S&P500—Here We Go Again

February 24, 2014

In what appeared to be a pause, the S&P500 dipped 0.1% last week, ending the week essentially unchanged from the prior week’s close. Volume was light, but that was partly due to the President’s day holiday that took away a trading day. Volatility rose slightly, but it’s still firmly holding on to levels associated with complacency about downside risk.

Technically the S&P is certainly in an overbought condition, both on the daily and the weekly resolutions. Prices have rapidly returned to their familiar spot—hugging the upper Bollinger bands, bands that point to an overbought condition. Bullish signals with respect to the moving averages have also returned. Prices have crossed back above the 50 day moving average, with relative ease, just as they have done so for the last 14 months. The 200 day moving average was never broken.

So does this mean that the bull trend continues? It appears so, but this does nothing to alleviate the extreme overbought condition and more importantly, the extreme overvalued condition. The Shiller PE is in an extreme danger zone, a zone that has been associated with new bear markets every time since the Great Depression (except for the tech boom of the late 1990’s). The only way this condition can correct itself is with a massive drop in equity prices, or with the attainment of a permanent plateau in earnings relative to sales and GDP, which—if it were to happen—would be the only time in history that something like this happens.

At the same time, other markets are not so bullish. Commodities are still struggling to reverse their multi-year losing streak. High yield credit has not jumped back nearly as much as equities have, and Treasuries are have sold off only slightly, meaning that a large amount of money is still taking shelter in Treasuries (rather than jumping back into equities).

So here we are again, right back to the melt-up trend that began over a year ago. The sell-off in January has essentially been reversed and everyone is now looking forward to new highs in the stock market….as usual, in the face of a struggling US economy. As long as corporate earnings don’t collapse, this trend can continue. But as mentioned above, earnings always, always revert back to the mean, when compared to sales and GDP.

This time will be no different. What is unknown, clearly, is the timing.


Is Gold Finally Turning Up?

February 18, 2014

The S&P 500 enjoyed another bounce last week, this time jumping about 2.3%. This brings the S&P almost back up to its all-time highs after dropping in the mid single digits at the end of January and the beginning of February. The problem, as usual with most of the multi-year really, is that volume was light. So not only were mom and pop missing this recent two-week bounce, but they were still busy running for the exits in the aftermath of the recent dip. Investors pulled out billions of dollars from stock funds in January and early February. Volatility, as one would expect, also dropped, but it didn’t quite return to the multi-year lows reached periodically throughout 2013. In other words, investors are still showing some nervousness.

Technically, the S&P 500 is now almost back to it’s highly overbought condition. This is the case on both the daily charts and the weekly charts. This should give bears some hope that a pullback from the bounce is now becoming more probable. In the bulls favor are the long term moving averages. Because the S&P has now bounced for two weeks in a row, it has jumped ┬áback up, comfortably, over the 50 day moving average. Also, not only was the 200 day moving average never broken, but it’s also still sloping upwards….and comfortably so. As a result, the bulls may now, once again, feel like they’re in charge.

In US economic news, the data was almost exclusively bad last week. Wholesale trade results missed expectations by 50%, growing by only 0.3% as opposed to the predicted 0.6%. Initial jobless claims were higher (worse) than expected. Retail sales missed badly. And even retail sales ex-autos missed. Industrial production was the shocker of the week. Instead of growing 0.3% as predicted, it dropped by 0.3%. This was the biggest miss since the summer of 2012. Needless to say, the US economy is not recovering in the traditional sense of the word.

Interestingly, one market that we’ve touched on repeatedly has just passed a major milestone. After peaking in mid 2011 at about $1,925 gold first fell below its 200 day moving average in late 2011. Then after see-sawing above and below the 200 day throughout 2012, gold finally crashed below in early 2013. And it has stayed below the 200 day ever since.

Until last week.

After dipping below $1,180 in June 2013, gold rebound somewhat, but stayed within a downward trend. Then after revisiting $1,180 at the very end of 2013, gold has been on a tear, rising almost every week in 2014 making it one of the largest price gainers so far this year, along with silver.

But most importantly, after testing (and successfully holding) the lows of 2013, gold closed above its 200 day moving average last week.

Why is this important?

Because if trades and investors use technical analysis at all (and almost all commodity traders do), then they will almost always start with the 200 day moving average. Assets that trade above their 200 day moving averages (especially when those averages slope upward) are said to be in a bull market and assets trading below their 200 day moving averages (especially when those averages slope downward) are said to be in a bear market.

So by closing above its 200 day moving average, gold has made its first major step to re-entering a bull market. If the move up in price is strong enough, it will be able to turn to slope of the 200 day up as well (it’s still sloping downward). And if this happens, then gold will attract a lot of traders and investors who will see an “all clear” signal to buy.

The next several weeks should give us this answer.

And the Bounce has Arrived

February 10, 2014

Not unexpectedly, the S&P500 did rebound last week, rising about 0.8% to put a stop, at least for a while, to the modest losses that had been incurred over the last month. Volatility melted back down, as one would expect. But volume–although moderate for the week–was light on the up days and strong on the down days. This suggests that investors were not coming back in droves to buy the dip.

US economic news last week was especially dismal. Let’s start with the ISM manufacturing index which registered its biggest miss (vs. expectations) on record and its biggest miss (in raw points) since 2008. Factory orders registered their biggest drop in five months. Ominously, factories built up their inventories at the fastest rate in 15 months; this means that, if end sales don’t pick up soon, factories will have to reverse this inventory build by slashing production—-and almost always, this leads to a recession. ISM services only met expectations. International trade figures for the US showed a greater deficit than expected; this will lower upcoming GDP figures. And the big number of the week—payrolls—disappointed, badly. Instead of rising by 181,000 as expected, US payrolls grew by only 113,000. Perversely, the headline unemployment rate dipped to 6.6% but only because unemployed folks keep dropping out of the labor force. The average work week and average hourly earnings failed to show any growth at all. In short, the US economy is still struggling to gain traction, and as of last week, it’s showing signs of slowing down. Not good.

Technically, the S&P500 just experienced a classic oversold (on the daily charts) bounce. During the drop, the S&P crashed through the 50 day moving average, and while not quite reaching the 200 day moving average, it bounced right back up to the 50 day moving average. Because it bounced back up to the 50 day from beneath it, this moving average will now act as resistance, or a ceiling, that will impede further gains.

Why? Because for the last year, traders were trained to buy all the dips to the 50 day moving average, and when the index bounce off the 50 day, they were rewarded with immediate gains. This time, the index sliced through the 50 day, causing all those dip buyers to face paper losses. And now that the index has recovered to the 50 day—the level where many of the dip buyers entered the market—they will tend to exit their trades at a break even price, and thereby successfully avoiding the pain of turning paper losses into booked or actual losses.

This means that the next test will be the price action around the 50 day moving average. If the index grinds upward and through the 50 day, and holds above it for a while, then the buy-the-dip crowd may return. But if the 50 day moving average does act as a ceiling and arrests further upward movement, then the short traders will gain confidence and jump in. This will push the index back down, making the 200 day moving average the next major line in the sand.

The upcoming week will be telling.

Still No Rebound in the S&P 500

February 3, 2014

The S&P500 lost another 0.4% last week on rising volume. The rising volume is ominous, because it suggests that the number of sellers was increasing which in turn suggests that the week’s loss could be followed ┬áby more selling. Adding to this risk was the big jump in volatility. The VIX rose back into the upper teens, and while this is by no means a panic level, it’s certainly above the ultra-low levels near which the VIX spent most of 2013.

Technically, the S&P 500 is still quite overbought. It’s important to remember that despite the tree weeks of losses, the S&P is still less than 4% off its all time highs. While notable, such a small total loss does not really eliminate the overbought condition, especially on the weekly and monthly resolutions. Sure, there’s room for a bounce on a day-to-day basis, but on longer time horizons, these are the conditions under which investors would religiously be buying the dips and pushing the index back up to new highs.

While the 50 day moving average has been taken out, the 100 day is still holding and the 200 day is still almost 5% away.

Breadth is weakening, which means that a larger and larger percentage of the index is suffering from the decline. That said, the percent of firms below their 150 day moving averages has still not declined to the lows of 2013 and are far away from the lows in 2012. The same conclusion can be drawn from the new highs minus the new lows. Although more stocks are participating in the sell off than usual, most are still near their recent highs.

Away from Wall Street, US economic data was especially weak over the last seven days. In housing, new home sales missed badly; the Case Shiller index of home prices dropped when it was expected to rise, and pending home sales collapsed and recorded their biggest miss in over three years. Durable goods orders, both headline and ex-autos, plunged. Initial jobless claims surged. Personal income showed zero growth, instead of the 0.2% growth that was expected. And real disposable income, on an annual basis, suffered its biggest drop since 1974. Main Street is hurting, and hurting badly.

So this leaves us with a stock market at a cross roads. For all of 2013, this would be the time when the faithful dip buyers would step up and buy with both hands knowing, or at least believing, that the Fed had their backs. And for this bull market trend to continue, THIS is the week that the bounce must happen for the uptrend to continue to keep everyone believing in the magical rising stock market.

But if —for any reason—this bounce does not happen soon, then look out below. Over the last year, the equity markets have become so over-valued and so over-bought that there’s a risk that a small sell-off, if not quickly reversed, could become a big sell-off.

This could get very ugly, very fast.