Greece Votes

January 26, 2015

The S&P500 jumped 1.6% last week on substantially lower volume, so the weak conviction pattern persists–when stock prices fall, investors rush to exit, but when stock prices rise, there’s no rush to jump into this market. At the same time, as would be expected in an up week, volatility dropped back down, but nowhere near the ultra-complacent lows of last summer.

The technicals point to a mixed picture. On the daily charts, the S&P actually looks like it’s poised to moved even higher in the short term. The lows of mid-December, early January and mid-January have been touched three times and have held. This could create a “floor” or support for technicians who may now feel more confident to take on risk on the long side—ie. they’ll tend to buy more. On the weekly charts however, a large rolling top seems to be forming, and unless the highs of late December are taken out, the risk is that some technicians will take money out of stocks because they fear that a more serious correction could ensue.

There weren’t a lot of US economic reports released last week. And aside from the housing starts figures (which slightly beat expectations), most of the reports were disappointing. The housing market index, initial jobless claims, PMI manufacturing, existing home sales, housing permits, and the Chicago Fed National Activity Index all missed consensus expectations. So once again, no good news for Main Street Americans.

While the announcement of new Quantitative Easing from the European Central Bank came in mostly as expected (actually slightly more euros will be created for a longer period of time….than many experts had predicted), and the markets mostly yawned about the results afterwords, the Greek election was a complete disaster for the forces that wish to impose austerity on the southern, Mediterranean states such as Greece. Instead of coming up with a last-minute Hail Mary victory, these forces witnessed the hard-left anti-austerity party cruise to victory and form a new government with another anti-austerity junior partner.

And while the markets mostly yawned about this event on Monday after the election, we must not forget that markets tend to take a long time—weeks and sometimes months—to fully digest the consequences of major political, economic or financial changes. Remember, Bear Stearns went bankrupt in March 2008, almost six months before the global financial meltdown climaxed in the fall of 2008.

And with the new leadership of Greece openly pledging NOT to honor the onerous and enormous debt obligations to the ECB and the IMF (and these debt obligations exceed 200 billion dollars), the consequences—down the road—for all risk markets cannot be good. And the greater risk is that if states such as Spain and Italy watch Greece shake off its debt burdens and free its people from the pains of austerity, then these other states may follow in Greece’s footsteps. And if this happens, then Italy and Spain may become the “Lehman Brothers” shock of 2015…..and this type of shock would certainly bring the markets to their knees, just as Lehman did in late 2008.

Two Upcoming Triggers for Risk Assets?

January 19, 2015

In an up and down week, the S&P500 managed to lose another 1.2% last week. Volume jumped again, which means that there was some conviction behind this selling. Volatility also jumped notably, with the VIX index closing above 20. This too suggests that investors and traders were treating the sell off more seriously than they typically did over the last three years. Finally, US Treasury rates dropped significantly. The implication was that as investors exited their equity positions, they didn’t just sit in cash, but ran for cover by loading up on the most deep and liquid safe-haven investment in the world, US Treasury bills and notes.

The technical picture got a little more bearish last week. On the daily charts, the S&P500 has failed to bounce back up to meet, much less exceed, the old highs set in late December 2o14. Instead, the S&P seems to be forming a larger topping pattern where the entire bounce from the mid-October surge is now slowly reversing itself. Also of note, when the late December highs were made, almost every momentum and breadth indicator did not confirm the all-time price highs. Instead, these associated indicators almost universally diverged bearishly. Does this guarantee a big drop around the corner? Not at all. But it is something to take note of.

In economic news, the results were mostly disappointing. Retail sales for example, both headline and excluding autos, missed very badly. Initial jobless claims came in much worse (ie. higher) than expected. The Philly Fed Survey utterly collapsed. On the bright side, the Empire State manufacturing survey beat expectations and consumers—shockingly, given the dismal retail sales results—claimed they were more confident than experts had originally expected.

For the first time in a while, a couple of upcoming one-off events could severely impact the world’s financial markets. First, on this Thursday, the European Central Bank is scheduled to announce a concrete program in which it will print (electronically) euros to buy government bonds. In other words, over three years after Mario Draghi assert that the ECB would do “whatever it takes” to save the eurozone, the ECB will finally be put to the test and announce a QE program of its own. The risk is that it may not do enough. For now, the world’s investors are expecting at least 500 billion in euros to be put to work, but the risk is that this may not be enough to satisfy investors. Also, the ECB may not do all the bond buying itself, but instead, allow its member national central banks to do the bulk of the bond buying—but only if certain conditions are met. The ECB is, and has always been, restricted by Germany which does not want to allow the ECB to print euros to rescue irresponsible member states. On Thursday, the world will b e able to judge if the ECB’s “whatever it takes” words will be matched by its actual deeds.

Second, on the following Sunday, the nation of Greece is set to elect a new government, a government that has pledged to re-negotiate the $200 billion in loans that Greece has taken on to pay its bills over the last five years. And now that Greece has finally achieved a primary budget surplus (it’s breaking even before taking into account its debt service), Greece can actually make good on its threat to default. And since Germany has warned that no prior debts will be re-negotiated, a major confrontation will be established. And the worst case scenario in this confrontation is that Greece exits from the eurozone and sets a precedent for all the other overly indebted member states to follow.

So this upcoming week will be very interesting, especially since despite the recent sell-off, both US equities and corporate investment grade debt markets have hardly suffered any meaningful damage. Will the events of the upcoming week change all that?

US Treasury Yields Continue to Collapse

January 12, 2015

The S&P500 gave up another 0.65% last week, following the 1.5% loss the prior week. Volume jumped back during this most recent loss. After dipping while going through the year-end holiday season, volume roared back and supported the drop in prices. On the other hand, volatility did not spike; the VIX index remained virtually unchanged for the week.

The technical picture for the S&P500 is somewhat bearish in the short-term. Last week’s failure to bounce back suggests that more downside risk lies ahead. That said, the longer-term picture is still bullish. Prices remain well above the 200 day moving average. The 50 day moving average is solidly above the 200 day moving average (and showing no signs of an imminent “death cross”) and most importantly, the 200 day moving average is sloping upwards, as it has done since mid-2011, the last time the S&P went through a near-correction (just shy of a correction because the peak-to-trough drop was a bit under 20%).

At the same time, the US economic picture remains worrisome. Last week, PMI Services missed, as did factory orders initial jobless claims.  ISM services missed badly, and consumer credit disappointed. International trade came in a bit better than expected.  In the big December payrolls report, the most promising figure released—the drop in the headline unemployment rate to 5.6%—was again mostly a result of folks staying out of the workforce and of people taking multiple low-paying jobs (because they couldn’t find good high-paying jobs) to make ends meet. Sadly, average hourly earnings plunged, instead of rising as expected; this was the biggest drop in eight years. Also, this drop supports the argument that people are being forced to take low-paying jobs. Finally, the labor force participation rate dropped to a fresh multi-decade low—specifically, a 38 year low. This supports the argument that people who can’t even find low-paying part-time work are simply dropping out of the workforce, and as a result, are no longer counted as being unemployed.

Finally, the US Treasury market made news last week, again. While the rate on the 10 year Treasury plunged to one-year lows in October, a couple of months ago. Last week, the rate returned to the same lows (the 10 year yielding 1.88%) but it did so in a much more controlled and deliberate manner.

This suggests that the rate plunge was not some sort of trading aberration that corrected itself and would not return. Instead, this suggests that low rates are here to stay for a while, and in fact could be head lower… suggested here numerous times over the last 8-12 months.

If rates don’t bounce back next week, and if oil (and other commodities) don’t bounce back in price very soon, then the next stop on the US 10 year yield could be 1.5%, which would be approaching multi-decade low set in 2012.

So anyone who’s been betting on lower rates—while almost all of Wall Street has been betting on rising rates—could be in for another successful outcome, following an outstanding result in 2014 when the 10 year rate plunged from about 3.0% to about 2.15% by year end.

Oil Continues to Collapse

January 5, 2015

For a change, the S&P500 ended a week on a down note with the index giving up 1.5%. Volume was light, but that was not a surprise given that the week was shortened by the new year holiday. Consistent with the fall in prices, the VIX index jumped a bit as investors bid up downside insurance protection.

What stood out however was that the much anticipated—and usually occurring—Santa Claus rally failed to deliver. Instead of rising in the period between Christmas and New Year’s, the S&P500 (and most other US equity indices) fell.

The question now is—does this mean anything for the new year?  And while it’s not a good start to 2015, the historical data shows that a poor start does not mean that a poor year is a certainty.

But the trigger to the sell-off last week isn’t something new. It’s a series of very ugly economic reports that shook the equity markets. While in the past, bad news actually pushed markets higher (on hopes for ever more Fed easing and printing), this time (perhaps now that the latest round of QE has ended), the bad economic news sparked bad news in the stock markets.

The week began with a dreadful result from the Dallas Fed’s manufacturing survey. It continued with disappointing results from the consumer confidence survey as well as initial jobless claims which jumped a bit higher. But then the Chicago PMI index really disappointed and by Friday, all hell broke loose when PMI manufacturing missed expectations, ISM manufacturing plunged and construction spending collapsed.

But keeping things in perspective, the S&P lost only 1.5% and in terms of technical analysis, the damage was barely visible, especially on the weekly charts.  And even on the daily charts, where the sell-off was at least perceptible, the 50 day moving average was still rising solidly and it was positioned well above the 200 day moving average.

The bottom line is that it would take a whole lot of 1.5% weekly drops to do any serious damage to the major trend—the rising 200 day moving average—that’s still in bull market mode.

Finally, and perhaps more interesting than the stock market, is the total melt-down in the oil markets. West Texas as well as Brend crude have now collapsed in a way last seen in 2008….only months before the equity markets collapsed themselves.

So investors are wondering if this time will be different?  Will the same amazingly accurate leading indicator that preceded the global economic meltdown in late 2008 announce the same grim warning for 2015?

Given how critical oil is to the global economy and to markets, it seems hard to believe that there will be no serious consequences—to the oil industry and to the capital markets that are attached to the price of oil.  But only time will tell if the damage will lead to contagion. In other words, we don’t yet know if the pain being caused by oil’s collapse will be contained or if it will spread and lead to pain in other industries and other financial markets around the world.

Oil is now a big story. Wise investors are paying close attention.