Macro Analysis 3/9/2012

In the past I've sent these commentaries as pdf's to about one hundred of you on a weekly basis.  The time involved in preparing and composing these reports and other commitments preclude me from continuing this format.  I'll be posting my weekly commentaries in an abbreviated form on this blog going forward.


Anyone who has been reading my blog posts regularly knows I've been watching Treasuries as an indication of where equities and risk assets may be heading.  I posted a chart on Thursday of the 30 Year Bond yield and how it was pushing to the upside of a consolidation triangle.  Well, we had a breakout on Friday:

(click for a larger image)

We'll need to see some follow thru next week to confirm the breakout but here are other charts that lead me to believe that the breakout above and this rally in stocks is going to continue:

This is the Consumer Discretionary ETF and it's composed of a basket of stocks that represent discretionary spending habits, from McDonald's to Disney to Amazon.  It made a 52 week high on Friday (blue arrow).

Here's a chart of another ETF to ponder:

This is the SPDR S&P Retail ETF which is a very broad based ETF that captures the performance of over 90 retail stocks.  It too made a 52 week high on Friday.

These charts are speaking to greater consumer confidence in the economy (regardless of consumer sentiment surveys).  More importantly, with "John Q Public" breaking out his wallet, it's indicative of greater economic strength than many "on the street" are predicting. 

Finally, below is a ratio chart of the Rydex S&P Equal Weight ETF divided by the S&P 500.  What I'm attempting to glean from this ratio chart is whether the bulk of stocks in the S&P 500 are participating in the present rally or whether the index is being carried by a few large issues. 

An explanation of the chart may be needed for those of you who are not regular market followers.  The S&P 500 is a market capitalization index of the prices of 500 large cap stocks actively traded in the U.S.  A capitalization weighted index is an index whose components are weighted according to the total market value of their outstanding shares. The companies with the largest market capitalization, or the greatest values, will have the highest weights in the index. As an example, a gigantic company like Exxon Mobil would exert much more pricing influence on the S&P than the smallest market capitalization stock in the index.

The Rydex S&P ETF, on the other hand, tracks the same 500 stocks as the S&P but instead of weighting each stock by its market capitalization, it gives equal weight to every stock in the index. 

Here's the chart:

As you can see by the blue dashed line, since the October lows the ratio has been rising which means more and more stocks are participating in this uptrend.

Admittedly, the ratio is not where we would want it to be (see the May/June highs on the chart) but with the other charts showing broad based strength and Treasury yields moving to the upside, the preponderance of evidence speaks to an intermediate term uptrend in risk assets. 

I'm looking for this rally to continue into April.  Then we can reassess the market based on the popular adage, "Sell in May and go away ..."