DIVERGENCES
Chris Ciovacco believes lower than normal stock market volume shows the large institutions (like pension funds and insurance companies) are not big buyers in this rally. The technology sector has led every significant rally in the last two years, except this one.
Copper tends to confirm lasting bottoms in stocks. It bottomed in the fall of 2008, several months before stocks bottomed with very strong buying volume on the way back up. Copper currently remains in a downtrend. Chris believes that if there were confidence in the current rally, the interest in copper would be much greater. He is keeping an open mind, but this still looks like a bear market rally.
James Kostohryz had two good articles today – see links below – where he discuses how both the bond markets and interbank markets are exhibiting major stress, Chinese equities are near multi-year lows, and industrial metals and basic material stocks are mired in major downtrends while the S&P 500 and Nasdaq are nearer to the top of their trading ranges and crude oil prices are close to $97. In 95% of situations in which he experienced these sorts of divergences in his career, James said a collapse of equity markets follows within a few months.
The last time he remembered such a severe divergence between the above markets and U.S. stocks was mid 2008. These divergences are a warning sign that there is a potential mispricing of assets going on in global markets. He believes U.S. equities, oil and the currency markets are not adequately pricing in the major threats that are faced by Europe and the entire global economy.
That doesn't necessarily mean that stocks have imminent risk of plunging in value. In 2008, it was not before several major financial institutions became insolvent and the entire banking system was on the verge of collapse that equity and commodity markets began to reflect the risks. In the absence of aggressive preemptive intervention by the ECB, James believes the sort of financial crisis that Europe will experience is likely of a similar magnitude as that experienced by the U.S. in 2008. He sees no persuasive reason to purchase equities at this time.
The first link is to an article where he gives reasons why the situation in Europe is fast approaching the point where a financial crisis is becoming unavoidable and that in the absence of aggressive intervention (money printing) by the ECB, Europe could find itself in the midst of a full-fledged crisis before New Year.
The market could keep running up on relatively low volume due to the "Bernanke put" and at some point, institutional money could jump in. However, it is a gamble because we are reading that Germany won't allow the ECB to defend Italian, Spanish and French interest rates and keep them low by printing money to buy their bonds in large quantities.
http://seekingalpha.com/article/307208-prepare-for-europe-collapse-before-new-year
http://seekingalpha.com/article/307054-divergences-point-to-risk-of-stock-market-crash