If it sounds like I'm making excuses for the market's rise in lieu of recent posts that suggest weakness over the next few months I have to say in my defense that the same issues that roiled these markets last year are just plain being ignored in 2012. Why? Who knows! But that's Mr. Market and why I'm a continually fascinated and passionate student.
Here's an updated chart of the Russell 2000 Small Cap Index which is an excellent indicator on the market's perception of the health of the U.S. economy. This index is overwhelmingly comprised of companies that do their business exclusively in the United States:
So, with a seemingly slowing China and Euro zone debt woes looming again what's pushing stocks higher? Here's where our inter market relationships serve to put the pieces of the puzzle together:
Interestingly, Treasuries are defying the historical inter market relationship paradigm. Throughout this week's positive price action in stocks Treasuries strengthened and yields dropped although the price action and momentum was tepid at best:
Here's a weekly chart of the iShares Barclays 20+ Year Treasury Bond ETF. As you can see Treasuries have been manifesting some strength over the past few weeks but notice the momentum indicators in the top panels. The ROC indicator (Rate of Change) has started to turn down. RSI (Relative Strength Indicator) is overbought and flat. As someone who watches these markets constantly I can attest that Treasuries don't have that crisp, vibrant price action that was indicative of their performance last fall when everyone thought the world, as we knew it, was ending.
It's almost as though there is some token buying pressure in Treasuries as a nominal hedge against any possible Euro zone eruptions.
Let's look at Gold:
Now let's look at commodities whose price action has caused me great concern since the end of January. And let's look at "Dr. Copper" with the PhD in economics:
This is a daily chart and I circled the past five days price action. Copper had a powerful surge this week. Momentum indicators have turned up as well. And all the other commodity charts on a daily basis are showing the same pattern with the exception of steel. Now, on the weekly charts all these commodities have a way to go before they penetrate resistance so all we can say for now is that we're in the beginning stages of a possible commodity rally.
And I thought I'd round out the commentary by posting a daily chart of the Shanghai Composite Index:
What to make of it all? Clearly, we have to acknowledge that, in the short term, stocks are liable to be heading higher. The key to understanding the direction of equities in the short to long run will be the direction of the U.S. Dollar. As the Dollar weakens stocks will rally and as it strengthens, stocks will correct.
I believe the price action in commodities, while also effected by Dollar weakness/strength, will also be impacted by the direction of the Chinese economy. So we'll need to monitor the Shanghai Composite as well in order to ascertain whether this week's upturn will be validated.
Finally, watch Gold. If we're truly in the infancy stage of a global economic recovery Gold will reflect that strength and its inflationary implications. A failure of Gold to advance from these levels puts into question the present strength in stocks and commodities.
News that will move markets this week:
Monday - Personal Income & Outlays
Tuesday - ISM Manufacturing Index
Thursday - Weekly Jobless Claims
Friday - Monthly Employment Report
Germany has some important economic reports this week which may also move our markets and Spain and France auction off bonds on Thursday which, in the past, has been a potential catalyst for market volatility. But in the present market environment we find ourselves, who knows! And of course, French and Greek elections are next week starting next Sunday. Watch the Greek election! There will be no clear plurality in their parliament which will set the stage for the Greek goverment reneging on their austerity commitments to the European Union.
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.