The risk-on trade has met with varying degrees of cynicism, from “don’t fight the Fed” to claims of a new a bubble.
In our February article, we contemplated whether this was really the fifth year of a market recovery or something else. Today, with the latest round of breakouts from sectors normally seen at the early onset of a new business cycle, e.g. retail, transport and finance, the answer lies much closer to “something else.”
What was missing from the illustration of the accepted risk-free trade of 20+ year Treasury (TLT) was the S&P 500 (SPX) for comparison. A bit of intermarket analysis and a tale from the small business community, and a different story unfolds than the one told by the SPX alone.
Two Business Cycles?
Looking at SPX over the last ten years, it is easy to recognize that the uptrend from 2004-2007 bears little resemblance to the uptrend over last five years. The SPX from 2004-2007 traded in a relatively predictable channel. In contrast, since bottoming in 2009, the SPX has experienced volatile and deep corrections, all during what one might take for granted as a single business cycle.
However, when we compare the action of the SPX to that of the TLT below, a different story emerges. What we see with the SPX is a large crater in the summer/fall of 2011, mirroring the volatile test by the TLT of its 2009 peak during the same period.
Figure 1: (SPX over the last decade)
Figure 2: (TLT over the last decade)
The Escalation of the European Crisis in 2011 Signaled the Top of the Last Business Cycle
The hypothesis that a first business cycle following the 2009 bottom actually topped in the summer/fall of 2011 can be hard to swallow if we focus on the SPX alone. I ask you to take a step back from the charts and recall the sentiment in the financial markets during the unforgettable summer of 2011. The summer of 2011 saw the global banking crisis that began in the U.S. hit the Euro zone full force. Compare the events of that summer to what has happened since, and then compare that to what we see in our local communities.
Visit your Local Chamber of Commerce or BNI
When the charts confound, sometimes the best thing to do is “sleep on it” or look elsewhere.
Last summer, in one my first blog posts, I mentioned signs of change coming to the small business community. My family did not escape the ravages of the Great Recession. Today, like others, we are trying to reinvent and rebuild as my husband and father-in-law build their new business. It is definitely not easy out here, but what I can share with you is that from the perspective of the small business community, last summer felt like the bottom.
You can take my word for it or, better yet, visit your own local Chamber of Commerce or BNI and talk to the small business owners there. My guess is they will tell you that it is still hard. My other guess is that you will gain from them a sense of renewed optimism couched with caution.
The Gold Chart from the Summer/Fall of 2011
Figure 3: (Gold Tops in Summer/Fall 2011)
Finally, I leave you with the chart for gold, the last refuge during an economic crisis and certainly during the last decade’s secular bear. The gold chart (above) portrayed the classic signatures of “irrational exuberance” when it jumped out of its trading channel in above-average trading volume, but then stalled over the coming weeks before re-entering the channel during the summer/fall 2011 Euro zone crisis. During that time, as the U.S. markets and the media eyed the crisis in Europe with intensity, the gold trade gained momentum but quickly found exhaustion. Gold confirms the parallel actions of the risk-free trade in the TLT.
The summer of 2012 saw the Eurozone crisis heat up again and a smaller peak build in the TLT chart. However, surprising or not, at the New Year both gold and TLT fell below the long term psychological support of their respective 10/50 week moving average (ma), signaling the climax of the crisis had passed and the risk-on trade was on.
It is still not easy out here. Wage rate is near the decade’s lows and unemployment is at historical highs. However, signals in the long-term bond market, gold and those of the small business community are a reminder that, unlike the more popular narrative of SPX, we are closer to the bottom than the top of the current business cycle.
References: Price Charts from Think or Swim.
