US Interest Rates Heading Higher?

April 30, 2018

The S&P500 closed almost unchanged last week. Actually, it declined by 0.01%, but essentially it went nowhere. Volume was very light and volatility also remained relatively unchanged–the VIX index remained in the mid-teens, close to where it closed the prior week.

In US macro news, existing home sales, new home sales, consumer confidence, headline durable goods orders, and the estimate for 1st quarter GDP all beat their respective estimates. On the downside, the Chicago Fed national activity index, the Richmond Fed manufacturing index, and core durable goods orders all missed their respective estimates. And the Fed’s balance sheet decreased by the largest amount in several weeks—$13 billion.

The technical picture, for the S&P500, remains the same. The daily charts are bullish and the weekly charts are bearish. So it would be no surprise if the S&P crept higher over the next several trading days. That said, the technical damage done in early February and in late March has not been reversed on the weekly charts. This means that longer term traders and investors should remain cautious. That said, our Simple Rule which utilizes an even longer time frame remains bullish for the S&P index as a whole. Last week’s minuscule loss did nothing to change this reading.

Finally, one of the big market stories last week involved interest rates. For the first time since 2014, the yield on the US 10 year Treasury rate rose above 3%. Many traders and market analysts have warned that the 3% level was a kind of line-in-the-sand, that if crossed, would cause equity investors to get worried and to start selling. Well the barrier was most definitely crossed mid-week but no equity market panic ensued. Does this mean that rising rates don’t matter to equity markets? Most likely the answer is that they do matter, but that the 3% level is still simply not high enough to do damage to the US equity markets. Apparently that danger level is much higher. So until, or if, these unknown higher rates are reached, US stocks may not have to worry about the 3% yield on the US 10 year. This doesn’t mean that the coast is clear for near-term price rises in the S&P, but it does mean that 3% on the 10 year may not be the “trigger” for market panic, panic that, many experts predicted would happen with a 3% 10 year Treasury.

Gold on the Verge of a Massive Breakout?

April 23, 2018

The S&P500 continued to bounce last week; it recorded a 0.5% increase by Friday’s close. While volatility didn’t change much for the entire week, it did creep higher on Friday. And volume was very light, strongly suggesting that this bounce was not the result of some massive money inflows or enthusiastic investor buying.

The technical picture resembles that of last week—bearish on the weeklies and bullish on the dailies. That said, the big pullback on Friday is now hinting that the bullish pattern on the daily charts may soon be ending. However, until it does, traders may continue to play the S&P more with a bullish stance rather than a bearish one. And our Simple Rule, especially with another week of gains, is still comfortably signalling a bullish position for longer term investors.

In US macro news the results were mixed. Retail sales, housing starts and the Philly Fed business outlook survey all registered results that beat expectations. On the downside, the Empire State manufacturing survey, the housing market index and initial jobless claims all disappointed. So once again, the US economy continues to muddle along.

In a subject matter that we bring up only a few times each year, gold continues to form a massive basing pattern. And by massive, we mean a formation that spans four to five years on the weekly charts. Specifically, gold is forming in inverted head-and-shoulders formation, a formation that is bullish. But what makes this long term formation more interesting is that it’s recently gotten the attention of some big-name and highly respected money managers. About a week ago, Jeffrey Gundlach from DoubleLine Capital, a multi-billion dollar money management firm, picked up on gold’s technical development. He not only supported the argument that gold is forming a huge basing pattern, but he went out on a limb and gave a rough forecast of gold’s upside price potential. Quite seriously, he said gold has about a $1,000 per ounce of upside breakout potential. And from our perspective, that forecast does indeed fit neatly with the inverted head-and-shoulders pattern that gold has already formed. While it would take some time to climb $1,000 it’s more than reasonable to see how such a move could happen.


S&P 500 Recovers in the Short-Term

April 16, 2018

The S&P 500 bounced almost exactly 2% last week. Volume was modest, so once again this rebound was not the beginning of a new wave of big buying. But volatility did fall back quite a bit; the VIX index dropped into the upper teens, which is approaching…but not quite reaching…the levels associated with very high complacency. For this condition to return (the condition that described most of the 2017 year), the VIX would have to fall back closer to 10.

In US macro news, consumer prices came in just about as expected; but producer prices were a bit hotter than consensus estimates. Wholesale trade was a bit weaker than predicted. Initial jobless claims also missed, coming in a little worse than predicted. Also, consumer sentiment and job openings both missed. And the Fed’s balance sheet shrank by about 2 billion dollars…not a lot, but a reduction nonetheless.

The technical picture, in the shorter term, has diverged somewhat. On the one hand, the weekly charts are still painting a somewhat bearish picture for the S&P 500. Among many momentum indicators, the MACD is now solidly bearish because the fast line is not only below the slow line but it’s the gap between them is still expanding. On the other hand, the daily charts have turned bullish—the MACD indicator has turned up and is suggesting that last week’s bounce has more room to run.

Most importantly, our Simple Rule indicator….which is based on a time frame that’s longer than the weekly time frame….is now solidly indicating that investors should remain long in the S&P500. This Simple Rule does take into consideration the portion of the typical 5-10 year cycle that the US stock markets are experiencing (eg. early, mid and late) so even though the S&P500 is in the late stage of its multi-year expansion, last week’s 2% gain ensured that this indicator would remain bullish, at least for the upcoming week.

US Stocks Fall Again, but is it Time to Get Out?

April 9, 2018

After a promising first four days of the week, the S&P500 registered a major retreat on Friday, resulting in a loss for the week. The total loss was about 1.4%. Mitigating this loss, was the muted volatility. While prices dipped on the week, the VIX index closed relatively unchanged from the prior week. Also suggesting that panic selling has not set in, at least not yet, was the low volume of transactions in the S&P; traders were certainly not rushing for the exits.

Unfortunately for Main Street USA, most of the macro results disappointed last week. PMI manufacturing, ISM manufacturing, construction spending, PMI services, factory orders, ISM services, international trade, initial jobless claims and consumer credit ALL missed their respective estimates. Even worse, the payrolls results were a disaster. The payrolls figure missed badly. The unemployment rate also missed. And the average hourly earnings result and the average workweek result only met expectations…no miss, but not a beat. So last week….while it was only one week….was a bad one in terms of the US economic picture.

Finally, the technical picture for the S&P500 is now focusing in on the 200 day moving average, which was violated several times last week. Although the S&P did not close the week below this critically important level, it finished the trading day on Friday just a few points above it. What’s important to remember is that there are a LOT of traders and investors who look to the 200 day as their ‘line in the sand’, which if crossed, will tell them to GET OUT of the US stock market. So the fact that the S&P closed above this critical level is positive, but what’s now worrying everyone is that the there’s very little room for error now. One more bad day like last Friday is all it would take for this level of support to break and for all hell to break loose in the US stock markets. Because if the 200 day fails, then this will almost certainly cause billions of dollars to rush out of the US stock markets…..leaving little else for prices to do but fall, and fall by significant percentages.


Dead Cat Bounce in US Stock Markets?

April 2, 2018

Last week, the S&P500 jumped by an impressive 2%. Unfortunately for the bulls, volume was very light, meaning that there wasn’t a lot of conviction behind this buying. Also bad for the bulls, volatility did not retreat; instead, the VIX index moved higher for the week.

In US macro news, the results were mixed. The Chicago Fed national activity index, pending home sales, initial jobless claims, and 4th quarter GDP results all beat expectations. On the other hand, the Dallas Fed manufacturing survey, consumer confidence, the Richmond Fed manufacturing survey, international trade in goods, and the Chicago PMI all missed their respective expectations. Once again, the US economy is stuck in a low-growth mode.

The technical picture is now becoming extremely interesting. Why? Because last week’s bounce, even though it was an impressive 2%, did very little to repair the technical damage done over the last 6+ weeks. In fact, the S&P500 still looks quite vulnerable to a test of the 200 day moving average….something that’s not been violated for just about two full years. If this happens (ie. the S&P falls through and closes below the 200 day moving average), then there will be quite a lot of additional pressure in the market for stock owners to sell more shares.

All that said, our Simple Rule….at the end of March….has not been violated. So as of March 31 2018, we’re still remaining long the S&P500 index.

But over the next few weeks, we’ll see if this recent bounce is merely a “dead cat bounce” and if the Simple Rule reverses its signal and tells us to exit the S&P for the first time in over two years.