Saturday, March 23, 2013

Macro Analysis 3/22/2013

Most major indexes finished the week flat to slightly down.  The media blamed ongoing problems in Cyprus for the non performance but we're starting to see technical divergences develop in these over extended markets.  In addition, Fed Ex reported very disappointing earning reports this week that might be portending greater weakness in the global economy than was previously thought.

Here's a chart of the NYSE Composite Index which is composed of the 1900 + stocks traded on the New York Stock Exchange.  I've super imposed the NYSE Summation Index which is a breadth indicator derived the McClellan Oscillator, which is a breadth indicator based on Net Advances (advancing issues less declining issues). The Summation Index is simply a running total of the McClellan Oscillator values. :

(click on chart for larger image)
 
I've circled the divergence that's developing "underneath the hood" of the NYSE as the summation index is now below it's five day exponential moving average.  Still, all this divergence is pointing to is a garden variety correction or possibly just side ways price action to work off the overbought condition stocks find themselves in.
 
 
My bigger concern about the market surrounds a macro divergence in the global economy that's developing and must be eventually rectified.  I'll illustrate that divergence in the following two charts:
 
(click on chart for larger image)
 
Here's a comparison chart of the S&P 500 (top) with the following three indexes:
 
- The Brazilian BOVESPA Stock Exchange
- The Shanghai Composite Index
- The iShares MSCI Emerging Markets Index
 
As you can see there is a stark divergence in direction and given the inter relatedness of the global economy this cannot continue.  The street is of the opinion that emerging markets are lagging and the divergence will disappear later this year.  Given present weakness in Europe I'm not convinced. 
 
(click on chart for larger image)
 
This second chart is a weekly chart of the S&P 500 with "Dr. Copper" super imposed behind it.  This divergence also cannot stand.  They say Copper has a PhD in Economics because of its wide demand as a necessary industrial commodity.  The chart shows that whenever it has not closely tracked the S&P eventually stocks suffered.  The divergence between Copper and stocks that started in 1996 was predictive of the crash that took place in stocks commencing in late 2000.  The lag between the beginning of the divergence and the dot.com crash can be attributed to the low interest rate cycle initiated by the Fed at the onset of the Asian Currency Crisis in 1997.
 
 
While the recent divergence I've identified is tiny compared to the previous divergence we have the same situation "in spades" today by the unprecedented monetary policy the Fed has implemented.  This brings into question whether the present rally that many argue started in March 2009 is nothing more than a Fed induced liquidity rally.  I'm of the opinion that it is something more than that and that our economy is indeed improving but that a "bubble" in equities", like the housing bubble of 2004 - 2007, may be developing.
 
 
When will the bubble burst (if my thesis is right)?  That's the billion dollar question!  In the meantime, the market has discounted the Cyprus crisis (although I do think that reverberations will eventually spill over to Italy in Spain) and it seems that, regardless of political dissension in Washington, the volatility it has induced in our markets in the past has evaporated.  Simply, the Fed is floating all risk assets.  The smart money is riding the crest of the wave for now.
 
I've decided to discontinue sending these out on a weekly basis.  I will attempt to send them out on a bi weekly basis or further apart if there's nothing useful to impart to my readers.
 
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.