Saturday, March 2, 2013

Macro Analysis 3/1/2013

  This will be a short commentary.

The markets turned volatile this week and are sporting a number of inter market and technical divergences which are giving us short to intermediate term negative signals.

As you look at the charts I've posted below, please keep in mind the inter market relationships with have been with us since the Asian Currency Crisis in 1998:  


                                      Inflation                      Deflation

If Stocks                                rally                                correct
Then Treasuries            will correct                         will rally
Then Gold                       will rally                          will correct
Then Commodities        will rally                          will correct
Then US Dollar            will correct                          will rally


Here's the S&P 500:

(click on chart for larger image)
 
I circled this week's price action.  The long red candlestick was Monday's sell off in reaction to the political gridlock that came out of the Italian election.  We consequently rallied on Tuesday and Wednesday after Bernanke testified before the Senate, reaffirming the Fed's pledge to keep the liquidity spigots open for the foreseeable future.  Thursday and Friday was a "wash" with both days sporting candlesticks spelling indecision.
 
Here's the iShares Barclays 20+ Year Treasury Bond ETF which traders use as a proxy for the long end of the US yield curve:
 
(click on chart for larger image)
 
 True to the inter market relationships I posted above, TLT broke out on Monday above significant resistance at 117.50.  Regular readers of my commentary will know I identified a consolidation pattern in the last commentary.
 
Here's the Dow Jones UBS Industrial Metals Index:
 
(click on chart for larger image)
 
Industrial commodities and basic materials have been diverging from equities since their highs in February 2011, signalling ongoing global economic weakness and reaffirming the deflationary specter facing the planet.
 
 
And here's the US Dollar:
 
(click on chart for larger image)
 
 The Dollar has been steadily strengthening since early February after a two month consolidation.  It has historically (since 1998) been inversely correlated to equities and where we have seen divergences (stocks and the Dollar rising together) the divergence has resolved itself with a correction in stocks.
 
 
Analysis
 
For those of us who make our living in the financial markets, this has been a week for mixed signals and divergences.  The FOREX (Foreign Exchange) market is fraught with crosscurrents with the Japanese Yen hiccuping this week and the Euro breaking down under support at the 132 level. 
 
The inter market divergences I identified in the charts above are telling us something has to give and soon.  You can't have a strengthening Dollar and a Treasury rally while stocks maintain these lofty levels and attempt higher highs.  Now, stocks did consolidate and the CBOE Volatility index (VIX) did spike this week so equities are dealing with some serious headwinds in attempting to break through 1530 (S&P resistance). 
 
Yet, looking out on the horizon it's difficult to find a trigger which will start a full fledged correction.  The market shrugged off the sequester (rightfully so) and seems little concerned with the Continuing Resolution to fund the government at the end of the month.  We have important economic reports this coming week culminating on Friday with the Monthly Employment report.  But as of late, most of our economic reports have been positive and pointing to a low inflation moderate growth economy. 
 
So, unless we get a negative surprise out of a report this coming week it seems we're facing a churning market at these present levels.  We could get a surprise next Thursday after the ECB (European Central Bank) meeting when Draghi and company decides whether to keep their key lending rate steady at 0.75% or lower it.  The consensus is for no change.  But if they lowered rates it would force the Euro lower and consequently, the Dollar higher.  The prospect of a strengthening Dollar might "break the camels back" so far as stocks are concerned.
 
My gut tells me that unless the almost 15 year inverse correlation of the Dollar to the US equity markets is about to change (and I don't see that for reasons I'll stipulate in future commentaries) somewhere stocks are going to slip into a short term hole and we'll get our correction.  When?  If I had that answer I'd be a billionaire!
 
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 REGISTERED INVESTMENT ADVISOR OR BROKER ... yet!