Monday, February 20, 2012

Morning Market Analysis, Pt. I: My Concerns

Every weekend, I run a performance chart over at  I run two data sets.  In the first, I compare stocks, bonds, commodities and the dollar while in the second I compare sector ETFs (XLBs, XLEs etc).  Below is a chart of the major sectors, with S=stocks, B=bonds, C/Com = Commodities and $ = dollar.  Parenthesis indicates the sector lost value over that time period:

Week Month 3M 6M Yr
1 S S S S B
2 C C C $ S
3 $ (B) B B (COM)
4 B ($) $ (COM) ($)

This is what I would expect a bull market sector alignment to look like: stocks are the top performer, while bonds are the worst.  In addition, over most time frames, stocks are the top performers.  Also note how bonds have moved from the top performer over the last year to the worst performer over the last week.  In short, this looks like a bull market.

I mention the above because of my concern for the recent stock market rally all of last week.  Let's start with my areas of concern, beginning with the daily chart of the treasury sectors

The IEIs are right at technical support.  The MACD and shorter EMAs are both moving lower, but the volume indicators are still positive.


 The IEFs and TLTs are still stuck in a trading range.

Part of the reason for this situation is operation twist, which has place a bid under treasuries.  However, US bonds are still catching a safe haven bid from the EU situation.  As such, some fuel for a rally in risk based capital is being held here in the treasury market for now.

 The weekly chart of industrial metals really outlines my concern in a big way.  Last week, prices were right at the 200 week EMA, yet couldn't get through.  Notice the very large drop we saw.  While the MACD is rising, it is still negative.  However, the volume indicators are extremely positive.

On the daily chart, we see that, again, prices were right at important levels (here a 200 day EMA) and they fell.  As mentioned above, given the underlying fundamental situation (belief that the economy is expanding) this is a concerning development. 

The above charts are very concerning; industrial metals should have moved through important resistance levels if there was a fundamental belief the economy was going to rally strongly.  More importantly, the economy is at an inflection point right now; bullish sentiment is building.  More and more economists are coming to he bullish side.  This type of market fail at this point is troubling.

Commodities rallied last week because of the oil market, which has finally moved through the 103.5 level.  Also note the positive technical developments; a rising MACD, A/D and CMF. 

On the weekly chart, notice there is plenty of room for oil prices to run, now that they've moved through technical levels. 

The dollar is in an extremely odd position right now.  On one hand, it is catching a safe haven bid in relation to EU.  And, the economy is growing, which should attract some interest from investors, leading to bullish advances.  At the same time the Fed has announced it will keep interest rates low for a long time, which is currency negative.  What we see on the daily chart is a reflection of that uncertainty.  The currency rallies when safe havens become important (especially in relation to the euro) while the currency sells when traders realize interest rates are going to stay low for an extended period of time.

So, to sum up my concerns; we have the following:

The treasury market is not selling off.  Some of this could be due to operation twist, which is partially born out by the shorter end of the curve (IEIs) being closer to support than the longer.  However, I don't think that explains the entire treasury situation.  There is still a fair amount of concern in the market about Europe, which makes the treasury market a good place to place money.

Industrial metals sold-off last week.  If the economy were about to accelerate into overdrive, we would expect the opposite to happen.  The rally in commodities was instead caused by a rally in oil, which could be economy negative.  More importantly, the weekly oil chart shows a tremendous amount of room for oil prices to run now that they've cleared resistance.

The dollar, oddly enough, is a bit of a non-factor at this point.  It is caught between competing trends that are equally strong.