Saturday, January 24, 2015

US Equity Market Week In Review For the Week of January 19-23: The Consolidation Continues

     One of my favorite themes in looking at charts -- one that I return to fairly often -- is perspective.  While one time frame may offer little to no meaningful analysis, another has information that is clear as day.  So it is with the current market; while the short term is a technical mess, the long-term charts provide solid analysis.  So, let's start with the weekly SPYs:


The market is clearly in an uptrend, with a trend line connecting the lows of 2012 and 2014.  There are several different sell-offs, all of which use one weekly EMA for technical support.  However, two important technical indicators -- the weekly MACD and RSI -- are weakening, and have been for the better part of the year.  This means that momentum and price strength is declining, lowing upside momentum.  Overall this plays into the shorter-term dynamic that the market continues to consolidate:

   
The daily chart shows that since the beginning of the year, prices have been trading between the ~99-100 and 105 level.  The market is technically in an uptrend, as a trend line does exist that connects the lows of early April and mid-October.  But, it's a very unsatisfying trend as there is a great deal of action above that line.  And starting in December we see a clear decline in momentum and negative readings from the CMF combined with an uptick in volatility.  All of this furthers the consolidation argument.

Also consider that underneath the surface there is clearly a move to safety, as seen in these two charts:



The top chart shows the year-to-date performance of the SPYs relative to the IEFs, with the treasury market clearly outperforming.  And within the market, the defensive sectors of utilities, health care and staples are the winners.  But a change may also be afoot:




The IEFs (top chart) broke a 30-day upward trend line last week .  And the SPYs (bottom chart) not only broke through the upper trend line of their consolidation, but are also in a 5-day rally.


And the more aggressive sectors clearly outperformed the more defensive last week, with technology and industrials catching a strong bid.

     So, what does all this mean?  At the macro-economic level, the US economy is doing well, but the other developed economies are facing headwinds, as highlighted by last week's central bank action: the ECB finally started a QE program, the UK is backing off potential rate hikes and Canada cut rates.  These developments are creating headwinds.  But the US economic uptrend is clearly supporting a decent bid for US equities. 

Weekly Indicators for January 19 - 23 at XE.com


 - by New Deal democrat

My Weekly Indicator post is up at XE.com.

Simply put, you don't have a recession risk when people are bidding up prices on corporate bonds to 50+ year highs - recessions being, you know, bad for corporate balance sheets - despite an air pocket in coincident indicators.

Friday, January 23, 2015

International Economic Week in Review; Big Week For Central Bank's Edition

This is over at XE.com

To sum up this week’s central bank actions:
  • The Bank of England is now a bit less likely to raise interest rates as oil’s fall has given them a bit more maneuvering room regarding inflation.
  • Canada is concerned about overall growth, and they are acting accordingly.  As an aside, this may give the Bank of Australia an intellectual justification for action as well, given some of the underlying similarities between the economies
  • Brazil’s problems are deepening.  Growth is stagnant, but inflation is becoming more and more entrenched.  The central bank may have to engage in far more aggressive policy actions to finally take inflation out of the equation.
  • The BOJ is in a policy bind.  They are already flooding the market with yen, yet inflation’s Y/Y growth is clearly moving lower.  It’s logical at this point to ask if they’re at or very near the end of their viable policy responses.
  • The ECB FINALLY did something about inflation.  While the size of their policy response has caught some by surprise, the fact it took nearly a year into their deflationary experience is very concerning, and leads to the question of “is this occurring too late.”