Bear Capitulations

If there's one thing that I'm noticing around the blogosphere this morning, it is that a lot of bears are throwing in the towel. John Murphy is leaning bullish now I think, and Carl Futia has also thrown in the bear towel. They might well be right. While the sovereign debt crisis is likely to result in a major crash at some point, that debt crisis won't be about two bit players like Greece or even Italy, it will be about the US and the EU as a whole, and when the members of the Euro zone bind themselves together ever more tightly to escape these first sovereign debt problems, they are increasingly creating a situation where if they go down, they all go down together.

The key thing here is that sovereign debt levels in the US and the EU (on average), on the optimistic reading where onerous pay as you go future pension and other commitments are excluded, are reaching about 100% of GDP and are still rising fast. I've read that the tipping point at which it starts to get a lot more expensive to roll over debt is at about 120% of GDP, and by 140% you are effectively insolvent. Debt can go higher of course, Japanese debt is close to an astounding 200% of GDP, but it's hard to find a serious analyst who doesn't think that Japan is effectively insolvent, and that default there is just a matter of time.

The key question is whether policies are changing to stop this slide into sovereign insolvency, and the answer to that is clearly no. The crisis may have been kicked down the road for a while in Europe now, but this summer has been the beginning of the sovereign debt crisis, not the end. More will be coming down the road and the problem will be larger then. There's an excellent article posted by Ritholz at his blog on this subject and it's well worth a read. You can see that here. Just for clarification on some of the comments there the average maturity of US treasuries is just over 5 years, which means that approximately 20% of it needs to be rolled over every year. The US national debt clock, which you can see here, has the US national debt at just under 100% of GDP and $15 trillion. That's roughly $3 trillion in debt to roll over each year in addition to any new borrowings and the amount owed has doubled in the last seven years. When lenders start to demand higher interest rates to compensate for default risk then the interest bill starts rising fast.

This may be a new technical bull market, but this elephant in this room won't be getting any smaller. As and when this crisis will return.

Back in the shorter term though, that was a major bullish break yesterday, with SPX taking out the 61.8% retracement, the 200 day SMA, and the H&S neckline in one day. Strong support is now at 1257 at the 61.8% fib. You can see from the chart below that the fib level breakouts so far have all been retested, though in each case so far only after a test of the next fib retracement level, which in this case would be the 78.6% retracement level at 1307.27 SPX:

Many thanks to my EW pal Alphahorn today, for pointing out a channel that I had missed. That channel is on SPX, and makes grim viewing for bears here as it is a rising wedge turned rising channel from the 2009 lows. I've also made a couple of other points on this chart, which are mainly that while we are very short term overbought, the daily RSI is not yet in overbought territory. The second point is that you can see that the daily 50 EMA and 34 EMA are important bull market support, and prices tend to return to them very regularly during bull markets. The daily 50 SMA is at 1183.41 today and the daily 34 EMA is at 1203.54. Just sayin'. That said these MAs rise and fall fairly quickly and a retracement to hit them might well meet them somewhere in the middle:

I posted a TF chart the other day showing the possible HS forming there and the key resistance levels to watch. I've charted this up on IWM today. I tend to switch between the RUT, TF, and IWM charts treating them as essentially interchangeable. You can see that IWM moved more than 5% in a day from one strong level, through the thin zone inbetween, to hit the next strong resistance level at the highs yesterday. This is the last strong resistance level before IWM gets into the level occupied by the topping H&S there and we may well see some retracement here:

RUT/TF/IWM has been the weakest of the three indices that I mainly watch, but NDX/NQ/QQQ has been the strongest. You can see from the QQQ chart that it is now close to challenging the last high. I've marked in the rising resistance trendline from those last three highs at slightly over 60:

EURUSD broke up strongly through resistance yesterday and the IHS I've been watching there is playing out. This is of vital importance to equities as EURUSD and equities have been very strongly correlated lately. I've marked in a couple of untested resistance levels on this bigger picture chart, but the IHS target is 1.467, and if those levels are broken, the chances are that target will be made:

30yr Treasuries have reached my possible neckline area at 135 and that level is holding so far. I have marked in the possible right shoulder that could now form here:

Copper reached my resistance area at 465-70 yesterday and has only pinocchioed through it so far. We might see a retracement here but the setup suggests that it will break up through it soon:

Silver broke up through strong resistance at 33.5 yesterday and I'm expecting a move to my declining channel upper trendline in the 40/41 area. I've marked in two minor resistance levels on the way there:

I don't think we have made an interim top yet and my feeling is that SPX will at least test 1307 and may well go higher before we see a meaningful retracement, which might by then only be to retest the resistance levels that broke yesterday. I'm leaning towards seeing some retracement today, and strong support is now at the 1257 SPX level at the 61.8% fib retracement. A break below that with confidence would suggest that an interim high has been made. Any retracement today may well not survive until the end of the day. The Gap Guy's tip for today is that 'historical odds favor a gap down on Friday and gap fill by end of the day'.