’s December low was 53.60 and the low for the move was 44.20. Stocks have been outperforming the product.

While both could enjoy a pause in the decline, it is worth noting that at 45 crude was back to the price level of April 2009. At the slump to 72 the US Oil Patch (XLE) compares to the level of 45 set in April 2009.

In Canada the XEG is back to the 2009 level and that is despite the 15 handle drop in the Canadian dollar.

Perhaps the big integrated oil companies are providing the cushion, but how long can it last? The Oil Patch could suffer a multi-year contraction as suffered by the Precious Metals.

Precious Metals

The action in the Precious Metals Sector continues to be constructive. Gold shares have been outperforming the bullion price and the silver/gold ratio has improved a little.

Of particular interest is that despite this week’s strength in the dollar, gold’s dollar price has increased. This could be confirming our “New Paradigm” theme whereby gold outperforms most other price series during a post-bubble deflation. This is more obvious in each of the recessions.

The “Old Paradigm” whereby the evil Fed depreciates the dollar and gold goes to “$5,000” is hopefully shelved. The “Goldbug” story began to get legs in the 1960s when macroeconomists became aggressive in their theories that through clever manipulations they could eliminate the business cycle.

Despite the endless drumbeat about the Fed there was not one long bull market in gold’s dollar price. There were two. From 35 in the 1970 to 850 in 1980. Then from 255 in 2001 to 1895 in 2011. The following chart shows the calls based upon the gold/silver ratio.

Relative to commodities, gold’s real price continues to advance, which will eventually enhance profit margins for the industry. It will also enhance valuation of gold deposits. 

Our advice has been to accumulate gold stocks on weakness, but we do not have a full position yet.



At the Christmas lunch with our favourite exploration company there were some “stories”. One was about a prospector coming to town and wearing his best suit which was medium grey. But it seemed to have “circles” in the fabric. This was a puzzle until someone figured out that he was putting the suit beneath the mattress overnight to keep it pressed. Coil springs.

All bear markets are the worst in history and in one in the early 1980s I recall talking to a mining broker and saying that “What the Vancouver market really needs is a good discovery”.

“Yes, but they have been holding back on those lately” was the response.

Link to January 16 Bob Hoye interview on TalkDigitalNetwork.com:



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    • Whenever the RSI on the silver/gold ratio soars to 80 or higher it indicates excessive speculation. 
    • In 1987 our research noticed that the silver/gold ratio changed before the magnificent blow-off in January 1980. 
    • We have been using it since. 
    • In 2011 the RSI on the ratio reached 92. The only other example occurred with
      the 1980 peak. 
    • The next speculative surge took it to 84 in September 2012. 
    • The last “Sell” was in June 2014 when the RSI reached 84.