Saturday, June 30, 2012

Macro Analysis 6/29/2012

We just finished one of the most momentous weeks in the market since Ocotber 2008 when it appeared the global financial system looked like it was becoming unglued.  We had a landmark decision by the Supremes on Obamacare and we ended up the week with a delirious market reaction to the EU Summit.

This will be an abbreviated commentary and there will be no commentary next week as I take a much needed rest from the ordinary weekend regimen.

Stocks had another volatile week with a steep sell off last Monday, drifting higher into mid week with a correction on Thursday and an exuberant rally on Friday based on news out of the EU Summit in Brussels.

Here's the S&P 500:

(click on chart for larger image)
There are two take aways from this chart:
1. Friday's rally was strong but did not reach the June 19th intraday high of 1363.46.  Stopping right below the Fibonacci retracement level of the previous high is not coincidental in my opinion.

2. The RSI momentum indicator in the top panel also stopped short of the 60 level which would signal a bullish bias to the S&P.

If Friday's rally was a turning point for the market as some are speculating we will need to see follow through next week with the S&P breaching resistance at the Fibonacci level I pointed to (black arrow) and RSI will have to exceed 60.  I'll be explaining below on why I don't think that will happen.

Treasuries, true to our inter market relationships, moved inversely to stocks but were not as weak as they should have been with all the "hype" over Europe finally getting their act together:

Here's a daily chart of the 30 Year Treasury Bond Yield.  The chart is counter intuitive in that one must remember in analyzing it that bond prices and bond yields move inversely to each other.  That is, as bond prices drop yields move higher and when bond prices rally yields drop.

I've circled Friday's price action and the 30 year yield bounced right off the downtrend line that originated from the March highs.  Again, if Friday's stock market rally is for real we would see the 30 year bond yield punch through this downtrend line (white dashed line).

The Dollar took a beating on Friday as per our inter market relationships and the Euro surged more than two cents, a huge move in the Foreign Exchange (FOREX) market!  Here's a daily chart of the Euro:

I've pointed to Friday's price action and you can clearly see that the Euro poked it's nose right above the 61.8% Fibonacci retracement level only to fall back and close virtually at that level.  As we saw with the S&P chart above, is this merely coincidence?  We need to also see follow next week in this index as well.

Lastly, Gold had a humongous day as it moved in tandem with other risk assets, closing up on the day over $44.00:

The day's price action is highlighted with the brown arrow.  I think the chart speaks for itself.  We have a long way to go before we can get excited about this bounce in Gold.  Here's a a longer term  perspective showing the SPDR Gold Trust Shares ETF (GLD):

There's a few things going for the Gold Bugs on this chart.  The weekly RSI (top panel) has held the 40 level which signals the long term bull is still intact.  The yellow metal has also bounced off the 50% Fibonacci retracement level four times in the last seven weeks which signals support at that level.  Nevertheless, Gold is stuck in a downtrend channel (pink and brown dashed lines) and must break out of that channel before anyone can proclaim that the brutal correction it has been under going since last September is over.


So, it appears that Merkel blinked.  At least that's what the consensus opinion is.  Clearly, the Germans were manuevered into allowing periphery nations access to the two backstop funds, the EFSF and ESM, in order to bolster their flagging bond markets.  There was also a big concession to investors by the EU putting aside seniority on the loans to at least Spain and it was agreed to create an EU-wide banking union.  But as with every other EU summit these announcements were light on the details.

I've been reading articles out of Germany as well as this country and there are still many issues that have to be addressed regarding these announcements.  But it didn't seem to matter to Mr. Market as any announcement that could be considered substantive, even if devoid of details, was enough to spark a rally in risk assets.  The reaction was indicative of the market's fear that they were staring down the barrel of a gun (in this case the unraveling of the Euro zone with unpredictable although ugly consequences).

With all that said, the strength and momentum of the rally was not warranted for the magnitude of the announcements made.

The Obamacare ruling on Thursday also fed the weakness coming into Friday although as we saw subsequent to the Supreme Court decision, the EU Summit clearly was the market's concern.  I'm not going to comment on the decision.  Already we have thousands of "Constitutional law" experts blogging about it.  I foresaw that if Obamacare was upheld there would be a sell off and there was until news out of the Euro zone started leaking out just prior to 3 PM EST on Thursday.  After that it was all uphill until Friday's close.

I'm going to end with this.  Anything can happen in these markets, especially these days.  But the idea that the actions out of the EU Summit were a "sea change" in those participants of that union and that all we have to do is work out some pesky details is not one that I adhere to.

On top of everything I've stated above, it is very apparent that the world economy is slowing and rather drastically at that.  Even if EU leaders can get together, have a hug fest and sing "Kumbaya" around the campfire, a 120 billion euro "growth" package is not pulling Spain and Italy out of depression.  And Germany is also slowing appreciably.

As far as the immediate term in the market, as I stated above, we must see immediate follow thru in risk assets next week if Friday's move was something more than an emotional "pop". Tonight at 9 PM EST China Manufacturing Purchasing Managers Index (PMI) will be reported.  It's expected to come in at 48.9 which is contractionary territory but if it comes in below expectations this will pressure markets to the downside on Monday.

On Monday morning the Institute of Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) is coming out at 9AM EST.  The word on the street is this will not be a good number.  A report below consensus expectations (52.0) will ignite a sell off on Monday as well.

The European Central Bank (ECB) announces their interest rate decision on Thursday with the forecast opinion that they will cut rates by .25%.  This will not prove to be a market mover unless they cut rates by .50%.  Not likely.

And on Friday the US Monthly Employment Report will come out with the consensus expecting that 90,000 new jobs were created in June.  This will be a big market mover.

The fact that it's a holiday week with markets closed in Canada and Hong Kong on Monday and the US on Wednesday means that trading volumes will be thinner which will exacerbate any moves either way.

I'm looking for a down market on Monday and Tuesday but I believe the Employment report next Friday may surprise to the upside.

We shall see ...