US Equity Market Week in Review For the Week of November 24-28

     One of the great benefits of having multiple equity averages is that they almost always confirm each other; for example, when the SPYs rally, the QQQs follow suit which implies the markets are most likely moving higher.  But this week we have a fascinating situation: the QQQs rallied, the SPYs moved sideways and the IWMs fell.  This essentially gives everybody from the most bullish to the most bearish something to base their opinions on.

 

     Let's start by looking at the SPYs:

 

 

First of all, remember this was a holiday shortened week with a shortened trading session on Friday.  But for most of the week prices remained in a narrow area between ~207 and 207.5.  Prices moved higher on Friday, but then trended lower for the last half of the trading session.

 

    

 

The daily chart shows prices gapping higher a week ago Friday in reaction to the ECB and PBOC adding stimulus followed by prices moving sideways. 

 

 

In contrast we see the QQQs, which moved higher for the first half of the week, gapped up on Friday's OPEC news and then sold off to a price near their open on Friday.

 

 

But on the daily chart prices clearly remain in an uptrend.

 

 

The IWMs mirrored the QQQs for most of the week, printing a slow by solid rally.  However, on Friday, prices sold off sharply, closing near their lows for the shortened trading week.

 

 

The daily IWM chart shows the sharp price drop on Friday.

 

     So -- what does all this mean?

 

     Let's begin the analysis by noting that odd things are more likely to happen in a holiday shortened week because there are fewer traders in the market.  And the sharp sell-off on the IWMs was most likely caused by no one wanting to hold a position over the weekend as a result of chaos in the oil market.  Assuming that to be the case, the most logical conclusion is the QQQs are driving the market higher and they will pull the SPYs and IWMs up over the next few weeks.  This makes more sense considering the overall stimulating effect of lower oil prices on the economy as a whole (which was also confirmed by the transports gapping higher on Friday as well).            

 

     But at the same time, we're still dealing with the limiting factor of a fairly expensive market as shown by this table from the Wall Street Journal:

 

 

 

The Dow is at 17 while the S&P is at 19.4 and the NASDAQ is at 25.  All three of these readings are high from a historical perspective and limit upside advances.

 

 

Weekly Indicators for November 24 - 28 at XE.com

 - by New Deal democrat

My Weekly Indicators piece is up at XE.com.

There was more than one very sharp positive.  But a few cracks appeared in the facade as well.

Happy Thanksgiving - and an economic fact to be thankful for

 - by New Deal democrat

Best wishes for a very happy Thanksgiving.

Here is a little wonky economic thing we can be thankful for.  Since the end of WW2, Typically real GDP growth (blue) outstrips job growth (red) by about 2% on an annual basis:

But in this expansion, GDP growth has only exceeded job growth by about 0.5%.

If the usual relationship held in this expansion, we would only be adding about 50,000 jobs a month instead of 200,000 jobs a month. We would have added 1,800,000 fewer jobs in each of the last 3 years than we actually have.  That is something to be thankful for.

A note about the housing market for October

 - by New Deal democrat

A slew of housing data for September and October was reported yesterday and this morning.  I'll try to have a long, more involved piece either on Friday or Monday, but in the meantime let me give you a few comments.

To begin with, let me reiterate that I pay so much attention to this market because it is the single most leading sector of the economy.

When interest rates increased by about 1.5% in mid-2013, I forecast that the housing market would stop growing and would even turn down this year.  That it did, making a trough at about the end of last winter.  Since then it turned up, but only at a very low rate.  Generally multi-unit properties are being construted at a slightly faster rate than single family homes, which have stagnated.  Meanwhile prices generally have continued to appreciate, although there are signs that these too may actually have turned down earlier this year before starting to appreciate again.

The latest data continues that trend.  Last week we already found out that while the more volatile housing starts number was deemed slighly disappointing, housing permits (which tend to be about a month ahead of starts) made a new post-recession high.  Today single family home sales were reported equal to their post recession high, made a little more than a year ago.  For the last few months they have been generally slightly positive YoY.  The less important existing home sales were positive YoY for the first time in many months yesterday.  Pending home sales declined from September, but were also have turned postive YoY.

All of the house price numbers are positive YoY.  The Case-Shiller index, however, has failed to make a new seasonally adjusted high since April.  It did increase month over month.  The median home prices of both new and existing home sales appear to have both re-accelerated after making a trough during the third quarter.

Mortgage rates continue to decline, with 30 year rates under 4% again.  This tells me that home sales will continue to improve, and are likely to improve a little more vigorously, in the months ahead.  And because housing is such a leading sector, this has made me increasingly optimistic about the economy, jobs, and wages next year.

Good news and bad news for workers: corporate profits rose in third quarter

  - by New Deal democrat

The BEA's revised release for 3rd quarter GDP included its calculation of corporate protifts, which rose 1.5% over the 2nd quarter, and once again made an all time high.

This is both good news and bad news.

The good news is that corporate profits, deflated by unit labor costs, also made a new high. This is a long leading indicator, meaning that it usually starts to decline one year or more before a recession starts. This in turn means that more jobs should continue be added to the eonomy over the next year.  Companies with shrinking profits do not hire new workers; companies with increasing profits do.

The bad news, of course, is that corporate profits continue to monopolize virtually all of the monetary gains since the economy started to expand in the second half of 2009.  Wages are still not sharing in the bounty.

I'll have more at XE.com later, and I'll post a link  UPDATE:  Here's the link.  I discuss this release in the broader context of the economy. It is virtually across the board good news.

Gasoline "Breaks on through to the Other Side"...

... of the oil choke collar.

 - by New Deal democrat

This is from Gas Buddy this morning:

The price of gas has fallen to $2.82 a gallon.  That is lower than at all times in the last 4 years.

Remember that for every $0.10 gas prices decline, after you factor in the typical mileage driven for a vehicle, times the number of drivers in the US, that is something like another $36 billion a year that consumers can save or spend on other goods.

Update:  Here are a few statistics to help understand how much the US consumer is saving on gas.

The average vehicle in the US is driven 11,318 miles/year:

http://www.epa.gov/cleanenergy/energy-resources/refs.html

The average gas mileage in the US fleet is about 24 miles per gallon:

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/12/13/cars-in-the-u-s-are-more-fuel-efficient-than-ever-heres-how-it-happened/

There are about 250 million vehicles in the US:
http://www.latimes.com/business/autos/la-fi-hy-ihs-automotive-average-age-car-20140609-story.html

That's about 9 billion gallons of gas per month total in the US.

Every 10 cent decline put $900 million dollars a month in consumers' pockets.

Gas now is about 35 cents a gallon cheaper than it was last November. That means about $3 billion dollars this month that can be saved or spent elsewhere.

Weekly Indicators for November 17 - 21 at XE.com

 - by New Deal democrat

My Weekly Indicators piece is up at XE.com.

The conclusion this week was pretty simple and straightforward.

US Equity Market Review For The Week of November 17-21

     One of the main points I've made over the last few weeks is the market is expensive by most valuation models.  This is hardly a revolutionary assertion; many traders have been looking to various metrics (PE, Forward PE, Dividend Yield) and making the same observation for the last few years.  What this means is the that, for the market to move higher in a meaningful way, we ultimately need fundamental change; something in the basic economic calculus has to be altered for the market to move higher. 

     And that's exactly what we got last week from two central banks.  Mario Draghi of the ECB has pledged to use central bank policy to increase inflation:

Mario Draghi strengthened his stimulus pledge for the euro area by saying the European Central Bank can’t hold back in its fight to revive the economy.

“We will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires,” the ECB president said at a conference in Frankfurt today. Some inflation expectations “have been declining to levels that I would deem excessively low,” he said.

And on the other side of the globe is the PBOC lowering rates:

China cut benchmark interest rates for the first time since July 2012 as leaders step up support for the world’s second-largest economy, sending global shares, oil and metals prices higher.

The one-year lending rate was reduced by 0.4 percentage point to 5.6 percent, while the one-year deposit rate was lowered by 0.25 percentage point to 2.75 percent, effective tomorrow, the People’s Bank of China said on its website today.

The net effect of this move on the US markets is clear from a daily chart of the SPYs:

The chart above clearly shows Friday's price movement as a gap higher, with the SPYs printing a solid candle on a nice increase in volume.  There are some technical drawbacks to the above chart, however.  The MACD and RSI are both already at strong levels, indicating prices are already at the top of a buying cycle.  While both of these indicators can stay pegged at higher levels while prices continue to move higher due to fundamental factors, they do bear watching.

     There are some other cautionary developments, however, in the 5-minute chart:

 

On Friday morning, prices gapped higher by over 1%.  But they moved lower in a disciplined manner until after lunch, when they slowly moved a bit higher into the close.  Some of this move is understandable; the market is already expensive, so an opening gap higher would probably be met with more valuation based selling.  However, in an ideal rally, prices would gap higher and then continue on that path. 

 

     This is hardly fatal.  And, when we look at the 30 minute chart, its importance diminishes:

 

 

After the sell-off about a month ago, prices made a continued move higher, forming a price arc.  For the last week and a half, prices have been consolidating right around the 204 level.  Friday's move was a push higher from this base, meaning the most likely interpretation is that we're looking at a new move higher, which is confirmed by the price action in other indexes:

The Russell 2000 (IWMs, top chart), transports (IYT, middle chart) and mid-caps (IJH, bottom chart) all confirmed the move higher.

     In addition to the international events driving the market higher, there is also the fundamental condition of the US economy.  Employment growth is strong and regional manufacturing numbers have been solid, corporate earnings are expanding.  The general consensus is that, in contrast to much of the developed world, the US is in good shape.  This means that, overall, the US equity market has the wind at its back -- at least for another week.




 

Failure to deflate: flat consumer prices only slightly help real wages, sales

 - by New Deal democrat

Usually changes in the inflation rate are all about the price of gasoline.  Not in October.  Although gas prices fell -6.4% (compared with a decline of -5.0% a year ago), unlike one year ago net consumer price failed to decline, instead remaining flat.

Over a two month period, a -8.6% decline in gas (vs. -6.1% in 2013) coincident with a 0.1% increase in prices, vs. a gain of +0.2% in 2013.  There seems to have been no single culrpit.  A wide variety of other prices slightly more than expected.

As a result, while measures of real sales and real wages did increase, they did not do so as much as expected.

First of all, here are real retail sales:

These returned to August levels.

Real retail sales per capita are a long leading indicator, typically turning one year or more before the economy as a whole.  October's increase still leaves these below August's level:

Real wages also increased, but are still below February's level, and are still about 0.7% below their 2010 post-recession peak:

Of course, even that level was below virtually the entire 1970s peak for real wages:

New post-recession high in building permits

 - by New Deal democrat

October building permits came in at the highest level since January 2008.

This is unequivocal good news, not just for now, but for the economy going through 2015.

I'll have more later at XE.com, and I'll update with a link. And here it is.  This has important implications for 2015.

Trends in wages - some comments

 - by New Deal democrat

My biggest focus now is what is happening with wages.  I've done quite a bit of number-crunching, but I have to do more time consuming number crunching in order to make the results more presentable.

In the meantime, let me tell you what the general results are:

1.  It isn't just a low wage recovery any more.  In the last 18 months, 1/3 or more of all jobs created have been high wage jobs.  Mid wage jobs, however, are still lagging.

2.  Almost all measures of wages, both average and median, have been slowly rising this year, and in particular rose in the third quarter.

Once I have the inflation adjusted charts and graphs ready, I'll post in more detail.

In the meantime, the Economic Policy Institute published an update on wages through the first half of this year, indicating that real wages fell slightly compared with the first half of 2013 across almost all income classes.  Although I question the metric - why measure first half to first half of years, if the data is seasonally adjusted? -  this is a good and thorough read.  I suspect the EPI arrived at a contrary result - wages slightly falling vs. slightly rising - because their source data was from the same panel that the BLS used in its "usual weekly earnings" series.  This data had an anomalous big decline in the second quarter, that wasn't present in any other series.  BTW, it rebounded in the third quarter.

In the larger view, I share the dismay that wages have been stagnant since the turn of the Millennium, and even as far back as since the 1970s, especially where so much income and wealth has been funneled to the very topmost segment of society.  It is simply not an economy which is functioning well if most of its participants do not benefit, or benefit very little, from its growth.  In the 1980s, the middle class coped by spouses joining the workforce, and by refinancing debt at lower interest rates.  The refinancing at lower rates continued periodically throughout the 1990s and 2000s.  Some people benefitted - temporarily at least - from participating in the stock or housing market bubbles.

This is not going to happen any more.  Income gains by the middle and working class in the US has since 2009 and will in the future continue to happen, when it happens, the old-fashioned way: by actual real growth.

Tomorrow October consumer inflation will be reported.  If it declines as expected, that may mean a significant jump in real average wages.  I'll follow up then.

Weekly Indicators for November 10 - 14 at XE.com

 - by New Deal democrat

My Weekly Indicators piece is up at XE.com.

More softness has shown up in coincident indicators.

US Equity Market Review For the Week of November 17-21

     One month ago, traders had re-examined their risk calculus and determined that equities were too risky, sending shares lower and the vix higher.  A rally in the bond market was reaching its apex, equities sold off and momentum indicators cratered to some of the lowest levels in years.  Fast forward a mere month, and the entire environment has more or less changed: equities have returned to previous levels, momentum indicators are back at higher levels and the vix is again showing market calm.

     Nothing highlights this changing situation more than the Vix, which spiked in mid-October to 26.25 but which has returned to a far more tranquil reading of 13.3.  And note the speed with which things have settled down; in less than a month, the market has gone from about a week of "holy shit, everything is changing" to "we're back to where we were." 

     The 30 minute charts of the SPY and IEFs highlight this change.

    

 

 

Over the last month, the SPYs have slowed and consistently moved higher.  The rally has consolidated gains on several occasions and, after doing so, resumed its ascent.  However, the pace of the rise has clearly decreased, with prices forming a slow yet very price obvious arc. 

 

 

At the same time, the bond market has not sold off to the same degree as the equities rally.  Instead, the IEFs have consolidated their position between the 104.5 and 105.25 price levels since the end of October.  If traders were seriously re-allocating their portfolios due to a return of the "equities are going to continue rallying" concept, we'd see bonds move lower.  But that isn't happening. 

 

 

In fact, the weekly TLTs (20+ section of the curve) are still obviously in an uptrend.  All the EMA -- short and long -- are moving higher.  The only bearish element on this chart is the decline in volume over the last few weeks, which could indicate the trend is about to reverse.  But prices would need to move at least another 2% lower, which is a far larger bond market than equity market move. 

 

     That leads to the question: what's next?  To answer that, let's look at the daily chart of the micro, mid and large cap ETFs:

 

 

The large caps' chart (OEF, top chart) is most closely tracking the SPYs.  Prices have moved through previous resistance, although the pace of the rally has clearly decreased, indicating short-term declining momentum.  In contrast, the mid-caps (middle chart) haven't made new highs, instead resting right at previously attained levels.  And while the micro-caps (bottom chart) have broken through resistance levels, they clearly have little upward momentum. 

 

     This means that overall, we have a potential for another 5%-10% rally caused by events like a solid GDP read or strong employment report.  But ultimately the market is still expensive, requiring positive fundamental news to move higher.  It also makes this a stock-pickers market were a company that is growing faster than the economy as a whole and its sector and then its industry will fetch a premium price. 

 

    

    



Gas price declines power consumers in October

 - by New Deal democrat

I have a new post up at XE.com on this morning's retail sales number.

This is our first indication of how much the decline in gas prices is helping out consumers.

Jobs and wages graphapalooza!

 - by New Deal democrat

At the end of the day, the economy ought to operate to bring the most benefit to the most people.  Jobs and wages are a pretty good proxy for that desideratum. With that in mind, let me update some of my graphs about them.

At the end of last year, Congress cut off extended unemployment benefits, on the theory that they provided a "hammock" for the unemployed, who would otherwise be motivated to find new jobs.  If that's true, then those who told the Census Bureau that they were not even looking anymore, and so were out of the labor force, but wanted a job now, should be declining.  Here's what has actually happened (graph shows NILFWJN as percent of work force):

Instead of falling, nearly a million more people, or .4% of the workforce, have been added to this group. Aside from the privation, and aside from the fact that these people aren't adding to the economy by spending the benefits, that means that unemployment is 0.4% lower than it would otherwise be.

Another way to look at the overall employment situation is to look at how many hours of work are available to those in the labor force, and those who want a job now but aren't counted in the work force:

This continues to slowly increase and is only about 1.8% below its 2007 peak and 5.8% below its peak during the 1990s tech boom.

How about wages? One measure I like is how much total real wages are available per person in the US population.  That's what is shown in this next graph:

In the aggregate, real wages are quite close to their prior peaks.  That tells us that it is the distribution of income among the workforce that is the most acute problem.

Finally, even back in the horrible days of 2008 and 2009 I used to like to find at least one item of good news.  That's the final graph, showing something that went totally unremarked in last week's employment report.  Namely, we have passed the 10,000,000 mark in new jobs added to the economy since the jobs trough in February 2010:

Once upon a time, Doomers used to claim that we weren't really adding any jobs, or were just "bottom bouncing."  They went silent on that claim quite a while ago.  Then they claimed that the jobs recovery was only part time jobs.  Part time jobs are that nearly flat line at 0 at the bottom.  99% of all of the jobs added have been full time jobs.

Except for the vile conduct of Congress a year ago in cutting off extended unemployment benefits, we are still making progress.  Not nearly enough, not nearly what I would like to see, but nevertheless progress.

The mighty Krgthulu has spoken: median income =/= median wages

 - by New Deal democrat

I've called median household income The most misused statstic in the econoblogosphere.  People routinely cite it to claim that wages have fallen since the onset of the Great Recession.  They have not.

The "households" included in the statistic include all those headed by anyone over age 16, including the burgeoning cohort of elderly retirees. Even excluding that age cohort, it includes households including the unemployed.  Strip out the elderly and adjust for unemployment, and household incomes show the same stagnation as wages.

But now the authoritative voice of Krgthulu Has spoken

although Leonhardt talks about wages, the chart he shows is median income, which is a somewhat different story. Wages for ordinary workers have in fact been stagnant since the 1970s, very much including the Reagan years, with the only major break during part of the Clinton boom.

 I hereby invoke Delong's Rule:

1. Paul Krugman Is Right. 2. If You Think Paul Krugman Is Wrong, Refer to #1

QED

Making the case that the consumer is slowing down

 - by New Deal democrat

A year ago, based on the long leading indicators at the time, I thought the economy would be in the midst of a slowdown about now.  I have a new post up at XE.com, making the Case for a consumer slowdown, based on trends in housing and cars.

The evidence is far from solid, especially given the relief consumers are having at the gas pump. We'll see.

It's (also) the interest rates, stupid!

 - by New Deal democrat

You know the old saw, "it's the economy, stupid!"  Both Robert Reich and Atrios have boiled last week's election results down to that maxim.

Atrios said, "It isn't really a big mystery why people still aren't thrilled with the economy. The foreclosure crisis and the great recession destroyed lives, and opportunities for The Kids Today are pretty crap."

Reich blames median household income:

If you want a single reason for why Democrats lost big on Election Day 2014 it’s this: Median household income continues to drop.This is the first “recovery” in memory when this has happened.Jobs are coming back but wages aren’t.

While I agree with his prescription:

[Democrats] have a choice. 

They can refill their campaign coffers for 2016 by trying to raise even more money from big corporations, Wall Street, and wealthy individuals.

And hold their tongues about the economic slide of the majority, and the drowning of our democracy.  Or they can come out swinging.

I disagree about using the metric of median household income, since your 75 year old Uncle Earl and 85 year old grandma are counted in that statistic, and there are a ton more Uncle Earls and Grandmas than there used to be (more on that below); and among 25 to 54 year olds it tracks the employment to population ratio nicely.

While the lack of a platform that speaks to younger voters was certainly an issue, I believe almost all commentators have overlooked another crucial component of what happened last week -- interest rates.

You've probably seen this graphic already from ABC news, showing the skew among age groups over the last 5 elections. Note that younger voters constituted 12% of the electorate in each of that last 3 midterms.

But look at what happened with the 60+ cohort:  it grew from 23% in 2006 to 32% in 2010, to 37% in 2014!

Not only has the midterm electorate skewed heavily towards senior citizens in the last 8 years, but the senior citizen cohort itself has become more conservative.  The reason? Most people arrive at their basic political orientation at about age 18, and never fundamentally change.   In 2006, 65 year olds had turned 18 in 1959.  In 2010, that was 1963.  This year it was 1967.

Now let's look at how 18 year olds political orientation has changed over time:

In 2006, there were still some FDR era voters around.  By yesterday, they had all but disappeared, replaced by an island of JFK era 18 year old blue voters amidst a red tide of Truman, Eisenhower, and LBJ voters.  In other words, the 65+ year old cohort that went to the polls in 2014 was the most conservative in several decades. (PS: Note that Obama turned 18 in very red 1979, which might not be a coincidence with his apparent veneration for Reagan).

And what do elderly voters care about?  It isn't jobs, and it isn't wages. After all, they are almost all retired!

No, what they care about is the interest rates their CD's and money market accounts are earning, and the COLA adjustments to their Social Security.

And there, the news has been abysmal for the last 6 years.

Here's the rate on CD's from 2008 to the present:

And here's the COLA adjustment to Social Security in the last 6 years:

Average CD rates have run no higher than 1%.  Social Security COLA has averaged 2.2%.

Now here's inflation (and keep in mind that there is evidence that seniors probably face higher inflation rates for what they buy):

For the last 5 years, inflation has averaged about 2% a year.

Obama and the democrats are seen as having bailed out Wall Street in 2009.  Meanwhile savers and those on fixed incomes have taken it in the chops.

So let's review:

1. A burgeoning midterm electoral cohort
2. skewing more conservative than in several decades
3. that is the prime viewership for Fox News
4. took it in the chops on their savings and, to a lesser extent, Social Security.
5. They blamed Obama and the democrats.

Last week, they got even.

A thought for Sunday: the importance of state-level third parties

 - by New Deal democrat

[You know the drill. It's Sunday.  Regular nerdy economic blogging will resume tomorrow.  And be sure to read Bonddad's latest summary, below]

There was a devastating piece about the Democratic Party published about a month ago by Chris Bowers, I think, that reads particularly bitterly in the light of last Tuesday's midterm election results. Of course I can't find it now.   (UPDATE:  I think it was This piece. By Matt Stoller. If you haven't read it yet, go read it now).  But in summary, it said that the high point of the left netroots was the Lamont-Lieberman Senate contest in 2006.  Anti-Iraq war progressives defeated Joe Lieberman in the primary. But because Connecticut has no "sore loser" law preventing primary losers from re-filing and running as independents in the general election, Lieberman did so, and the Democratic Party establishment, including one Barack Obama, rallied around him.  When Lieberman won with the help of GOP votes, he got a standing ovation in the Senate.

In 2008 most of the netroots backed Obama, who also suggested that he was anti-Iraq war (he never actually cast a vote) vs. the pro-Iraq war Hillary Clinton.  But once Obama won and no longer needed  progressives, he dumped Howard Dean as Democratic Party Chair, along with his "50 state strategy," and installed economic neoliberals as his most powerful appointments.

The point Bowers(?) was making is that the party establishment learned in 2006 that it didn't have to worry about progressives.  Progressives would lose most primaries where the primary determinant was money, and then they would fall meekly in line, backing a centrist Democrat in the general.  This is where Kos's mantra "more and better" democrats led.

The GOP, when installed in power via Bush, or even with a stranglehold on a necessary artery, like the filibuster rule in the Senate, has relentlessly pursued a maximalist strategy, rallying round the most extreme policies and maybe compromising a little at the end.  The democratic estabslishment, with no party discipline to the right, pursues milquetoast centrist policies and even then compromises with the GOP.

The Progressive voice is never going to be heard, let alone come to power, under these circumstances.

In order to do so, progressives need to take a page from the historical rise of the UK's Labour Party.  One hundred years ago, the UK's two major parties were the Conservatives (a thoroughly reactionary party), and the Liberals, a center-left coalition much like today's Democrats.  The Labour Party formed after the Liberals stabbed them in the back.

And Labour did not win by defeating Conservatives. Labour won by driving the Liberal party to the brink of extinction.

Similarly, progressives will not win because of GOP losses. Progressives will only win by driving corporatist democrats to the edge of extinction, just as movement conservatives took over the GOP by making Rockefeller Republicans as extinct as the dodo bird).

As spelled out above, corporatists are throughly in charge of the democratic establishment, to the point, it is widely reported, that they would prefer GOP election wins over progressive democratic candidates. See, for example, here

So, how to make corporatist democrats extinct?  By showing them that they can never win.  And how do you show them that they will never win?  By borrowing a page from the career of Joe Lieberman.

It isn't enough for progressives to primary corporatists. State level third parties, like New York's Green Party, give progressives the ability to stay in elections right through the general election, even if they lose a democratic primary to corporatists.

Yes, this strategy will mean some general election losses over a few cycles.  But when corporatist democrats learn that they cannot win, they will start to disappear.  Progressives will win either as Democrats, or under another party banner.

By the way, this happened before. One hundred years ago, there were active Populist and Progressive Parties in the states (remember Robert LaFollette?). Ultimately they became part of the winning New Deal coalition.

Progressives shouldn't abandon the Democratic Party.  But they should target the corporatists as mercilessly as Tea Party republicans targeted their less-extremist wing, and state level Third Parties are an indispensable part of that attack.

US Equity Market Summary For The Week of November 3-7

At the end of last week's column, I make the following observation:

So, in conclusion, we're where we were a few weeks ago: a market that is pretty expensive that has decent earnings growth potential but whose various companies also face some a weak international environment and a stronger dollar.  That limits the upside potential a bit.

To begin this week's market review, let's take a look at the overall valuation of the major indexes:

The above screen shot from the WSJ's market page highlights the bulls predicament.  The S&P 500 is trading at a PE of 19; this isn't "super" expensive, but it certainly isn't cheap either.  And its forward PE of 16.65 doesn't provide a great deal of upside room.  The NASDAQ 100 has the same problem; it's currently more expensive than the S&P 500 and its forward PE is also high, limiting a rally.  The Dow is in a somewhat better position, but, frankly, as an index it's an historical anachronism -- I follow it because I have to, bit because it provides a unique insight into the markets.

     And not only are the valuation measures limiting a potential rally, so is increased international economic risk.  The EU is hovering just above recession and/or a deflationary situation, Russia is quickly becoming a potential economic disaster, Abenomics is stalling and China's real estate market is starting to fall under its own weight.  Although the US economy is actually on decent footing, most major companies derive a fair amount of their revenue from international operations.  This means the potential international slowdown has negative implications for earnings growth, and, by extension, a potential market rally.  And, just to add the icing on the cake, the dollar is rallying, making the repatriation of profits that much more difficult.  All of the previously listed issues add up to limit any rally.

     The limited upside potential is highlighted on the SPY daily chart.  In mid-October, the market had a sharp sell-off from peak to trough of 201.9 to 181.92 -- a near 10% selloff.  But nearly three weeks later, prices rebounded, erasing losses and eventually making new highs.  The pace of the rally, however, has decreased.  Note in the circled area the candles have narrower bodies, indicating the opening and closing levels for that trading day were very close.  Overall volume has also decreased.       

 



 

The 30 minute chart adds more detail to the analysis.  There are two rallies.  The first starts mid-way through the 15th, continues through resistance until November 4th and then breaks the trend.  The  second rally started on the 4th, but has a lower angle, indicating declining momentum. 

 

Two other broad indexes raise concerns about a potential continuation of the rally: the IWCs and QQQs.

 

The micro-caps (daily chart above) hit resistance at their upside resistance trend line.  More importantly, they didn't continue through resistance with the other averages.

 

And while the QQQs broke through resistance, they traded sideways last week, which is better seen on the 5-minute chart:

 

 

The detailed daily chart shows the QQQs hit resistance at the 101.6-101.7 level and failed to continue higher.  In fact, last week's QQQ 5-minute chart looks like a sideways consolidation pattern.

Last week's sector performance chart also shows why the overall advance was subdued.  While industrials and financials advanced, so did utilities, health care and staples -- three sectors that are defensive in orientation.

And when we look at year-to-date sector performance, defensive sectors again are the two top performers also representing 3 of the top 4.

     To return to the theme from the opening paragraph, the market is expensive and faces moderately strong headwinds in the form of increasing international economic uncertainty and a stronger dollar.  When these factors are combined with the more defensive nature of the market's advance and its already expensive valuation levels, a topside rally is limited, barring better company or sector level earnings news and/or speculation.  That makes the current more and more a stock-pickers market.