All asset classes are being held captive to news events coming from the Euro zone and to a much lesser extent China. There are fundamental reasons that support a choppy market to the end of June or even beyond. I say this with the caveat that any announcements from central banks that are seen as supportive to weakening economic conditions will easily ignite a worldwide rally in equities and commodities. I'll be laying out my short term to intermediate term theses on the financial markets later on in this commentary. But let's do what we do best; look at the charts!
I'm going to start with a chart I normally have not started with in the past:
This is a daily chart of the US Dollar going back to April 2009. The Dollar has been on a tear since the beginning of May when it bounced off its 61.8% long term Fibonacci retracement level, broke out of a long term consolidation triangle and is now approaching the 38.2% Fibonacci retracement level which will act as resistance. Just how much resistance is another question. The momentum and slope of the rise from May is not sustainable and conventional wisdom says we're overbought and in need of a correction. To this I agree but there's nothing fundamentally brewing in the global financial/political sphere that would precipitate a correction in the Dollar. Technically, we have a near record number of speculative "shorts" in the Euro which is about 57% of the Dollar Index and normally with this sized short position any upward pressure on the Euro would force the "shorts" to cover their position, sending the Euro significantly higher and inversely, the Dollar lower.
Remember the relationship between the Dollar and stocks and commodities. A stronger Dollar equates to cheaper stocks and commodities because it takes less Dollars to buy those commodities and stocks.
It's surprising that stocks have not taken more of a beating given the Dollar's precipitous rise. Here's the Russell 2000 Small Cap Index which had the best week among all the major indexes:
Here's the Wilshire 5000 which is the broadest index of stocks traded in the US:
Lastly, here's the S&P 500:
Stocks are maintaining their support levels at this point and we'll need to watch for a breakdown of the following levels for a more significant decline:
Russell 2000: 754 - 755
Wilshire 5000: 13480
A decisive break on the S&P below 1292 will most likely drag the other indexes down with it.
Will stocks break down from here? In the current environment we're in anything can happen but all things equal, I see more of a trading range in the coming few weeks.
Treasuries back filled a bit this week after their record breaking performance last week:
The Chaikin Money Flow indicator measures the amount of money flow volume over a specific period. It's a way of measuring the balance of buying or selling pressure on any stock, ETF or index. I've highlighted on both panels below the price chart with brown dashed lines the divergence between the buying pressure and the price action in the ETF. We must always remember that price action is the primary way to evaluate these charts while momentum indicators are clearly subsidiary indications in these evaluations. Volume indicators are,at best, tertiary in analyzing the chart. With that said, I've found Chaikin Money Flow helpful in the analysis of weekly charts in the past. I've had the learning lesson of ignoring this kind of divergence on this ETF back in 2010 to my detriment!
I've been suspicious of the rally in Treasuries for some time now and the Chaikin Money Flow divergence suggests that the party in Treasuries will end soon. Nevertheless, as long as Europe threatens to implode investors will continue to flee to the safety of Uncle Sam's debt paper. I'm not fighting the trend here; I'm just watching things very closely.
Gold has been showing some signs of life and I believe it is clearly in a basing pattern:
And commodities are still basically dead in the water:
Greece seems to be the overriding concern of the market these days and rightly so. I already sited in another post Soberlook.com's estimate that a Greek exit from the EMU (European Monetary Union) would convert a half a trillion in debt presently in Euros into Drachmas, essentially making the debt worthless. Now Charles Dallara, managing director of the Institute of International Finance (IIF), states that a Greek exit from the Euro zone would cost a trillion Euros and render the European Central Bank insolvent!
When I start seeing estimates and projections a half a trillion Euros apart it tells me that no one really knows what the backlash from a Greek exit will be. More important in my eyes would be whether such an exit would be orderly or disorderly. A disorderly exit will be an ugly event for risk assets worldwide.
But maybe we're getting ahead of ourselves? I was pretty adamant last month that Greece would leave the EU but I've tempered my opinion in the past week or so based on polls out of Greece that suggest the Greek people are shying away from the default precipice. And although I believe the June 17th vote in that country will be a cliff hanger I'm willing to step out on a limb once more and say that "pro austerity" parties will overcome the leftists in that election out of fear of the unknown if the country did default and exit the Euro.
Lest you think my changed opinion is nothing other than just that I do have some technical reasons to support my new thesis. This is a weekly chart of the Three Month T Bill Discount Rate:
I've constructed a red dashed vertical line on the three charts to delineate the nose dive in the Three Month yield in December 2008. The Three Month T-Bill yield quickly recovered, and in this case, predicted the "V" bottom in March 2009 and the subsequent bull rally.
But for all the talk of a Greek exit and bank runs in Greece and Spain, look where the yield closed on Friday! We are not seeing the flight to safety that we saw last year in spite of the fact that there's a better than even chance of Greece exiting the Euro within a month.