The BDI - Big Drop Indeed

UPDATE: Jan. 31 - How ironic is it, that no sooner had this piece been published yesterday, this article appears on Zero Hedge today?  Talk about impeccable timing.


ORIGINAL ARTICLE:

Every once in a while the Baltic Dry Index is brought to the forefront for discussion.  This is one of those times and I guess for good reason since it has dropped 53% this month alone.  Are you kiddin' me?  Wow!  This shipping index deserves another look to be sure.

I personally haven't used the $BDI for the purposes of trying to gain any timing advice regarding the broader stock markets in the past 5 years at least.  I'll explain why a bit later on.  The theory is that since it's a kind of transportation index it gives an indication of the health of the global economy.  So in that respect it's different from the Transportation Index ($TRAN) or statistics on rail traffic which are both based on the US economy alone.  By far, the $TRAN and rail traffic studies offer much better guidance on the timing aspects for the North American markets.  Further, the $BDI is a measure of the prices charged for carrying ship cargo that, well... that is not liquid.  In other words, basically it's a measure of prices charged for the shipping of dry goods such as coal, wheat, lumber, goats, automobiles, steel, goats, textiles, electronic goods, goats, furniture, etc.  Did I mention goats?  But it doesn't include oil.  And neither does the CPI data and we know how accurate that ridiculous measure is.  But for the purposes of measuring the health of the global interactive economy, the $BDI does offer a general clue.  Currently, the Baltic Dry Index is off its all time high of May, 2008.  Down by 93.8% to be more precise.

The ghost fleet.  Empty dry-cargo ships with nothing to do.

Although there are those who claim to see signals from the Baltic Dry Index that give indication about the future direction of markets, I think those virtues are restricted to only the grandest of scales.  There are a couple of good reasons why the $BDI should be considered unreliable as an indicator for 'timing' the markets.  The first is that although it measures prices paid for shipping cargo, this is not a measure of the quantity of cargo being shipped. The second and equally important reason is that it tends to be rather capricious.  At times, when the index is tracking the equities markets quite nicely, it can suddenly veer off course without warning.  The habit of 'suddenly veering off course without warning' is not a particularly endearing characteristic to have at the best of times, let alone if you're  in the shipping industry.

In any event, the correlation between the $BDI and the global equities markets should actually be recognized as as being rather flimsy because there are just too many other factors that affect shipping rates.  Those factors include the all-import

LIBOR3 Packs A Punch

One relatively popular method of trying to get a handle on where markets are likely to be headed is to investigate what the TED spread is doing.   There are two components that make up the TED spread: the rate on 3 month US treasury bills and the rate on 3 month London Interbank Offer Rate, more commonly known in the world of charts as LIBOR3.  The TED Spread is the difference between the two.

Over the past couple of years, the FED has pretty much pinned short term treasury prices down near zero, so out of the two components that make up the TED, it has been the European factor that is doing most of  the moving. So for the past year or more, my focus has been on the European end alone... the LIBOR3.

The most important concept to understand is that if the rate of interest that Bank A is charging to loan money to Bank B begins to rise, it means that Bank A is perceiving Bank B of being a slightly riskier entity to lend money to than it was yesterday.  I suppose it has something to do with the commonly accepted premise that when Bank A lends out money, it would like to get it back. The bottom line is that when LIBOR3 is rising, liquidity is no longer flowing as freely it was in days prior.  What is most important when investigating such an important gauge of rates as LIBOR, is not its little day-to-day fluctuations, but the larger trend, and most importantly, any change in direction that might be occurring in that trend.

Let there be no doubt, a change in the direction of the trend in LIBOR3 has a direct correlation with the general direction of the equities markets.  The trend itself doesn't necessarily present an overly tight relationship on a day-to-day basis, mainly because once rates begin to move in one direction, they tend to remain fairly loyal to that trend.  Conversely, equities markets flip flop around on a daily basis like that fish you just landed in your boat.  So to demonstrate the reliability of LIBOR3 as a good indicator of what is likely going to happen in the equities markets, we begin by looking at a longer term snapshot in the weekly chart below:

Click here for a full blown version of the live and updated chart

I draw your attention to the candlesticks which represent LIBOR3.  The orange line represents the rate on 3 month US treasuries but it has been toned down so as not to detract from our focus.  By far, the most import aspect to consider when seeing a change in direction of LIBOR3 is to ask "Why did it change direction?".  As can be seen in the chart above, the FED

THE DEMISE OF KHRYSOS

If there was ever a time when Elliott Wave technicians and old school technical analysis practitioners could be in total conflict and both be right, this would have to be it.

I don't mean right as in predicting the direction of the market over the next two months and beyond, because one of them is going to be wrong.  I mean right as in drawing the correct conclusions based on what his particular field of study is telling him.  We seldom see such a wide conflict in signals as what we're seeing today.  When was the last time had to deal with such confusing messages?  You're going to find out below.  But this is a conflict that won't last long.  The markets are going to resolve one way or the other and very shortly thereafter both schools of TA will quickly come back into sync with each other and line up perfectly in total agreement.

First of all, I don't really think there are all that many old timers from the old school of technical analysis who are not fairly well versed in EWT.  But for the sake of discussion, we're going to pretend.  What I'm going to present here is a look at both areas of practice and illustrate why the weekly charts are in such conflict at the present moment, that it would appear we are at an inflection point of epic proportions.  It's decision time.

We start off with a look at a weekly chart of one market which has produced such a beautiful wave count that it's far superior to any of the American indices for this purpose... the $DAX.  Keep in mind that I have never professed to be particularly good at EW counting.  But for this exercise that doesn't really matter because what we're going to examine is a generality... simply to illustrate the current conflict between both schools of study.  In the first chart below, we take a look at the weekly $DAX and apply a wave count that seems so clean that it's almost too good to be true.  If only all waves were this textbook.  Admitting that this count could be wrong, I simply ask you to just assume for a moment that it is correct and that the $DAX is currently in a cyclical correction higher within a secular bear market.  Use your imagination if necessary... we're going somewhere with this:

BEARISH - Left click on either chart to bring up the Lightbox.  From there you can toggle back and forth between the two.  Click here for a live, updated and much larger version of the chart above.

At this point, I need to interject that for those who believe that a global deflationary collapse is the only logical outcome after decades of the largest degrees of credit creation in history, and that it has already begun, the labeling on this chart is the only choice.  Or I should say that regardless of whether or not my own labeling is perfect, the general bearish conclusion is the only choice.  There is no other option if the deflationary genie is in fact already out of the bottle.  A bottle which has been kept safely under lock and key for the past 80 years or so, carefully guarded by KHRYSOS as he, among all other gods, fears this king of

But What If?

A couple of days ago I presented the chart below showing the 6 day moving average of the S&P.  It was more or less an effort to remove the noise and try to get a picture of the skeleton of the market.  It's just a rather unorthodox way of trying to see what's really happening here.  As one commenter (who shall go unnamed) politely suggested, in his opinion by using a moving average on which to base a wave count, I was probably removing valuable information (our friend doctor_jr. is always polite) .  And he's right, from the perspective of Elliott Wave Theory.  But nonetheless, for simplicity sake and in order to just get a picture of the basic DNA of this thing, it's a helpful approach.  So please bear with me... it's just for the most basic of  discussion purposes really.

So far, the count I came up with hasn't been blown up in any way but the more the market melts up, the more I have to admit that it appears that nothing, and I mean absolutely nothing matters anymore.  A 100% total Greek default?  "So what!".  France and Spain get downgraded with much fanfare and fear at the horrific consequences... and what do the equities markets world wide have to say about that?  "So what!"  On August 5th, the USA's credit rating was downgraded for the first time in history and what did the markets do?  Nothing that it wasn't going to do anyway.  The S&P simply continued lower at the exact same pace it was already dropping and ultimately, the wave pattern that was going to form anyway, formed anyway..  [ It was headed lower at the time and you can see where the downgrade of US debt occurred in the second chart ]

This is the count which I presented last week as one possibility.  For a rather handy perspective, left click on this chart directly, and then in the "lightbox" you can toggle back and forth between this chart and the one immediately below.

And then in early October the markets found a bottom and took off in a sparkling rally, the rally that we're still currently in and which so far is a 3 wave structure.  Most EW practitioners seem to consider the move up off the October low as a wave 2.  Not

Ok, So Here's The Plan

All those who know me from various blogs are aware that I'm the first to admit that I'm not a very good Elliott Wave practitioner.  Thankfully I've got a pretty darned good background in pretty much all other forms of technical analysis by now, considering that I started studying it at age 11.  But it's been a long time since I read any of Prechter's books and to tell you the truth I don't even know where they are right now.  Probably in a box somewhere in a friend's garage or something.  I've literally got a library full of great TA books and thankfully most of what I read there got stuck in the old noggin.  That's a good thing because I don't know where those books are either.

But in any case, EWT all sounded simple enough at first.  But when I tried to put it into practice I soon discovered that very seldom was I getting the results I was expecting.  I don't particularly like surprises like the kind I was being confronted with.  I don't like disappointment... I want results that I can rely on a little better than that.  For example, when I stick my tongue in a light socket, I know what's going to happen.  The light bulb that I screwed into my arse is going to light up!  Those are the results I want... something dependable.  So it didn't take me long to realize that although some people have a great ability to come up with some remarkable visions, I personally just had to swallow my pride and admit that I'm just not a good wave counter.  I don't have the proper aptitude for it.  I don't have the patience for it.  I don't have the vision required to come up with alternate counts.  The only letters I'm familiar with in EWT are A, B and C.  When it came to Ws and Xs and Zs, my eyes kind of glazed over and I discovered that WTF was more appropriate most of the time.  Nope,. I'm just not a very good waver.  As some of you already know, the last time I did any seriously good waving was when the bus carrying the South Okanagan Bikini Team drove through town.

But by golly, I'm feeling kinda cocky tonight.  So I've decided to really stick my neck out here and show all of you what is going to happen. Yup, this is what's going to happen... I've made up my mind.

Click here for a larger version

I know what you're thinking.  You're thinking "What in hell is that?"  That my friends, is the S&P 500, invisiblized.  What you're looking at is the 6 day simple moving average of the S&P with the S&P itself made invisible.  Nothing like clearing away the

Where Friends Gather - Jan. 12th, 2012

UPDATE: Jan. 16th, 2012

DISQUS IS INSTALLED!

After chatting briefly with BrightFire, I thought I'd put together one space where friends could gather to chat about anything related to markets.  Kind of a general meeting place where you drop off a comment for whomever you want.  I put up no charts, set no stage and suggest no topic. As it turns out, several friends have dropped in from time to time but they been spread all over the place.  But I know that they know each other.  Now that Blogger is providing a way for me to respond to comments in a way that they are at least threaded properly, it might be a bit more convenient.  I'm also entertaining the idea of installing the Disqus format so that readers can reply to each other in a properly threaded format.  But we'll see.  I also don't really have the time nor the inclination to run a message board or chat room but it does no harm to offer the space.  Maybe the friends who want to get together in a nice quiet place will gather.  It's a courtesy as much as anything else... simply a nice alternative for those who prefer to chat in a respectful environment.

So grab yourself a pint and fire away.

USD - "Inverse" About To Become The Norm

Click here for a live and updating version

[This particular article has been the most popular on this blog since Jan. 11, 2012 when it was first published.  More recently it has been viewed on a remarkably steady basis at approximately 1000 times per week.  Over the past 6 months it has been visited approximately 32,000 times for a total that at last count was heading toward 56,000.]

The notion that in order for equities to rise, the dollar must be falling and vice versa, is actually a total myth.  As the chart below shows, over the past 6 years, equities and the dollar actually moved in tandem half the time and move inversely half the time.  They can both move in the same direction whether both are going up or heading down.

Between 1995 and mid-2000, the dollar and equities moved up and down together like they were joined at the hip.  Mostly up.  It was a different world back then.  At that time, the US economy was truly growing on its own merits as opposed to today when growth is due primarily due credit expansion.  Where is the once- gigantic American manufacturing base?  Offshore, that's where.  So the solid link between equities and the dollar that had them running solidly in tandem was broken for good back in 2000.  Ever since then it has been a hit an miss affair.  Is it any wonder that year 2000 also marks the huge systemic change that occurred when money flows began to accelerate into commodities rather than into stocks?  Not at all, since year 2000 also marked the beginning of a dozen straight years of incredible credit expansion (dollar destruction).  As detailed in this article on the CRX, the commodities stocks started on a run that saw them rise 100 times as much as the broader S&P did over the next 12 years.  It's no coincidence that the same type of study that compares the price of oil to equities shows the exact same phenomenon surrounding the year 2000.  It is no coincidence... year 2000 was a turning point in global economic history.  That is the year that truly marked the beginning of our current long term cycle phase lower, not 2007.

USD MONTHLY - notice the dollar and equities rising together for 6 straight years, ending that solid relationship in  2000.  Obviously this chart doesn't move much but you're welcome to check out the live version.

So going forward, what should we expect from the dollar as it relates to equities?  Would it be likely that as the dollar takes off in the coming weeks and months (perhaps years), that stocks should hitch a ride and soar along with the USD?.  Not a chance.  Not this time.  When the dollar takes off upward in this next, and what is sure to be a long and protracted ride, it will be for far different reasons than it has ever risen before.  This time around when the dollar takes off it will be due to the unwinding of at least 3 decades of ever-accelerating rates of dollar destruction.  Particularly the past 12 years worth.  The great unwind is about to begin and this time cash is going to become so scarce due to the necessity of buying every dollar in sight just in order to pay down debt, that it will be sucked out of almost everything priced in dollars.  The first victims will be the same things that were the prime beneficiaries of dollar destruction in the first place... the "risk on" beneficiaries... commodities and equities. 

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The CRX Beginning to Rumble: Suggests Deflationary Forces Building

In this article we're going to revisit the topic of the S&P 500 as it would appear relative to a basket of commodities stocks (the CRX).  Last May I presented the first article on this study, which I'm happy to report garnered a rather surprising degree of interest.  After the passage of 7 months, it's definitely time to take another look at the charts since a whole lot has developed, and pretty much as suspected.

First, let me brush the dust of the old thesis and summarize what the theory is here.  But before we go any further, even though I am quite aware that lengthy articles are generally speaking darned near a nuisance, I find that I just cannot get this study much shorter and still provide the explanations that I think are necessary.  For those of you who might be annoyed by a relatively long article, I can simply extend my apologies and offer this happy alternative.  For those who elect to continue with a relatively lengthy but revealing study, we carry on...

Most readers have probably seen studies where the analyst takes a look at the equities markets as they would appear priced in gold, oil, or any one of several other meaningful relaters, such as a different commodity, foreign currency or domestic bond, or perhaps an index such as the VIX.  The resulting charts can often be a real eye opener, revealing some rather interesting if not downright frightening realities.  Unfortunately, in many cases no sooner is that article released than the debunkers parade forth declaring something akin to "Yeah but it means nothing.  Gold is irrelevant.  It has no intrinsic value.  Goldbugs are a bunch of fools."  It's a big mistake to totally discount those types of studies and to make such outrageous claims, but to a degree the protesters have a point.  In the case of using gold as the benchmark for example, the debunkers are flat out correct.  The reason being that the price of gold has been manipulated and suppressed for so long by the central planners who dare not allow it to rise as it should, out of fear that the unwashed masses might notice the astonishing effect inflation has had on their lives.  That type of price manipulation by the dark overseers is insidious, far reaching, and ongoing.  Not to mention that it can really mess up an otherwise valuable and revealing study.  And let there be no debate, spin and price manipulation will surely continue unabated until the regulators themselves are given a friendly demonstration on how a guillotine works.  Until that day arrives though, we're going to have to find other methods of getting at the truth.

So pricing equities in gold is not going to reveal the facts with the honesty and accuracy we're demanding.  How about this one?  Gold priced in oil.  Well, oil too is a manipulated market but at least it would provide a more realistic representation of the health of the entire global economy than gold does.  So shortly after the $CRX article was published, I investigated the relationship between oil and equities and published the results in an article entitled "Oil Confirms the S&P 500 Lost Decade".  And as suspected, that study too betrayed the fact that although decades of money creation had indeed driven the price of just about everything higher, including equities AND commodities, a major dichotomy began in 1999.  From that year forward the equities markets began to languish, to fall behind as the

DAX And The Entire European Financial Index - Going Parabolic?

Recently I've tuned my focus to Europe in order to try to get a better handle on exactly what the hell is going on over there.  Well actually, whatever is actually going on over there will probably forever remain a mystery to all of us... hidden under so much paperwork, lies and spin that we'd never be able to get to the bottom of it.  Nonetheless, I want to know if there are any clues we can garner from across the pond if we just focus a little harder and do some meaningful analysis?  Yes, I think there are.

So here's a revealing study I've been investigating over just the past few days.  First of all, rightly or wrongly I think Germany holds the key to clues coming out of Europe.  Therefore, I want to know what the DAX would reveal if it were compared to the entire European banking system.  And what do you know... it reveals plenty.

We begin by putting together a chart of the DAX as if it were priced in units of the Dow Jones Europe Financials Index.  This would be similar to pricing the S&P 500 in terms of the BKX.  The only difference is that the study which follows is purely European.  The first picture we're going to look at is the monthly chart of the $DAX:$E1FIN (the DAX divided by the Dow Jones European Financial Index).  We have to look at the big picture first in order to see if there is in fact any pattern or relationship that suggests reason to investigate further.  And immediately, we see that there is.  The result is a ratio which in turn can be compared directly to activity within the DAX itself.  I've also added the European Financials Index as a separate entity in its own panel in order that we can look at all 3 at the same time and in the same context.  I realize it's a rather long lanky chart, but it contains a ton of information and there's not much point in presenting a chart that lacks useful data:

MONTHLY - Click here for a full blown version

The first thing we want to know is whether or not any major top or bottom in European equities (using the DAX as the most logical proxy for all) coincides with a major change in the ratio.  In other words,