Saturday, February 16, 2013

Macro Analysis 2/15/2013

The markets finished the week mixed with the Dow Jones Industrial Average off 0.08% while most indexes managed to squeeze out fractional gains.  But small caps as reflected in the Russell 2000 finished the week up over 1%. 

The market, however, is clearly getting tired and professional traders are at the edge of their seats awaiting the first signal that a correction is imminent.  We saw a perfect example of that skittishness (and perhaps the signal) on Friday when Bloomberg reported obtaining emails from Wal-Mart where an executive called February sales a ‘total disaster.  Here's the exact quote:
“In case you haven’t seen a sales report these days, February MTD sales are a total disaster,” Jerry Murray, Wal-Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail to other executives, referring to month-to-date sales.The worst start to a month I have seen in my 7 years with the company.”
The weakness was blamed on the expiration of the payroll tax break and delayed tax returns.  Executives quickly made statements that the e-mails were taken out of context and was not necessarily reflective of Wal Mart's upcoming earnings report.  Nevertheless, Wal Mart's stock took a dive and the whole retail sector along with the broader market followed suit.  Here's a series of five minute charts of Wal Mart, the SPDR S&P Retail ETF (XRT) and the S&P 500:

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Notice that all indexes made a comeback but nowhere near the highs of the day. 
This kind of activity is symptomatic of a very nervous market.  The S&P has been grinding higher but has bumped up against the 1525 level which is the target I specified in my commentary of 1/25/2013. Specifically I specified a target of 1523 - 1528 based on Fibonacci price extensions (1523) and previous resistance levels (1528).  Here's a daily chart of the S&P 500:

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With the price action in small caps so strong I had been considering that the major averages may just churn at this level instead of having a meaningful pullback.  But fundamental developments that are brewing under the surface along with a busy economic calendar week for Europe coming up have made me decidedly bearish in the very short term (next few weeks).  I've positioned myself in a small short futures position over the weekend in anticipation of a correction starting next week.  Let's see if I'm right.
Let's also remember that if the S&P clears the 1523/1528 level there is virtually no resistance up to the all time high of 1576.09 set in October 2007!
Treasuries are still in a pronounced downtrend but gave us timely signals this week on where the equity markets were heading on an intraday basis.  Here's a four month daily chart of the iShares Barclays 20+ Year Treasury Bond ETF (TLT):
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As stated above Treasuries remain in a downtrend as there is no threat that the red dashed resistance line on the chart above will be violated.  The yellow dashed line is short term resistance that TLT would have to overcome in order for me to start reconsidering my bearish thesis on the Treasury market.  But I've also circled the price action since the end of January and there is a possibility that Treasuries are in a basing pattern.  If this indeed is the case, then our correction in equities should begin once the yellow dashed line is violated.
Gold, gold, what to make of gold!  Here's an update of the chart I've been posting for months: 
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As stated in last week's commentary, gold needed to hold above the blue dashed support line I delineated with a blue arrow.  But it promptly fell out of bed on Monday and has had an absolutely ugly week, closing on Friday on the cash market at $1,611.00 and down 3.43% on the week.  It has violated all short term and long term Fibonacci support lines and from what I can see there might be some support at the $1,560.00 level. 
I've been warning my readers for some time about the issues surrounding gold and it's failure to rally in the face of unprecedented central bank money printing.  The familiar mantra among "gold bugs" is that the gold market is being manipulated.  And while I'm not going to write my treatise supporting that any manipulation is not the most important factor in gold's decline, the price action on the chart above is speaking to a lot more than "manipulation".  In fact, I contend price action in gold is speaking to a unique confluence of factors that are impacting its price, from the super low interest rate environment we find ourselves, to the incredible slack in the global economic recovery, to the gargantuan deflationary forces I've written about so much over the past two years and lastly, to the virtual lack of wage/price inflation.  I'll be addressing gold a bit more in my analysis.
I haven't been addressing commodities in my commentaries lately because they've been basically going no where.  But I'm going to post two daily charts to give my readers a snapshot on where they are at.  The first is the Thomson/Jefferies Reuters Commodity Research Bureau Index which tracks 19 different commodities from grains to livestock to petroleum products, aluminum and "softs" (coffee, cocoa,sugar):
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As can be seen above, the CRB made an intermediate term top in September when Bernanke announced unlimited bond and MBS purchases but has since gone nowhere.  Here's a weekly chart of the CRB going back four years:
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I've highlighted once more the QE3 announcement and you can see the post crash high in the index of April, 2011 in the center of the chart.  The purple dashed downtrend line on the chart has been drawn from the all time high in the index (late June 2008).  

And here's a daily chart of the Dow Jones UBS Industrial Metals Index ($DJAIN):
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And lastly, to make a point, here's the latest chart out of the St. Louis Federal Reserve showing the adjusted monetary base.  This is actually the best representation of the Fed's liquidity programs (money printing) since the Great Financial Crisis:
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For all the money printing, the Fed sure hasn't gotten much bang for the buck.  Any price inflation due to money printing would manifest itself quickly in ALL commodities.  Why isn't there inflation?  Until the money actually gets into the economy, by credit expansion or in the pockets of wage earners (aka money velocity), there can be no inflation!  I've been beating this drum for years.  And this speaks tons to why gold is acting the way it is.
Finally, let's look at currencies which tell the story of our present market more than any other technical or fundamental indicator.  I'm posting an update on the Euro chart:
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I've written much on the inverse head and shoulders pattern on the chart above and the projection to the 145/150 Euro level.  Last week I stated that we would need to see a lift off of the neckline at 135 within five to ten trading days in order for the pattern to be validated.  Well, we didn't get that lift last week and it doesn't seem as though we will see it this coming week either.  Here's a close up of the Euro:
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Friday's close is pointed to (purple arrow) and we're in a short term downtrend which is liable to persist based on fundamentals this coming week.  Only a violation of the blue dashed down trend  line would negate my thesis.
Why do we care about the Euro?  As the world's premier "risk on" currency it is strongly correlated with equities.  As the Euro goes, so goes stocks!
And the Dollar is strengthening against all the major foreign currencies with the exception of the Swedish Krona.  Here's a chart comparing the Dollar against these currencies on a three day moving average basis:

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Notice the incredible rise of the Dollar versus the Japanese Yen, reflective of the ongoing historic devaluation the Bank of Japan (BoJ) is undergoing in order to squelch a two decade long persistent and virulent deflation.  The short term message of this chart (the next week) is not good for stocks.  Remember, the Dollar and equities are inversely correlated.
 I've already outlined my opinion on where I see US equities going in the next few weeks.  In keeping with the inter market relationships I follow I'm looking for a weaker Euro based on German and French,  economic reports that are coming out this coming Wednesday and Thursday.  Last week's German, French and Italian GDP reports showed the sharpest economic contraction in those countries since 2009 and unless we get some positive surprises in these reports they will be the "icing on the cake" on the Euro's decline.
It must also be remembered that a very important Italian election in Europe is coming up on February 24th and 25th.  There's a blackout on opinion polls at this point but there's an even chance that Berlusconi's party will receive enough votes to hamper the formation of a coalition government that would be effective in carrying on the austerity reforms that Mario Monti's technocrat government has implemented.  I'll be watching Italian bond yields as we get closer to the event.  Any uptick in these yields will spell commensurate weakness in the Euro currency and risk assets world wide. 
In addition to all this we have the sequester cliff looming in this country.  On March 1st, 85 billion dollars in spending cuts will be implemented effecting everything from the Defense Department to Head Start.  This pressure is building even as the market gets whiffs of the impact on our economy of the expiration of the payroll tax break and delayed tax returns.  Even if Obama and Congressional Republicans can agree to surgical cuts they still have to lop off 85 billion from this year's budget.  Either way, any indication that these issues are impacting retailers or consumer discretionary stocks will send the market reeling.  Wal Mart's quarterly earnings report, to be released on Thursday, 2/21 before the market opens, will be closely scrutinized.
What could make my short term bearish thesis wrong?
- the 4th Qtr 2012 GDP reports out of Europe last week were backward looking and we could get some positive surprises from the German economic reports.  That would certainly contain any corrective activity in stocks.  Don't expect any positive French surprises as Hollande is driving the French economy into the ground with his socialist agenda.
- a last minute deal in Washington delaying the sequester.  Virtually no chance of this.  As long as Obama insists that more tax increases are necessary in any future negotiations the Republicans will let the sequester kick in.
Longer term, the trend for stocks is still up.  Fed liquidity abounds and unemployment, housing and even industrial production continue to improve.  Never mind that we might be in a Fed induced stock bubble.  I can't get my arms around developing a thesis like that.  It hurts my head ...  :-)
And just a comment on gold:  Gold may still have its day. No one is omniscient on this side of glory including me - but I'm getting close  :-).  Those who still cry $5,000.00 gold or more have to be betting on an inflation twice as bad as 1979 - 1980.  But, as I've stated before, we are living in totally different times and determining virulent inflation or even hyper inflation by just looking at money supply, without taking in other factors, some of which I mentioned above, is simplistic and dangerous.  Again, anything can happen but Armageddon scenarios normally don't.
Have a great week!