Everyone’s Still Watching Greece and Ukraine

February 23, 2015

Already hovering near all-time highs, the S&P500 inched up another 0.6% last week on very low volume. All the evidence points to the fact that this gain was based on a short-squeeze; for example, the most shorted stocks were the ones that rose the most in percentage terms. This weekly rise, judging by the abysmal volume, was most certainly not a reflection of investor exuberance or new money rushing into the stock markets. Volatility, as reflected by the VIX, dipped somewhat as well.

Technical analysis is now screaming that the S&P is very overbought. Prices on both the daily and the weekly charts are hugging the upper Bollinger bands. But while prices roared back up to new highs, several indicators of market breadth aren’t doing so well. In other words, they’re not confirming the surging price. The McClellan oscillator, for example, dropped off a bit last week. This suggests, once again, that the index is rising on the back of fewer, yet very large, leaders rather than rising due to a broad market participation where large and small firms are going up.

While there weren’t a lot of economic reports released last week, almost all were quite bad. It all started with the Empire State manufacturing index which missed expectations by about 20%. Then the housing market index registered a drop, instead of an expected rise. Core producer prices fell, and this is more indicative of a slowing economy, not a growing one. Industrial production came in 50% below expectations. The Philly Fed index also missed badly, as did leading indicators. The only minor bright spot was seen in weekly jobless claims which came in slightly better than expected.

Finally, all eyes are still on Greece and Ukraine. While both hot spots seemed to have calmed down by the end of the week, neither problem is truly solved…..not even close. Ukraine’s recently signed truce with Russia was already starting to fall apart by week’s end, and Greece’s 4 months extension with the Troika is only a draft. Both sides need to formally agree on details and get them approved before the “deal” becomes real.

So while stocks once again are priced for perfection, the myriad of political and economic problems beneath the surface have not gone away. If anything, they have been ignored with the hope that they will ultimately be solved. So the risk is that one day, one of these big problems blows up and reminds the markets that the problem was never actually solved.

US Treasuries—Not Cheap to Cheap?

February 17, 2015

On ever falling volume, US stocks continued to rally last week, with the S&P500 climbing 2%….despite a slew of market and economic headwinds. The falling volume suggests that the rise was based more on a short-squeeze than any true change in investor sentiment. In other words, investors did not rush into the US stock market, with new money, to push near record high stocks to even higher prices. By all meaningful long-term (ie. 100+ year horizon) comparisons, stocks today in the US are not cheap, and are instead arguably expensive. Volatility, last week, did not change very significantly.

All eyes were on Russia and Greece last week. And while another cease-fire agreement was reached between the East (Russia and Eastern Ukraine) and the West (US, Europe and Western Ukraine), the Greek stand-off with Europe did not improve at all. Still, US equities rallied.

Technical analysis is once again screaming that the S&P is overbought on both the daily and the weekly charts. On both resolutions, prices are hugging the upper Bollinger band. And they are well above their respective 50 day moving averages. Entering at these levels on the charts can be risky in the near-term.

In economic news, small business optimism dropped instead of rising as predicted. Initial jobless claims jumped over 300,000, much more than expected. Retail sales were absolutely horrible. They fell almost 1% for both the headline results and for retail sales excluding autos. Business inventories fell; they were supposed to rise. Finally, consumer sentiment plunged, registering one of its biggest misses in years. On the positive side, sadly, there was no really “better than expected” report last week.

Finally, a few weeks ago, we noted that among the major asset classes available to US investors the US Treasuries were no longer cheap. Since the 10 year note had plunged in yield from about 3.0% to about 1.65%, the upside opportunity (in price) had been significantly diminished. Flash forward only two weeks, and today the US 10 year is suddenly offering a 2.10% yield. In the 10 year Treasury market, a rise in yields (ie. a collapse in prices) from 1.65% to 2.10% is absolutely massive….if it occurs over a mere 10 trading days. The US 10 year rarely jumps 45 basis points in only two weeks.

And since this is precisely what has happened, US Treasuries have now suddenly become extremely oversold and appetizingly cheap…..at least in the short-term. And given that the major global risk triggers are far from resolved and given that other major risk asset classes are back to all-time highs in prices, a trade—-from the long side—in US Treasuries begins to makes sense…..again.

Yo Yo in Equities

February 9, 2015

After last week’s severe drop, this week US stocks came roaring back. The S&P500 jumped just over 3% on moderate volume. And volatility, as would be expected during a week when stocks rose, dropped back down.

In terms of technical analysis, the S&P suddenly went from being slightly oversold, on the daily charts, to being slightly overbought. That’s what a 3%+ move over 5 trading days can do to prices on the daily charts. As of Friday last week, the S&P was hugging the upper Bollinger band and that suggests that it is somewhat overbought. On the weekly charts, the downturn that began a few weeks ago is still in effect, but that said, the longer-term uptrends, namely the 50 day moving average and more importantly the 200 day moving average, are still saying that the bull market has not ended…..yet.

The macro picture was mixed last week. On the negative side, personal spending fell more than expected. ISM manufacturing also disappointed. Construction spending missed expectations, as did factory orders. International trade came in far worse than expected (this will hurt upcoming GDP growth results), and productivity was far lower than experts had predicted. On the positive side, ISM services was slightly stronger than expected, and in the January payrolls report, more new jobs were created than economists had expected. That said, the headline unemployment rate went up (not a good sign) and labor force participation rates remain at multi-decade lows (a very bad sign……one that proves that there has been no true recovery in the US jobs market).

Finally, a comment on the recent yo-yo price movement in the US equities markets. Historically, when investors are unsure about where equity markets are headed, they tend to result in huge swings, swings like we’ve seen over the last several weeks. The last time we saw such price fluctuation was during the summer of 2011, and the end result was a market (the S&P500) that ended up losing just about 20% by early October of that year.

So yes, the S&P500 bounced back nicely last week, but the fact that it’s been jumping around so dramatically over the last month or so suggests that investors are on edge and that they would are willing to sell, far more eagerly than in the recent past, should they be given a good enough reason to do so. Clearly, this is not a positive development for US stock markets.

What’s on Sale, and What’s Not on Sale

February 2, 2015

After bouncing back the prior week, the S&P500 dropped almost 3% last week to register one of its worst weekly losses over the past year. Volume, as it usually does on down weeks, jumped up. And volatility also increased. So the sell-off was confirmed by volume and volatility.

The technicals are now more bearish than they were a week ago. In the short term, instead of continuing its bounce, the S&P promptly reversed course and dropped far more than it had gained during its bounce. This result now removes the constructive stance seen in last week’s daily charts. The longer term weekly charts were bearish last week and have now become more so. The S&P has now had over a month to recover to old highs, and yet it has failed to do so. This suggests that there is more serious concern that the familiar pattern of three steps forward and one step back (or simply, buy on the dips) may now be ending. If the S&P500 closes down meaningfully this week, then this could spell even more trouble for long-term bulls who have done very well by buying every dip over the last three years.

In macro news, durable goods orders absolutely imploded. Both headline and ex-transportation results were atrocious—instead of rising as predicted, both dropped, substantially. The Dallas Fed survey badly missed expectations. Pending home sales as a disaster. And the first estimate for 4th quarter (2014) GDP growth missed.  On the positive side, new home sales beat consensus estimates, as did initial jobless claims (but remember, initial jobless claims were doing just as well in late 2007, about 6-12 months before the economy—and markets—imploded) and Chicago PMI. The bottom line is that US economic activity is just muddling along, never having reached strong and sustained organic growth since 2009.

Finally, as we touch on the various major financial markets available to investors, it’s worth summarizing just where we stand today, from a value standpoint.

Over the last several months, several major markets have corrected, and arguably crashed, to the point where one can claim that they are “on sale” and offer investors substantially better value than they did only six months ago.

Oil has fallen well over 50% and is now a much better value. Copper has fallen a great deal, not quite as much as oil, but enough to begin to attract long-term value investors. Iron ore and coal have been very cheap for a while now. Other commodities are also on sale. Grains such as rice have fallen to levels last seen in 2009-2010. The same goes for corn and soybeans. In foreign exchange, the Canadian dollar (in US dollars) and the euro (also in US dollars) have fallen substantially. US high yield debt has dipped in price, but is not on sale the way these other markets are.

What’s not cheap?  Just about the only major risk assets that have not fallen much or at all—US equities and US investment grade corporate debt. Both remain very near their all-time record high price levels and both are clearly not on sale. Also, US Treasuries,while arguably on sale about a year ago, are no longer cheap—with the US 10 year now yielding only 1.65% down from about 3.0% a year ago.

The good news is that for the first time in several years, several major asset classes are on sale.  A year ago almost everything was seriously over-priced and difficult to buy from a long-term value perspective, at least today, patient value investors have some good options to choose from. By no means does this mean that the assets that are “on sale” will not get even cheaper, but if they do, investors can ride out the further dips knowing they avoided the first 50%+ of the price drop.