US Stocks—New Highs and New Lows

August 25, 2014

Yes, it looks like the equity melt up has in fact resumed. The S&P500 gained another 1.7% last week and set new record highs before retreating a very little bit on Friday. Volume was extremely low, which as mentioned last week, suggests that last week’s move higher was not done with a rush of new buyers. Volatility dipped some more, but as in the prior week, it didn’t fall back down the lows reached in earlier this year.

Very few economic reports were released last week. The consumer price index shows no signs of inflation. Both headline and core rates show very mild price increases. Housing starts were a bit stronger than expected. Initial jobless claims came in near the 300,000 mark. The Philly Fed survey was somewhat stronger than expected, as were existing home sales. But again, very little can be inferred about the US economy from these reports simply because so few were announced. Next week, the number of releases will jump back up to more normal levels.

The technical picture has returned to one where the US equity markets look extremely overbought. Prices on both the daily and weekly perspectives have jumped back up to their respective upper Bollinger bands. While this is the area they’ve been hugging for the past one and a half years, long-term historical data suggests that prices will not remain there forever, that once they reach this area and stay there for a while, they tend to correct back down to the lower Bollinger band. Shockingly, this hasn’t happened since 2012. So stocks have been overbought, arguably, on a sustained basis, since that time. Coincidentally, this is approximately the amount of time that the Fed has conducted its latest QE program, the program that will almost certainly be shut down—as stated directly by Fed officials—in less than 60 days.

Finally, there is one very important breadth indicator that has diverged very bearishly from the latest new high set in the S&P500 last week. The number of new highs minus the number of new lows (for the NYSE) has surged above 500 every time new record prices were set in 2012, all of 2013 and even the first half of 2014.

But this time, this latest surge in July and late August is different. This time, the new highs minus new lows has risen to only about 300—far below the 500+ seen at every other price high.

This means that the market internals have badly broken down….that fewer and fewer market leaders are—this time—participating in price rise. And more importantly, every major market correction is preceded by a break down in this internal measure.

Will this time be different?

The Equity Melt-Up Resumes?

August 18, 2014

The S&P500 gained 1.2% last week. Volume was abysmally low, so there was no rush of buyers stampeding into stocks, most likely because most everyone who wants to own stocks already owns them. Volatility retreated back down somewhat, but the VIX did not return to the lows of 2014 when the most recent equity highs were hit. So there’s very little conviction behind the buying and yet, it could continue based on volatility levers which have further to fall just to return to recent lows.

The  technical picture is returning to the one we’ve seen over the last 18 months, one where stock prices are stretched, yet continue to stretch higher. Sure, prices have not returned back up to the most recent highs, and there’s no guaranty that they will. But the last two week recovery looks very similar to the recoveries that followed all the other minor sell-offs over the last year and a half. The next two weeks will tell us if the bounce back succeeds. At that time, prices would be back at, back above, the upper Bollinger bands on both the daily and weekly charts and this is a simple test of stocks being over bought…..once again.

Last week’s US macro news was mixed….once again. Retail sales, both headline and ex-autos, badly missed. At the same time, business inventories met expectations, as did producer prices both core and headline.  Initial jobless claims jumped up, well above expectations. Consumer  sentiment also disappointed. On the positive side, industrial production came in a bit better than consensus estimates. All in all, the same story about the US economy continues—we’re seeing a meager and halting recovery for Main Street, while we watch Wall Street flourish.

Around the world, several major stress points have recently grown in importance. In Ukraine, the east (Russia) is battling the west (US and Europe) over a strategically critical territory (Ukraine) that—if it becomes controlled by the west—would weaken both Russia and China….the only superpowers on the planet powerful enough to stand up to the US and Europe.

At the same time, a war has broken out in Iraq and Syria where one class of Muslims are attacking other classes……all the while, the US is trying to protect its interests (mainly oil-based) in the same region where the fighting has broken out.

Israel and Gaza are at attacking each other in what can most accurately be described as a war as well.

Tensions in the South China Sea are rising as China is asserting itself as the dominant power in this area.

And there’s more. All together, shockingly, almost 12% of the of the world’s population is engaged in some sort of fighting—whether open war, or low-level and intermittent clashes.

Yet equity markets in the west are at or near record highs. Corporate bond prices, both investment grade and high yield, are not far behind.

Something doesn’t make sense. Tensions, risks and problems around the world are growing—this should limit risk asset prices. But risk asset prices are not falling.

Sooner or later, one of these conditions must change—either the tensions will diminish or risk asset prices will fall.

US Treasuries…”Confounding the Experts”….Again

August 11, 2014

The S&P500 ended the week up very slightly, specifically 0.3% on lower volume than the week before when the S&P fell. Once again—there seem to be more sellers than buyers. Volatility dipped, however, as one would expect during an up week.

Technical analysis is painting a mixed picture. On the daily charts, the 50 day moving average has been decisively broken. And now, the S&P being a bit oversold, has a good chance of recovering back up to the 50 day moving average. At that time, the S&P will be at a cross roads, again—if it jumps back above, and stays above, the 50 day moving average, then the recent sell-off will have been nullified, again. But if the 50 day moving  average acts as a ceiling, or resistance, then the S&P may turn down again, and possibly approach (and test) the 200 day moving average for the first time in almost two years.

On the weekly charts, the S&P’s uptrend is still intact, with the recent sell-off being barely a blip on the long-term uptrend. Prices are still above the 200 day moving average and this average is still sloping upward.

Macro news was light last week. Factory orders beat expectations, as did the ISM services index. But PMI services missed expectations. Initial jobless claims fell back below 300,000, but wholesale trade badly missed consensus estimates.Next week, the volume of economic reports returns to a more normal level.

First it was Bloomberg reporting recently how badly it’s panel of 100 economics experts called the direction of interest rates in the US this year, and now it’s the New York Times taking a turn.

Over the weekend, in a cover story titled “Yields on 10-Year Treasuries Fall, Confounding the Experts”, the paper reveals to the general public how badly the so-called market experts fared in calling for the direction of interest rates in 2014. As we all know by now, the experts called for rates to rise. But instead the fell and they fell by a significant amount—from roughly 3.0% on the US 10 year at the start of the year, to roughly 2.36% at the lows last week,

This has resulted in huge losses for the investment and trading firms that the experts advise. Why? Because as the firms were making huge bets that rates would rise, these bets have generated huge losses. And as mentioned here the last time interest rates were discussed, these bets have not yet been terminated; this means that many of these firms are sitting on billions in unrecognized ‘paper’ losses hoping that interest rates turn back up and reduce those paper losses.

What’s sad is that these firms have been waiting for almost nine months for rates to turn up. Instead, rates have only proceeded to make drop lower and lower every quarter. In fact, last week’s 2.36% on the 10 year was the lowest level of the year.

Is this trend (to lower rates) over? Not even close. While risk asset markets (mostly equities) still hover near all-time highs, this is not to exit bets that Treasury rates are done falling. Only after equities enter a serious correction will that time come. And until that happens, some really smart money is staying long US Treasuries and winning….confounding the experts.

Minor Equity Sell-Off

August 4, 2014

The S&P500 lost almost 2.7% last week, in one of its biggest weekly sell-offs of the year….so far. Volume jumped, once again proving that when stocks sell off, there are more sellers than there are buyers when stocks melt up on lighter volume. And notably, the VIX index soared by over 30% for the week. That said, it still closed well  below 20 and therefore in no way does this suggest that any true panic selling has begun. For that to happen, VIX would have to jump above 30,which was last seen in mid-2011 when the S&P corrected by about 20%.

The technical charts have changed very little, despite this equity retreat. In fact, on the weekly charts, the 2.7% drop is barely visible. Prices are still comfortably above the 200 day moving average, and this average is still rising strongly; until both of these conditions change, any sell-offs should  be considered just that—minor dips. At the same time, the 50 day moving average was violated. But since this has happened three other times in 2014—without much further damage—we can’t read too much into this as well.

In macro news, there were a few positive reports, but as usual, more were disappointing. On the positive side, the PMI services flash index slightly beat expectations. Consumer confidence beat the consensus estimate. The first estimate of Q2 GDP beat expectations, but over the last year, all of the first estimates have been revised lower; don’t be surprised if the same happens with this first stab at economic growth in the 2nd quarter. Finally, ISM manufacturing also beat the consensus estimate. On the negative side, pending home sales collapsed, as did the Chicago PMI. Construction spending also disappointed. And the biggest number of the week—the July jobs report—was a disaster. The headline payroll figure came in well below expectations. The unemployment rate ticked up; it was supposed to stay flat. And average hourly earnings did not grow at all; they were supposed to jump 0.2%.

Overall, the week was eye-opening primarily because of the sell-off in risk assets. Yes, high yield credit had already been selling off hard for three straight weeks, and in many ways, stocks were only partly “catching up” to junk bonds. And there was no single catalyst for the sell-off.

So the takeaway is that no big conclusions should be drawn from this stock loss. The longer term technicals are still bullish, and nothing fundamentally with corporate profits changed dramatically (they’re still near record high levels). And finally, nothing external to the markets created any sort of shock; all of the geo-political problems (and there are a lot of them today) were already well known at the start of the week.

So in the very short term, the US equity markets are slightly oversold and some sort of bounce would  be very unsurprising. The question, as always over the last two years, is what happens after the initial bounce—will new highs be set (as usual)? Or will the bounce fail, and new lows for 2014 be established?