Saturday, January 17, 2015

US Equity Week in Review For the Week of January 12-16

     At the start of a new year, it's easy to fall into a pattern of thinking that the market will go up.  After all, it's the new year!  And, according to most analysts (myself included), the general consensus is the US economy ended the year with a bang that should continue forward into the new year. 

     Unfortunately, the markets are not cooperating with this sentiment.  But it's not the fault of the US economy.  Instead, global weakness is changing traders' risk calculations.  As I noted in my international week in review over at, Australia, Japan, Canada, the EU and Russia are all experiencing some type of weakness, which is increasing volatility and creating a safety bid in the market.

     Let's start by looking at the VIX:

The market was lulled into a sense of false complacency at the beginning of 2Q14, as the VIX readings moved to between 10 and 12.  There were two spikes in the second half -- one in early August and the second in early October -- but things quickly settled down toward the end of the year.  But in mid-December, volatility really picked-up.  As a result:

The treasury market has caught a strong bid at the start of 2015, with the long end (the TLTs) moving from 122.93 to 133.19, for an overall gain of 8.34%.   More importantly, notice the strength of the rally.  The 30 minute chart shows a continued move higher, with the ETF consolidating at several points and then making a disciplined advance on a regular basis.

But perhaps the real star of this latest move is the US dollar.  Starting in mid-July, the dollar started to rally and has continued on this path.  From the absolute July low to Friday's close, the dollar ETF has advanced 15.66%, indicating there is a very strong bid for US assets.  And considering the move in the treasury market, it's clear that investors are looking for safety.

     When looking at the US equity markets, things get a bit trickier because no really clear trend emerges.  The SPY's daily chart is a case in point:

On the one hand, the chart may be in the middle of a pennant pattern.  Or, we're in the middle of a downward sloping channel.  An argument could be made for either at this point.

     But several other markets may be indicating we're about to see at least a small move lower.   Consider the transports:

This index has clearly broken trend.  But, prices have not moved sharply lower. 

And the IWMs are back below their near-year long upper channel line at the 119-120 level.  But like the transports, the move lower is not sharp.  Instead, prices broke support and then consolidated right below that level.

     But in comparison to most other equity indexes, the US is the only one that is in positive territory for the last year (save for China):

Over the last year Europe, the UK, Canada, Australia and Japan are all at a loss.

So, after all of this meandering, what can we say with confidence?

1.) There is clearly a safety bid in the market.  The US dollar is rallying as investors convert other currency holdings into dollars to buy treasuries.

2.) While the US economy is in good shape, the weight of negative numbers from around the globe may pull the US indexes lower.  Or, at minimum, keep them from rallying strongly.