To give my readers a perspective on the price action for the week here's a 60 minute line chart of the S&P 500:
The Fed met expectations on Wednesday afternoon and tapered another 10 billion which only served to lend impetus to the declining market that day.
Turkey's move to raise interest rates on Tuesday in order to defend their currency was applauded in the after hours market that evening with the S&P 500 E-minis spiking around 15 points. But that move was faded and by Wednesday the market was in free fall as the wider implications of their policy decision became apparent.
Let's look at stocks and the damage done. Here's a daily chart of the S&P 500:
I'm of the belief that the problems EM currencies are dealing with are, contrary to some opinions out there, more than isolated instances. While it is true that the countries having problems are due to balance of payment issues (read debt) the Fed's sucking money out of the global financial system (or even the perception that is happening however incremental their approach) is the catalyst for these problems.
Let's look at some sectors of our economy that I believe are signaling that all may not be as rosy in the US as some may believe :
As we look under the hood of the market and survey it's breadth we can see a long term divergence between price and breadth:
And which stocks are benefiting from this volatile environment? Utilities!
And here's the latest daily chart of the Ten Year Treasury yield:
Gold had a pretty consistent week in it's role as a "safe haven" trade but that relationship broke down in Friday's trading where Gold futures started out strong but gave back much of the gains only to finish the day marginally higher:
Gold is the piece of the puzzle which will tell us which way stocks are going not only in coming weeks but also for the rest of the year. I do believe gold's price action on Friday was a response to the latest release of Euro zone inflation which dropped to 0.7% on the year from 0.8% in December. I'll be addressing this issue in my analysis.
As we look for clues on the state of the global economy there is probably no better gauge of economic health that the Baltic Dry Index which is a measure of international shipping rates. Just last month the Baltic was rallying and seemed to be on the precipice of a meaningful breakout. However, as can be seen below, the index has done an "about face":
Shipping rates weaken when the supply of shipping tonnage outstrips demand.
We received another verification this week that Chinese economic activity is slowing when the HSBC Manufacturing Index fell into contraction territory. The China Manufacturing PMI released on Friday evening at 9PM EST came in flat at 50.5 which is still in expansionary territory.
Deflation is in the air! While that statement may be already apparent to many in the market (though they would never use the "D" word on TV) everything we are seeing, from Emerging Market currency crises to dangerously low Euro zone inflation is signaling deflation. Here's a chart of the latest EU CPI (Consumer Price Index):
We are not immune to the same problem as lower bond yields and weakening consumer discretionary and retail sectors are pointing in the same direction. Whether the "deflation pulse", a term that Michael Gayed from Pension Partners has coined, is a brief one or something more lasting, we cannot get away from this fact.
Clearly, we have been fighting this battle since the dark days of 2008 as both charts below verify. The challenge is that the problem is getting worse: