Non-Confirmations Still Persist

The S&P 500 has recently made a new high, in short the rebound from the mid October low has not failed at a lower high. Therefore, the clock has so to speak been reset. However, as our updated comparison chart between SPX and the major euro-land indexes shows, there is now a third divergence in place between them, and this one is even more glaring than the first two. Keep in mind that there such divergences have not always been meaningful in the past. However, when global markets are drifting apart, it is a sign that the global economy is no longer well-synchronized. Given that the Fed’s “QE inf.” is in relative pause mode (we hesitate to say it has ended), the situation is certainly worth keeping an eye on.


1-Euroland vs. SPXA third divergence between the SPX and the major continental European stock markets is now in place – click to enlarge.


ECB Meeting and Central Bank Coordination

There will be an ECB meeting this week, and possibly the central bank plans another surprise announcement, although we actually doubt that at this point. While the rate of change of euro-land CPI has continued to decline, the BuBa is implacably opposed to “QE” involving government bonds, and with three different liquidity pumping measures already in place, there is surely a case to be made for the ECB to wait for their “success” before embarking on even crazier schemes.

We only mention this because it seems highly likely that the recent Fed, ECB and BoJ actions were subject to coordination. Let us not forget, these people regularly meet (in secret) at the BIS. It is not a secret that these meetings are taking place on a regular basis – secret are only the details and what is discussed there. Let us just say that everything that has recently happened in terms of central bank decisions smacks of a coordinated effort. Even the jawboning seemed to be coordinated at times.

As noted in this recent report at Der Spiegel, “deep divisions have emerged at the ECB” over putative plans to expand QE into the sovereign bond arena. The usual pablum about the alleged “dangers of deflation” is mentioned of course, but as the article also points out, the “success” of QE is actually impossible to gauge, since no-one can possibly know what would have happened without it.

The technical differences between Fed QE and BoJ QE are of course not touched upon, but it seems to us that they are rather important. It is a lot easier to restart bubble activities in the economy when QE not only crates bank reserves, but also creates deposit money directly, as is the case in the US. How relevant the BoJ’s success in boosting asset prices will be to economic activity in Japan remains to be seen, but past experience indicates that it usually appears to work up until the time when monetary pumping is abandoned again.

Note here that we don’t believe that economic activity is per se a useful measure of economic progress. After all, aggregate economic statistics always look good during boom times, and yet, they tend to mask a lot of capital consumption. In aggregated statistics, malinvestment of capital cannot be differentiated from wise capital investment. We do however know with certainty that monetary pumping distorts relative prices and that unless the entire business community decides not to play along, capital malinvestment inevitably ensues.

As an aside to this, even if all businessmen were fully aware of Austrian capital and business cycle theory and were to agree with its conclusions, a majority of them would likely still decide to come out and play, in the belief that they will make hay while the sun is shining and will be able to jump off the train in time. Many institutional investors find themselves in an exactly similar position. A number of surveys have shown that many fund managers are indeed well aware that asset bubbles induced by monetary pumping are bound to end in tears – and yet, they are playing along, presumably not least because not doing so would represent a career risk for many.


Junk Bonds Diverge As Well

High yield credit also continues to diverge slightly from the stock market. To be sure, this divergence is small enough that it could be easily erased, but for the moment it persists:


2-JNK,SPXJNK, SPX and the JNK-IEF ratio (we are using IEF instead of TLT, as this provides us with a more accurate proxy of credit spreads. The maturity profile of IEF’s holdings is closer to that of JNK’s holdings). A number of divergences between JNK and SPX have emerged as well recently click to enlarge.



With the major US stock indexes at new highs, the coast seems superficially clear for the market, but there is certainly a significant element of uncertainty left. There have also been instances in the past when marginal new highs turned out to be traps (the most prominent fairly recent occurrence was the October 2007 peak), so as such, they are not sufficient to sound the all clear. Given the ongoing divergences with European markets and high yield bond spreads, caution continues to be advisable.

The recent explosive move higher in the Nikkei (as we recently discussed, Japanese stocks had been heavily shorted, which undoubtedly played a role in the ferocity of the advance) on the other hand is a “confirming” move, but we suspect that the Japanese stock market has some potential for marching to its own drummer, at least over the medium to longer term.

As a final remark, although we plan to discuss market sentiment in more detail on another occasion, the Rydex bull-bear asset ratio has just closed at a new all-time high again. While it has only slightly exceeded its previous highs, this is worth noting because the market started at least a short term pullback every time a new high in the ratio above the 18 level has been reached this year (this means more than 18 times more Rydex assets are currently in bull and sector funds than in bear funds).


Charts by: StockCharts




Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


One Response to “SPX, European Stocks and Junk Bonds Continue to Diverge”

  • TheLege:

    It’s a curious thing but Kyle Bass, at the recent Barefoot Economic Summit, announced that Kuroda would do precisely this, so while it came as a ‘surprise’ to many, Mr Bass evidently had a reasonable idea that this stimulus boost was on the cards. It certainly didn’t sound speculative on his part.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • US Stock Market: Conspicuous Similarities with 1929, 1987 and Japan in 1990
      Stretched to the Limit There are good reasons to suspect that the bull market in US equities has been stretched to the limit. These include inter alia: high fundamental valuation levels, as e.g. illustrated by the Shiller P/E ratio (a.k.a. “CAPE”/ cyclically adjusted P/E); rising interest rates; and the maturity of the advance.   The end of an era - a little review of the mother of modern crash patterns, the 1929 debacle. In hindsight it is both a bit scary and sad, in...
  • How to Blow $12.2 Billion in No Time Flat
      Fake Responses  One month ago we asked: What kind of stock market purge is this?  Over the last 30 days the stock market’s offered plenty of fake responses.  Yet we’re still waiting for a clear answer.   As the party continues, the dance moves of the revelers are becoming ever more ominous. Are they still right in the head? Perhaps a little trepanation is called for to relieve those brain tensions a bit?  [PT]   The stock market, like the President,...
  • Despondency in Silver-Land
      Speculators Throw the Towel Over the past several years we have seen a few amazing moves in futures positioning in a number of commodities, such as e.g. in crude oil, where the by far largest speculative long positions in history have been amassed. Over the past year it was silver's turn. In April 2017, large speculators had built up a record net long position of more than 103,000 contracts in silver futures with the metal trading at $18.30. At the end of February of this year, they held...
  • US Stock Market – The Flight to Fantasy
      Divergences Continue to Send Warning Signals The chart formation built in the course of the early February sell-off and subsequent rebound continues to look ominous, so we are closely watching the proceedings. There are now numerous new divergences in place that clearly represent a major warning signal for the stock market. For example, here is a chart comparing the SPX to the NDX (Nasdaq 100 Index) and the broad-based NYA (NYSE Composite Index).   The tech sector is always the...
  • Stock and Bond Markets - The Augustine of Hippo Plea
      Lord, Grant us Chastity and Temperance... Just Not Yet! Most fund managers are in an unenviable situation nowadays (particularly if they have a long only mandate). On the one hand, they would love to get an opportunity to buy assets at reasonable prices. On the other hand, should asset prices actually return to levels that could be remotely termed “reasonable”, they would be saddled with staggering losses from their existing exposure. Or more precisely: their investors would be saddled...
  • US Equities – Mixed Signals Battling it Out
      A Warning Signal from Market Internals Readers may recall that we looked at various market internals after the sudden sell-offs in August 2015 and January 2016 in order to find out if any of them had provided clear  advance warning. One that did so was the SPX new highs/new lows percent index (HLP). Below is the latest update of this indicator.   HLP (uppermost panel) provided advance warning prior to the sell-offs of August 2015 and January 2016 by dipping noticeably below the...
  • Return of the Market Criers - Precious Metals Supply and Demand
      Ballistically Yours One nearly-famous gold salesman blasted subscribers this week with, “Gold Is Going to Go Ballistic!” A numerologist shouted out the number $10,000. At the county fair this weekend, we ran out of pocket change, so we did not have a chance to see the Tarot Card reader to get a confirmation. The market criers are back in gold town [PT]   Even if you think that the price of gold is going to go a lot higher (which we do, by the way—but to lean on...
  • Good Riddance Lloyd Blankfein!
      One and the Same   “God gave me my money.” – John D. Rockefeller   Today we step away from the economy and markets and endeavor down the path less traveled.  For fun and for free, we wade out into a smelly peat bog.  There we scratch away the surface muck in search of what lies below.   One should actually be careful about quotes like the one attributed to Rockefeller above, even if it of course sounds good and is very suitable for the topic at...
  • Incrementum's New Cryptocurrency Research Report
      Another Highly Useful Report As we noted on occasion of the release of the first Incrementum Crypto Research Report, the report would become a regular feature. Our friends at Incrementum have just recently released the second edition, which you can download further below (if you missed the first report, see Cryptonite 2; scroll to the end of the article for the download link).   BTC hourly (at the Bitstamp exchange). Although BTC has been in a bear market since peaking in...
  • US Stock Market – How Bad Can It Get?
      SPX, Quo Vadis? Considering the Crash Potential In view of the fact that the stock market action has gotten a bit out of hand again this week, we are providing a brief update of charts we have discussed in these pages over the past few weeks (see e.g. “The Flight to Fantasy”). We are doing this mainly because the probability that a low probability event will actually happen has increased somewhat in recent days.   Robert Taylor and Deborah Kerr cast wary glances at their...
  • Yosemite Sam is Back!
      Dubious Picks Unless this is part of another cunning negotiation tactic, the Donald's recent cabinet nominations have to be considered highly dubious, to say the least. First he promoted Mike Pompeo from his CIA post to the position of Secretary of State – removing the eminently reasonable, and as we believe widely underappreciated Rex Tillerson. Pompeo is mainly known for sharing Trump's irrational dislike of the  nuclear deal with Iran, which was pretty much the only laudable policy...

Support Acting Man

Item Guides


Austrian Theory and Investment



THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Buy Silver Now!
Buy Gold Now!

Diary of a Rogue Economist