I'm no prophet. Well, not exactly. But my technical analysis is uncannily accurate.
As I was working on my Federal Revenues Report this week for The Wall Street Examiner Pro Trader, I noticed three very telling signs that we are indeed entering a bear market.
I wouldn't wear a sandwich board saying "the end is nigh," but I might just hold up one of these three charts.
Sign No. 1: Rising Treasury Cash
Withholding tax collections pulled back a little over the past few weeks, but the trend remains strong. This means that top-line economic data will continue to look strong, despite the steady hollowing out of the U.S. middle class.
Therefore, the theme continues to be that the lack of any sign of material weakness would encourage the Fed to stay on track for a real tightening of monetary policy. "Real tightening" means shrinking the balance sheet, not the sham tightening of increasing the interest rate subsidy to the banks by increasing interest on excess reserves.
The Fed has made it official that the real tightening started in October as the Fed took the first step toward shrinking its balance sheet. That will pull money out of the banking system. The program starts very gradually. The effects will be minimal at first. But over time it will increasingly reduce the pool of cash available to purchase stocks and bonds. This has set up the conditions for a bearish stock market, but as I wrote last month, it "won't necessarily trigger them immediately."
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With the lifting of the debt ceiling, the Treasury began selling the predicted large quantities of new debt in the second half of October. Treasury cash has risen and will continue to rise. The TBAC (Treasury Borrowing Advisory Committee) wants the Treasury to rebuild a $500 billion contingency fund. As that cash is pulled out of the markets, it will put downward pressure on stocks and bonds.
The impact of such Treasury cash builds in the past has been immediately bearish. But this time, stock prices have not yet fallen. I expect a delayed reaction as the Treasury continues to raise cash. The timing is a matter for technical analysis. Recently, our short-sale picks on The Wall Street Examiner Pro Trader Daily Trades List have been working well. This is probably a sign that the end is nigh.
The Treasury balance is shown on an inverse scale on the chart below to show the usual relationship between it and stock prices. The Treasury has begun rebuilding its cash since the debt ceiling was lifted in early September. Normally stock prices would fall as investors bought the heavy Treasury issuance. Some Treasury buyers liquidate other investments to raise the cash for the Treasury purchases. That selling at the margin normally depresses stock prices.
That did not happen this time. At least it has not happened yet. But the TBAC has told us that the Treasury would continue selling a ton of new debt through December. It is only a matter of time until stock prices succumb. I view this divergence as a warning sign. It is not a sign of strength. It is a sign of dangerously extended stock prices.
Sign No. 2: Gains in Withholding Tax Collections
About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.