2/24/2012
All the major averages ended up the week on a
slightly positive note save the Dow Transports.
The Dow Industrials flirted with the 13,000 mark which the media hyped
all week but has no technical significance.
Momentum is slowing as we reach the more important 1370 resistance level
on the S&P 500. Commodities with the
exception of oil had another lackluster week and Treasuries continue to
maintain their strength in the face of stronger yet moderate economic growth.
Stocks – much was made by CNBC on Friday that the S&P 500
closed above its June 2008 level. Yet
when I look at the chart I find this fact hardly significant (double click on chart for larger image):
The yellow horizontal line on the first chart above is a significant resistance area and we’re hugging that resistance line. However, there are no indications we’re setting up for a correction.
As I highlighted in last week’s commentary
breadth indictors are very strong. And
the daily chart above of the New York Stock Exchange High/Low Index for the
exact same period as the S&P chart supports that fact. This is a cumulative total of New Highs
versus New lows on the New York Stock Exchange.
As you can clearly see, we are considerably higher at Friday’s
close than we were at the all time S&P high in October 2007. The bottom panel is a ratio of cumulative new
highs to NYSE total volume. Even here,
with a seeming divergence highlighted by the purple dashed line, we have still
broken a downtrend that started in April 2011.
No matter which way you
try to manipulate these charts to suit your opinion on which way stocks are
going, you can’t help to come away with a bullish bias to this market.
Here’s one more
indicator that I’m especially excited about.
This is a daily chart of the CBOE Equity Only Put/Call Ratio. It simply can be defined as the ratio of put
options to call options for all equities (stocks) for which options are offered
on the Chicago Board Options Exchange.
This is an excellent indication of sentiment in the market. When utilizing the raw data any number less
than 1.00 but even more so less than .80 means bullishness is more pervasive in
the market while numbers over 1.00 means bearishness is the prevailing
sentiment. It can used as a contrarian
indication meaning that as bullishness becomes rampant it’s time to sell and
when the reading is bearish it’s time to buy.
But notice the momentum oscillator in the top panel called PPO (Percentage
Price Oscillator). I’ve drawn horizontal
green and red lines that correlate to the S&P chart in the lower
panel. The green horizontal lines are
meant to highlight that when the PPO dropped into negative territory (six times
in the past year), in five of those instances stocks moving higher; four of
those times almost immediately.
Conversely, the red lines highlight that when PPO surged above the 10.0
level we had at least two solid sell signals.
Now, no indicator is
100% accurate in predicting the market and the indicator below proves that
fact. But when I see an upward trending
market like we have now and this indicator dipping below 0, I believe that, in
conjunction with the other breadth indicators I’ve posted in the past two
weeks, that this is predictive of higher prices in the short to intermediate
term.
I believe we are
consolidating after the run up we’ve had since December 19th and we
will be breaking through the 1370 level in the S&P very soon (maybe as
early as this coming Wednesday). I’ll
have more on why Wednesday may be important in my Analysis.
Treasuries & Commodities – I’m
grouping these two asset classes together this week as I’ve been beating this
subject to death on my blog for some time.
The bottom line is that commodities other than oil are going
nowhere! I can put up numerous charts to
support this fact but I’ve put up so many on my blog I’ll just refer you there:
equitymaven.blogspot.com .
Treasuries are giving
up the ghost but only with a fight to the death. The “fear trade” is still very much with us
and of course, as highlighted in last week’s commentary, the FED is very active
in the bond market, “jawboning” the short end of the yield curve while actively
buying the “belly” of the curve (7 to 10 year paper).
Below is a chart of TLT
(iShares Barclays 20+ Year Bond ETF) which is a proxy for the long end of the
yield curve (Treasuries with maturities 20 to 30 years). As you can see, the ETF broke to the downside
of the consolidation triangle. Momentum
as seen in the upper panel has been declining since mid September. Lower Treasury prices equate to higher
interest rates and I’ve been forecasting a back up on the 10 year note to the
2.4% – 2.5% level barring any easing of the “fear trade”. But take notice of the black arrows on the
momentum indicator (RSI – Relative Strength Index). Even though momentum is waning the indicator
has found solid support at the 40 level four times since November. And in the last few trading days RSI is
showing signs of strength. 
Now stocks and
treasuries can coexist in the current market conditions we find ourselves in
(stocks relatively flat to marginally higher).
However, a break of the RSI above the blue dashed line will be a
negative for stocks. Conversely, a
breakdown below 40 on the RSI will be a positive for stocks.
Gold – had a good week, breaking out of resistance. Here’s an updated version of the chart I
posted earlier in the week on my blog:
Gold is setting up for
an interesting week. I’ll have more on
this in my analysis.
The Dollar - The dollar acted like a wet noodle this week. Below is a one year daily chart and we broke
down below the 61.8% Fibonacci retracement level on Friday. Any continuation lower will serve to confirm
the breakdown and if we break down below the purple dashed support line we’ll
be on our way back to the 76 - 75 level very quickly.
For all the pundit predictions of an imminent Dollar rally the FOREX market refuses to acquiesce and we’re seeing significant strength in the Euro. I’ve given up pinpointing when the big sell off in the Euro is going to occur and I’m staying away from the trade. The Euro, Yen and Dollar are in the “least ugly” beauty pageant. With the Bank of Japan announcing this week that they are finally going to get serious in fighting their two decade battle with deflation by printing trillions of Yen, the Euro comes out the winner with the least cratered face J.
ANALYSIS
The big event this week is going
to be on Wednesday when the European Central Bank’s second LTRO (long term repo operation) takes
place. Anyone who has read my
commentaries or blog knows that my bullish thesis has rested on the results of
the first LTRO offered on December 21st, 2011 when European banks
took advantage of the liquidity offered by the ECB to the tune of 489 billion
Euros.
Many are stating that the second
offering may see combined demand by European banks reach 1 trillion Euros! But, in fact, no one really knows how much
liquidity the banks are going tap this time around. There are a number of variables that the
banks need to consider before borrowing from this source of liquidity. I will not address those variables here but
if anyone is interested Simon Nixon has written some excellent pieces this week
in the Wall Street Journal that can give you some insight into what the banks
may be considering.
In any case, this will be a
significant market mover for the same reasons as the first LTRO. The difference this time will be the size of
the “take”. The money the banks as a group
decide to access will determine market direction. Predictions on “the street” seem to delineate
the 500 billion Euro marker as a determinant of market direction. In other words, if the European banks as a
group access less than 500 billion Euros this will be seen as an insufficient
amount that is needed to further insulate the banking sector from exposure to
sovereign default. If however, the
amount borrowed is over 500 billion than this will be seen as “market friendly”
and stocks will rally.
Of course, such a rigid parameter
is speculative at best. I’d say that the
market will be disappointed if the amount borrowed is less than 500 billion and
there would be negative reverberations if it was, say, 200 billion. On the upside, any amount over 500 billion
would be positive for the market but not anything that would suddenly move
stocks higher. If however, the banks
borrowed 1 trillion Euros this would be a big mover and stocks would lurch
forward right away.
I believe Gold has pierced
resistance in anticipation of a higher than 500 billion LTRO. Gold is also being buoyed by rising tensions
caused be the Iranian situation. If
however, a poorer than expected LTRO takes place, deflationary expectations
will negatively impact the precious metal in the short to intermediate
term. An escalation of tensions in the
Gulf of Hormuz might mute any downside for Gold if those tensions should occur
simultaneously with Wednesday’s LTRO.
In any case, when we wake up on
this side of the Atlantic on Wednesday morning we’ll know the results. Of course, if you can’t wait until you wake
up start checking Bloomberg or CNBC at 2:30AM!
J
I want to address rising oil
prices. I have to admit I haven’t been
following the fundamentals behind its rise but I’ll take a stab on where I see
this going. Rising oil prices would have
a negative impact on economic growth but I don’t believe as much as many others
think. That’s because rising oil prices
harbor the seed of demand destruction, where at a given point, rising prices
curtail demand. Now, if there was an
Iranian instigated crisis a sudden spike would roil markets and the shock would
create a hiccup in global economic growth.
But will such a crisis take place?
My answer to that is probably not.
First of all, the U.S. has
prepared to keep the Strait of Hormuz open.
So if the Iranians close it, there will be some shooting which will
cause oil, gold and the Dollar to spike.
But the Strait would almost immediately be opened again and things would
quiet down almost immediately.
Secondly, it’s clear that the
Israelis do not have the necessary political support to launch an attack
against Iranian nuclear facilities and its been well documented that such an
attack would have formidable logistical challenges in terms of distances
involved and Israeli Air Force access to air space.
Thirdly, there is considerable
unrest brewing in Iran itself and inflation is getting out of control. While this could be the catalyst for an
unexpected act of aggression out of the Iranian leadership, it more likely
could be the reason for a de-escalation of the crisis or even a change in the
government.
I don’t want anyone to think that
I’m minimizing the possibility of a crisis and $5.00+ gas at the pump because
anything can happen. I just believe the
odds are decidedly in favor of such a crisis not happening.
Other than that, when I look at
other commodity prices I still see that disinflationary to deflationary forces
are prevailing. Agricultural commodities
are flat, copper is flat, nickel is flat, zinc is flat, aluminum is flat. About the only commodities that are rising is
the livestock complex and oil. And I
would submit to you that while the price of oil may continue to rise from here
there is considerable supply coming on line in this country which will serve to
blunt that rise and there is another industry that is growing by leaps and
bounds that will insulate us in the long term from higher oil prices: the
natural gas industry!
If you’re going to play the LTRO
be positioned by close of business on Tuesday.
That’s it for now. Have a great week!
NOTHING IN THIS COMMENTARY SHOULD BE CONSTRUED AS AN OFFER OR ADVICE TO BUY OR SELL ANY SECURITIES, OPTIONS, FUTURES OR COMMODITIES. THE OPINIONS ARTICULATED ARE ONLY THIS AUTHOR'S WHO IS NOT A LICENSED INVESTMENT COUNSELOR OR BROKER.
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