LunaticTrader

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Posts Tagged ‘bonds’

Putting the QE toothpaste back in the tube

Posted by Danny on November 19, 2018

Last year I wrote an article on what to look for when the Fed unwinds its QE program: Quantitative squeezing – what you need to know.
Since the start of QT (quantitative tightening) the stock market is more or less flat and long term bonds are down about 10% yoy.

Let’s have a look at how the unwind is progressing and detect possible implications for investors.

The Fed’s balance sheet remains the main chart to watch (https://fred.stlouisfed.org/series/WALCL):

Fed_assets

From $4.46T a year ago the balance sheet is down to $4.14T, or an unwind of $320 billion. At this rate it would take about 10 years to get to a balance sheet that is back in line with the levels prior to 2009. As I pointed out last year, that’s not going to happen. Trying to put all the QE toothpaste back into the tube would create an economic crisis that is worse than the one they claim to have “solved” with their QE program.

I pointed to excess reserves held by commercial banks as the prime candidate to pay for the unwind. Here is the current situation (https://fred.stlouisfed.org/series/EXCSRESNS#):

excess

From $2.2T excess reserves a year ago the banks are down to $1.75T. That’s a reduction of $450 billion. It does look like those excess reserves are indeed picking up the QT tab. But the interesting thing to note is that a $320 billion QE unwind came with a $450 billion reduction in excess reserves. A reduction at this rate could continue for another 3 years, bringing the Fed balance sheet to around $3T, but that would still be three times higher than it was before the crisis. Essentially, the excess reserves of banks are back down to late 2011 levels already, with the Fed’s balance sheet still $1.3T above its late 2011 levels. This is a strong indication that only a partial unwind of QE will be possible.

I also keep an eye on commercial banks’ holdings of government paper (https://fred.stlouisfed.org/series/USGSEC#0):

banks_treas

There is only a small rise from $2.49T a year ago to $2.56T now, an increase of $70 billion. This means banks are not showing much appetite for the debt paper that the Fed is unwinding, which is what I expected.
How about foreign buyers? Official foreign holdings of US treasuries were around $6.3T a year ago and are down to $6.2T now. Largest holders China and Japan have reduced their holdings and Russia has sold almost all its US treasuries. Predictably, those foreign buyers are also refusing to become QT bagholders: http://ticdata.treasury.gov/Publish/mfh.txt.

This weak demand by major participants is why longer term treasury bond prices are down 10% over the year:

tlt

How about cash on the sidelines held by stock investors? The data are now here: http://www.finra.org/investors/margin-statistics
Stock investors have about $340 billion in cash and $650 billion in margin debt. Not much change. With those numbers we can’t expect stock owners to play much of a role in a $3T QE unwind. If anything they may panic alongside bond holders at some point, because margin interest rates go up together with rising Fed funds rates.

The question becomes: how much more QT can be done before it causes global bond market stress and starts choking the economy? We may be reaching that point already. If Europe and Japan start their own QT it could become even more interesting.

My guess is that QT in the US will be stopped (paused) as soon as excess reserves at commercial banks approach zero. It may be stopped even before that point. Stock and bond markets could show a very positive response to any such announcement. That’s going to be a wild card for investors in the year(s) to come. At some point it will be concluded that it is more desirable to freeze central bank’s balance sheets at their elevated post-2010 levels. Europe, Japan and China may never start their own QT (or only do a small symbolic reduction) because their economy remains too weak to take it.

A possible side-effect of doing too much QT would be an unexpectedly strong US dollar because it makes dollars more scarce.

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Watching bonds for a big move

Posted by Danny on January 4, 2016

Stocks had a weak santa rally and the S&P 500 ended the yearly nearly unchanged. The S&P remains confined to the 2000-2100 range and the next major event is going to be when stocks break away from that range, up or down. Let’s have a look at the chart (click image to enlarge it):

S&P 500

The bad news is that a pattern of lower highs and lower lows is starting to appear, and that’s bearish. The good news is that the slower Earl2 (orange line) has finally turned up, suggesting that the recent correction is nearing an end. But the faster Earl (blue line) is just turning down, pointing to short term weakness first. The MoM indicator is rather neutral. Meanwhile we are in a lunar green period, normally favoring rising stock prices, but the LT wave for January indicates an unusually weak green period. So, this is a very mixed bag and not a straightforward setup to buy.
Whenever we have so many noses pointing in different directions it is usually the shorter term indications that pan out first. In this case that would mean stocks stay weak until the Earl bottoms out again and gets in a position to go up together with the Earl2. And it could take a few weeks to get there.

Besides stocks I would also keep an eye on bonds in the first months of 2016, and this is our chart of the week (click image to enlarge it):

TLT

As this Bloomberg article points out, the world’s main economies have to refinance $7 trillion worth of bonds in 2016. With interest rates projected to go up from their historically low levels, investor’s appetite for those bonds may not be what it used to be. And that could get interesting, especially in the countries where bond redemptions will go up compared to 2015 (US, UK and China).
As you can see in the chart, US long term bonds (TLT) have been stuck within a huge triangle from which a breakout can be expected soon. If TLT drops below 119, then a slide towards 105 becomes likely and that would be a 10% loss for bond investors. From a foreign investor’s perspective it would take a 10% climb in the US dollar to offset that loss. Of course, if the US dollar keeps climbing it would also make US stocks more attractive for foreign investors, provided they don’t enter a bear market. That’s why I am watching bonds for the potential ripple effects it will have on US$ and on stocks. If bonds decline while the dollar goes up then US stocks could become the winner because of foreign inflows.

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Key reversal levels for week of January 27, 2014

Posted by Danny on January 26, 2014

Key reversal levels for this week:

Weekly Current Mode Key (W) MoM (W) Weeks % Ch.
Nasdaq 4,128.17 3,863.36 8.06 55 33.63
S&P 500 1,790.29 1,761.10 5.94 60 26.40
Nikkei 15,391.56 14,815.61 5.97 61 62.60
FTSE 100 6,663.70 6,570.60 2.27 4 -1.29
DAX 9,392.02 8,999.01 6.41 28 14.01
Bonds (TLT) 107.48 104.27 -1.04 0 0.00
Gold (spot) 1,269.80 1,309.92 -2.92 57 -23.36
$EURUSD 1.3670 1.3460 1.54 26 2.92
Oil (CL) 96.64 100.20 -2.12 13 -1.27

(Legend: Mode: green = bullish, pale green = weak bullish – may have peaked, red = bearish, pink = mildly bearish – may have bottomed | Key: key reversal level | MoM indicator: green = rising, red = falling | Weeks: weeks since start of current bullish or bearish mode | % Ch: percent change since start of current mode | yellow box: changed direction) (for more details about these key levels, see: https://lunatictrader.wordpress.com/key-reversal-levels/ ) (for information about the MoM indicator, see: https://lunatictrader.wordpress.com/2013/09/14/mom-indicator/ )

Important developments in the weekly key reversal levels:

* Stock market weakness that started showing up a few weeks ago is continuing. Weekly MoM remains down for most indexes, and some markets are coming close to their weekly key reversal levels. At this point it is only a pullback, but if weekly key reversal levels get broken to the downside it marks the start of a bear market or at least a more prolonged correction.

* Bonds (TLT) have turned bullish.

Daily key reversal levels as of today:

Daily Current Mode Key (D) MoM (D) Days % Ch.
Nasdaq 4,128.17 4,185.27 4.21 0 0.00
S&P 500 1,790.29 1,835.86 -0.16 0 0.00
Nikkei 15,391.56 15,817.08 -2.37 0 0.00
FTSE 100 6,663.70 6,759.83 3.27 0 0.00
DAX 9,392.02 9,590.68 3.97 0 0.00
Bonds (TLT) 107.48 104.25 8.68 10 3.58
Gold (spot) 1,269.80 1,231.13 2.48 10 1.75
$EURUSD 1.3670 1.3580 -1.26 1 -0.18
Oil (CL) 96.64 94.53 2.33 2 -0.05

(Legend: Mode : green = bullish, pale green = weak bullish – may have peaked, red = bearish, pink = mildly bearish – may have bottomed | Key: key reversal level | MoM indicator: green = rising, red = falling | Days: days since start of current bullish or bearish mode | % Ch: percent change since start of current mode | yellow box: changed direction) (for more details about these key levels, see: https://lunatictrader.wordpress.com/key-reversal-levels/ ) (for information about the MoM indicator, see: https://lunatictrader.wordpress.com/2013/09/14/mom-indicator/ )

Important developments in the daily key reversal levels:

* All covered stock indexes have broken below their daily key reversal levels and are now in declining mode. Whether this will be yet another brief pullback or turn into something bigger remains to be seen. As long as MoM is to the downside there is no reason to buy.

* Bonds (TLT) and gold are continuing their recent rally.

* $EURUSD and Crude Oil are back into rally mode.

Our current key target zones (we use a +/-1% zone around these targets):

Key Targets Top1 Top2 Bottom1 Bottom2
Nasdaq 4200 4390 3530 3210
S&P 500 1870 1926 1755 1576
Nikkei 17220 13860 * 12940 *
FTSE 100 6800 7150 6230 6110
DAX 9800 10120 8715 7870
Bonds (TLT) 111.80 128.50 102 96.25
Gold (spot) 1298 1448 1153 1075
$EURUSD 1.3950 1.42 1.3435 1.2870
Crude Oil(CL) 105 113 89.50 86.00

(* = new target ) (for more details about these key targets, see: https://lunatictrader.wordpress.com/2013/08/20/key-target-levels/ )

Important developments last week:

* A new Bottom1 target for Nikkei at 13860

* Stock indexes tested their Top1 targets and failed to break above them. This is their second failure, so now we get a move to the downside. We can start watching for the Bottom1 targets to be tested in some markets.

* For gold, oil, Euro and bonds we can now set sights on their Top1 targets.

 

PS: if you are looking for key reversal levels for other world markets or individual stocks, then check out my Twitter account.

Good luck, Danny

 

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Key reversal levels for week of December 16, 2013

Posted by Danny on December 16, 2013

Key reversal levels for this week:

Weekly Current Mode Key (W) MoM (W) Weeks % Ch.
Nasdaq 4,000.98 3,758.37 8.29 49 29.52
S&P 500 1,775.31 1,718.10 7.75 54 25.35
Nikkei 15,403.11 14,070.27 5.58 55 62.72
FTSE 100 6,440.00 6,629.66 1.38 0 0.00
DAX 9,006.46 8,774.91 7.47 22 9.33
Bonds (TLT) 103.21 107.46 -2.09 30 -10.92
Gold (spot) 1,236.34 1,356.16 -4.09 51 -25.38
$EURUSD 1.3741 1.3372 2.74 20 3.46
Oil (CL) 96.60 101.33 -4.66 7 -1.31

(Legend: Mode: green = bullish, pale green = weak bullish – may have peaked, red = bearish, pink = mildly bearish – may have bottomed | Key: key reversal level | MoM indicator: green = rising, red = falling | Weeks: weeks since start of current bullish or bearish mode | % Ch: percent change since start of current mode | yellow box: changed direction)
(for more details about these key levels, see: https://lunatictrader.wordpress.com/key-reversal-levels/ )
(for information about the MoM indicator, see: https://lunatictrader.wordpress.com/2013/09/14/mom-indicator/ )

Important developments in the weekly key reversal levels:

* The picture continues to weaken for stocks. The FTSE 100 has fallen below its weekly key reversal level and for the Nasdaq we see weekly MoM turn down.

* No significant changes for bonds, gold, oil and EURUSD.

Daily key reversal levels as of today:

Daily Current Mode Key (D) MoM (D) Days % Ch.
Nasdaq 4,000.98 3,981.06 2.17 44 6.20
S&P 500 1,775.31 1,790.47 -1.06 1 -0.15
Nikkei 15,403.11 15,171.13 1.02 23 6.02
FTSE 100 6,440.00 6,613.38 -6.77 13 -2.96
DAX 9,006.46 9,159.87 -5.02 2 -0.29
Bonds (TLT) 103.21 104.05 -2.20 27 -1.65
Gold (spot) 1,236.34 1,268.39 -1.15 28 -5.74
$EURUSD 1.3741 1.3581 6.24 15 1.43
Oil (CL) 96.60 95.53 5.05 7 -0.75

(Legend: Mode : green = bullish, pale green = weak bullish – may have peaked, red = bearish, pink = mildly bearish – may have bottomed | Key: key reversal level | MoM indicator: green = rising, red = falling | Days: days since start of current bullish or bearish mode | % Ch: percent change since start of current mode | yellow box: changed direction)
(for more details about these key levels, see: https://lunatictrader.wordpress.com/key-reversal-levels/ )
(for information about the MoM indicator, see: https://lunatictrader.wordpress.com/2013/09/14/mom-indicator/ )

Important developments in the daily key reversal levels:

* The S&P 500 and the DAX have joined the FTSE 100 by going into declining mode (red). The Nasdaq and the Nikkei are coming close to doing so as well. It’s too early to buy as daily MoM remains down for all covered stock indexes.

* Bonds (TLT) have seen daily MoM turn back upwards, so have survived another test of the 102 bottom level, at least for now.

* Gold continues to build a base just above 1200. MoM is to the upside, so if gold can close above its daily key reversal at 1268.39 then a further rally becomes likely.

* For oil we see daily MoM turn down, probably just a consolidation after its recent gains.

Our current key target zones (we use a +/-1% zone around these targets):

Key Targets Top1 Top2 Bottom1 Bottom2
Nasdaq 4200 3530 3210
S&P 500 1820 1870 1576 1522
Nikkei 15850 17220 12710 10450
FTSE 100 6800 7150 6205 6110
DAX 9480 9800 7870 7210
Bonds (TLT) 111.80 128.50 102 96.25
Gold (spot) 1448 1540 1215 1153
EURUSD 1.3950 1.42 1.2870 1.2350
Crude Oil(CL) 105 * 113 * 89.50 86.00

(* = new target )
(for more details about these key targets, see: https://lunatictrader.wordpress.com/2013/08/20/key-target-levels/ )

Important developments last week:

* A new Top1 target for Crude Oil at 105, with a refined Top2 target at 113.

* Bonds (TLT) continues to sit just above its Bottom1 target at 102. That level may not hold much longer and I would start looking for the Bottom2 target at 96.50

* EURUSD is closing in on its Top1 target

PS: if you are looking for key reversal levels for other world markets or individual stocks, then check out my Twitter account.

Good luck,

Danny

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