Saturday, August 4, 2012

Macro Analysis 8/3/2012 abbreviated

Hi,  I had a few minutes this morning to throw together some charts and make a few comments on what was a momentous week in global financial markets.

This will be extremely abbreviated but I thought it important to give my readers a perspective on these developments because I believe they set in motion a course of events that will lead this market higher into the election.

Simply put, Bernanke's comments after the FOMC meeting have put a floor under our markets.  The idea that additional monetary easing is not a matter of "if" but "when" changed the tenor of the market Thursday afternoon when in the last hour of trading an incredible surge in buying power came into the market.  Friday's better than expected employment report served to feed the buying frenzy and after four down days in the market we had a nice short covering rally. 

The question now becomes: what form of easing will the Fed implement?  Those who are looking for outright unsterilized purchases of bond and mortgage backed securities are liable to be disappointed.  Employment is the Fed's focus but is something they can only impact in an indirect way.  Look for a program that attempts to make the money center banks lend more.  Inevitably, the Fed is pushing on a string but the market will pop in direct proportion to the amount and kind of QE.

Draghi promised but didn't deliver.  The immediate reaction was a sell off but then the street put a different spin on his statements on Thursday which fed Friday's rally.  I'm not buying the optimism that somehow the ECB is getting it's act together in conjunction with the Germans.  Since this is a short commentary I cannot expand on this topic but the ECB's hands are tied by law and politics and will inevitably do little to keep Spanish and Italian bond yields from skyrocketing because the Germans won't let them.  I'll try to expand on this topic as I'm able in coming blog posts.

Most of the major averages are approaching or are at significant resistance:

Here's the Dow Jones industrial Average ETF (DIA).  We're moving toward the post crash highs set in April but there's a lot of resistance in this general area.

The S&P 500 ETF (SPY) hit resistance on Friday and backed off (orange arrow):

Treasuries, true to their inverse relationship to stocks, backed off their highs and on the weekly charts are showing weakness:

Here's a weekly the iShares Barclays 20+ Year Treasury Bond ETF and we've broken a pretty steep uptrend line (red arrow) and we'll have to monitor next week's price action.  I've noted in previous commentaries the negative momentum divergences in the Treasury market and this is the only piece in inter market relationships that is troubling me.  My preliminary opinion is that the bond market is starting to take into account US fiscal woes.  

If Gold was a believer in all the Central Bank "hype" it wouldn't be languishing under $1,625.00: 

This is the "inflationist" demarcation line.  When Gold punches thru $1,625.00 you'll know that ECB President Mario Draghi finally means what he says.

Industrial commodities continue to show minuscule signs of life:

The question is whether this "flicker" of life is due to real economic activity or "hopium".

Finally, the Dollar is looking weaker as well:

 I've circled last week's price action.  That big long black candlestick representing Friday's price action is ugly and we've broken an uptrend line from the May lows.

The charts are telling me that stocks are moving higher but not necessarily for the right reasons.  We do have a floor under the market due to perceptions the Fed will announce some form of QE as early as the Jackson Hole meeting at the end of August.  Depending on perceptions of how much and what kind of easing we will either see the market tread water in a trading range until then or we'll start to see a slow methodical rise in the indexes in August.  And, of course, if Europe does get their act together it will serve to push our markets to new post crash highs.

That's it until next week. Enjoy your week!