This Time Is Different. Or Is It? – Part I

NOTE: This is part of a series for the simple reason that we bit more than we could chew (or put in a reasonably sized blog post)!!!

At the end of 2013 and beginning of 2014, the chatter on the Street was that the yields have no place to go except up. A consensus was emerging that the inflation will tick higher and the Fed has to follow its announced tapering with rate hikes. In April 2014, MarketWatch reported that a survey of 67 economists showed that 100% of them expected the 10-Year yields to rise in the next six months. In March, 97% of them held this view, in February, 95% thought so and in January 97% of were holding the ‘yields will rise in near term’ view.

But nobody told yields about that and they missed their calling. On March 31, 2014, the yields on 10-Year Treasury was 2.723%. It dropped to 2.508% on September 30th, and dipped below 2.20% on October 14th. To be fair, yields did rise briefly in May-June from the low of 2.402% to the high of 2.692% and again in September from a low of 2.305% to a high of 2.642%. But, the point remains that since the last week of December 2013, the 10-year yields have been under a strong downward pressure. We wonder what happened to the investors who took these economists’ advice.

Surely, there were many who did not buy into the argument that the Fed will raise rates soon. Jeff Gundlach and Bill Gross did not think that yields will rise. They said that if the labor growth remain subdued and low inflation persisted then the yields will fall and fall they did. The US economy is showing signs of recovery but there is still no sighting of the dreaded inflation. The employment numbers have risen and unemployment rate has fallen below 6% but the wages haven’t picked up. The global risk has increased and EU is on the brink of deflation so the positives of US economy are countered somewhat. Wilbur Ross thinks inflation concerns are a thing of past and he is more concerned with deflation (though he expects rates to rise in 2015 – six months from now??? ) and thinks that Chairwoman Yellen will move towards ending QE efforts.

On the other hand, San Francisco Federal Reserve Bank president, John Williams, says that he would be open to another round of QE if inflation trends fall significantly short of Fed expectations. His observation indicates that Fed’s rate hike decisions will be impacted by growing global concerns and the strength of dollar.

That is that but how are the charts shaping up? Do they show inflationary concerns or deflationary pressures? Are they telling us that the new stock market highs of 2014 are like that of 2007 market highs or something else?

Revisiting Charts of 2007

On October 14th, the low of S&P 500 was 7.3% below the all time high of 2019.26. In August 2007, S&P also dropped so much from its then all time high of 1555.90. This is how S&P 500 looked in mid-August 2007.


After making a triple-bottom between July 2002 and March 2003, S&P 500 rose to make a double top in July 2007. It then fell and broke below 39-week EMA but did not break the 89-week EMA trend line.

Dow Jones Industrial Averages had similar chart pattern in August 2007, except that compared to S&P 500, it did not make a double top as it had already crossed its previous all-time high (11750.28) in October 2006. Dow Transports was little bit different in the sense that unlike Industrials, its mid-August low was below previous swing low. This constitutes a minor Dow Theory signal for a change of trend. Transports also breached the uptrend line unlike the Industrials and S&P 500.

INDU_141014_W_99_07 TRAN_141014_W_99_07

In 2007, NASDAQ Composite was nowhere near its all time high and had bounce back to Fibonacci 38.2% level of the decline from all time high reached in 2000. Russell 2000 had a chart pattern similar to Dow Transports.

COMPQ_141014_W_99_07 RUT_141014_W_99_07

So the charts show that in the third quarter of 2007, the major US indices were retracing from their respective highs (either all-time or multi-year) but the uptrend was mostly intact with minor breaches for Transports and Russell 2000. Global indexes were showing similar patterns.

European / Developed market indices were also at record high. German DAX had just made an all time high and UK’s FTSE 100 was near the all time high (6650.60) made in December 1999. Broader European STOXX 600 was making higher highs after eclipsing the previous all time high in November 2005.

XET_141014_W_99_07FTSE_141014_W_99_07 STOXX_141014_W_99_07

Rest of the World was also gung-ho with emerging markets taking the lead. China’s Shanghai Composite was near the then all time high. So was India’s SENSEX. Dow Jones Emerging Market Index was retracing from the all time high as was EEM, iShares Emerging Market ETF.

SHG_141014_W_99_07 SENSEX_141014_W_99_07 W5DOW_141014_W_99_07 EEM_141014_W_99_07

Most major global equity indices were either near all time highs or multi-year highs. Their retracement from those high levels were entirely understandable as the normal up-and-down market movements.

However, when we combine these patterns with other asset classes then an interesting picture emerges. Back in 2007, bonds were continuing their then 25+ years bull run. After making a low in 2000, which coincided with S&P 500 top, 30-year US Treasuries rose till 2003, when S&P 500 bottomed out. From 2003 to mid-2007, bonds generally traversed a descending triangle and, unsurprisingly, 10-Year Treasury yields formed an ascending triangle.

TNX_141014_W_99_07 ZB_141014_W_99_07

Dollar index was in a free fall since 2002 and had just made the then all time low of 79.87 in July 2007. The Goldman Sachs Commodity Index had just made a double top in August 2007 near its then all time high.

DX_141014_W_99_07 GSCI_141014_W_99_07

To summarize, in mid-August 2007, the equity market indices were either at all time high or several-year highs. The broader index, S&P 500 was at a psychological stage of forming bearish double top pattern. Dow Industrials and Dow Transports were giving Dow Theory trend change signals; NASDAQ Composite was at a psychological resistance of 38.2% Fibonacci retracement level and Russell 200 was threatening to break uptrend line. Global equity markets were also roaring being led by the Chinese and emerging market growth

The commodities were rising. The combination of rising equity and rising commodities was indicative of late stage of business cycle. Yields were breaking below an ascending triangle pointing to rising bond and falling rates.

The classic intermarket analysis of these charts tells us that something was definitely afoot in mid-August 2007. Next few weeks’ market action was the follow through confirmation. S&P 500 and Dow Industrials bounced back and made another attempt to break above the high before giving up the ghost in the early January 2008. NASDAQ and Russell 2000 rolled over in October-November 2007. The yields on 10-year Treasuries continued their break down of the ascending triangle and bottomed at 2.038% by December 2008. Dollar Index also continued the downward trajectory before arresting the fall in April 2008. Commodities broke above the high and shot up to the moon by the summer of 2008.



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