Saturday, October 18, 2014

US Market Review For the Week of October 13-17; The Rebound Potential Is Increasing

     Last week put to rest any doubt about whether or not the market was in the middle of a correction.  Although the SPYs ended the week down only 1.09%, the index broke key support at the 200 day EMA, with the NASDAQ falling to that key technical line.   While the IWMs rebounded, closing right at the previous support level in the 106/107 level that defined their near year-long sideways consolidation, that indexes momentum (MACD) is still declining.  And the mid-cap and small cap ETFS confirmed the downtrend.  But the sell-off is hardly in bear market territory as the SPYs are only down 5.7% with the QQQs and IWMs down a bit over 6%.

     But the most important charts of the week come from the treasury market, beginning with the weekly IEFs:


After hitting the 98 level at the beginning of the year, prices have been on a slow but steady climb.  Notice the lack of any meaningful correction.  Instead, prices simply continued to grind higher with a slight but noticeable increase in volume since the first of the year with increasing momentum. 

And the TLTs which represent the long end of the curve, are telling the exact same story.  But both the IEFs and TLTs are nearing resistance levels established earlier this year.  And the 10 year is at 2.22 with the 30 year at 2.98 -- pretty high levels.  This may indicate the treasury rally is nearing its high.

While he's not a trader per se, Krugman hits the nail on the head in explaining the importance of the above chart:

Most obviously, interest rates on long-term U.S. government debt — the rates that the usual suspects keep telling us will shoot up any day now unless we slash spending — have fallen sharply. This tells us that markets aren’t worried about default, but that they are worried about persistent economic weakness, which will keep the Fed from raising the short-term interest rates it controls.

     In fact, with the exception of the junk bond market which has sold off recently, the other bond markets are in the middle of a decent rally:

The best-performing bond ETF for the last year has been the TLTs which have risen 17%, with the municipal market a distant second coming in a bit below 10%.  The intermediate corporate market has gained ~7.5% with the 7-10 year treasury up 6%. 

     Let's take a step back and look at some of the factors that may lead to a bond market rally:

     1.) When there is no or little fear of inflation.
     2.) When economic growth will be insufficient to provide an environment in which companies can increase revenues. 
     3.) When the annual yield payments will be at least on par with and hopefully higher than the combination of dividends and capital gains associated with comparable equities
     3.) When the risk premium offered by equities is insufficient compensation
Clearly number 1 is in play, as global inflation is minimal: the EU is near deflation, with no major economy is experiencing even an inflationary spike (Inflation is an issue in Russia, Brazil and India, but their respective central banks have acted aggressively in raising rates).  With inflation low, even a 2%-3% is a fair return in a slow growth environment, which leads directly to point number 2.  International markets have realigned to a "risk off" trade, caused by a realization that the EU may be in or near a deadly combination of recession and/or deflationary spiral.  This has been exasperated by negative news from Japan and Russia, leading investors to rethink their global growth calculus.  While the S&P is yielding a little over 2%, it is also fairly expensive by other multiple valuations.  Combine the high valuation levels with a potential global slowdown on the table -- and a corresponding slowdown in earnings -- and a safe asset with a comparable yield looks a bit more attractive.  And the risk off trade has already been alluded to.  Over the last month or so it's just gotten riskier.  Major international organizations have lowered their growth forecasts, military conflict is increasing and we have a bona fide global health problem.  Those three factors combined would scare any trader at least a bit.         

     All that being said, let's now turn to the equity markets, beginning with the weekly SPY chart:

Technically, the underlying environment is clearly bearish with a declining MACD and RSI, increased volume on the sell off, rising volatility and prices breaking the 200 day EMA.  But the 200 day EMA often acts as a center of gravity; when prices break below that level, they usually respond by rallying back to that point (which they did on Friday).  In the current market, that's usually because of trading programs.  But, irrespective of the reason behind Friday's bounce, bounce it did.
And breaking the 200 day EMA is not the bearish indicator you might think:
In fact, some technical analysts consider breaking below the 200-day moving average to be the official end of a bull market. So, at least according to this definition, we’re now in a bear market. (The usual definition is a 20% or more decline.)

The situation may not be that dire, however. While market-timing systems based on the 200-day moving average had impressive records in the earlier part of the last century, they have become markedly less successful in recent decades — to the point that some are openly speculating that they no longer work.

In fact, since 1990 the stock market has actually performed better than average following “sell” signals from the 200-day moving average.
Next four weeksNext 13 weeksNext 26 weeksNext 12 months
Following ‘sell’ signals from 200-day moving average2.5%5.4%6.1%9.7%
All other days0.9%2.7%5.6%11.7%

The full article is definitely worth a read.
    Other charts are also pointing to the possibility that we may see at least a stabilization around these levels.

Above is a 30 minute chart of the IWMs -- the average that led the market lower, making it a decent potential leading indicator.  Since trading on the 9th, prices have been moving a bit more sideways, consolidating between the ~104 and 109 level.  Prices aren't forming a definitive pattern, making this a fairly week technical observation. 

But we're also seeing it in the IWCs -- a micro-cap ETF.  Both it and the IMWs (above) also broke through their respective 200 minute EMAs as well, a potentially bullish sign.

Adding onto the theme of a potential rebound next week, consider this chart:

Above is a three year graph of both the NASDAQ and NYSE stocks below the 200 day EMA (ignore the right hand side).  Both are at very low levels, indicating the market, at least from this metric is very oversold.  These types of conditions usually lead to traders nibbling on what they consider to be undervalued shares, as shown in the following chart:

Above is a chart with the SPYs on top and the percentage of stocks below the 200 day EMA on the bottom.  For the last three years, this level of oversold (at least on the stocks below their 200 day average indicator) has usually led to a market rebound.  And the current level on the 200 day EMA -- which we see at the end of 2011 (far left of the chart), led to the strong spring rally in 2012.

And finally, let's place this sell-off against the general US economic backdrop as expressed in the Fed's Beige Book which was released on Wednesday:

Reports from the twelve Federal Reserve Districts generally described modest to moderate economic growth at a pace similar to that noted in the previous Beige Book. Moderate growth was reported by the Cleveland, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco Districts, while modest growth was reported by the New York, Philadelphia, Richmond, Atlanta, and Kansas City Districts. In the Boston District, reports from business contacts painted a mixed picture of economic conditions. In addition, several Districts noted that contacts were generally optimistic about future activity.

The market is a leading indicator.  But there is nothing in the fundamental US economic picture indicating we're near a recession.  As I noted earlier this week, the leading and coincident indicators are in good shape, and consumer spending is at decent and sustainable levels.  That means traders aren't selling because a recession is around the corner.  Ultimately they're readjusting portfolios.  That arguably puts a higher potential bottom on the chart.

     A rebound certainly isn't guaranteed.  There is clearly a big change in the risk calculus caused by the EU, Japan and increased military conflict.  And those external events can have a domestic impact in an increasingly inter-connected world leading to lower corporate earnings and, by extension, equity prices.  It's also possible that there is simply too much downward momentum baked into the current market environment to stop now.  And, honestly, considering the overvalued nature of most shares, that wouldn't be a bad thing.  But the US markets are getting caught up in a sell-off that is arguably more globally based, while the US economy isn't showing any recessionary signs.  And there are also very important indicators pointing to oversold conditions.   Overall, the possibility for a rebound has at least increased.


Friday, October 17, 2014

Weekly indicators for October 16-20 at

 - by New Deal democrat

My Weekly Indicator post is Up at

This week, at least, it turns out the US really is exceptional.

Housing permits still say: deceleration not DOOM

 - by New Deal democrat

Housing permits are one of the best long leading indicators there is.  They give us a good read on the economy 12-18 months out.

Here's a graph of permits since the beginning of 2011:

As you can see, the pace of growth started to slow down heading into 2013, and for the last 15 months they have gone sideways with a slight upside bias (in September, like almost every other month this year, they were just slightly positive YoY).

The bad news is, this is strong evidence that the economy is probably decelerating by now, and that deceleration will continue for awhile.  The good news is, there has never been a recession without permits falling at least 175,000 from a recent high.  At their worst reading this year, they were only down about -130,000 from their 2013 high.

The recent economic news, whether retail sales, or industrial production, or jobless claims, or interest rates, or whatever else you can think of, simply is not consistent with any actual downturn in the US in the near future.

US consumers paying the least for gas in nearly 4 years

 - by New Deal democrat

This post is up at

The best way to look at this is,how much of their disposable income do US consumers have to spend on gas?  When gas prices go up, consumers have less to spend on everything else, and according to research performed by UCSD Professor James Hamilton, if there is a sharp spike, consumers tend to cut back spending by about $2 for every $1 more they spend paying for gas.

Conversely ....

Thursday, October 16, 2014

Quick Technical Update on the SPYs

Above is a yearly chart of the SPYs with Fibonacci lines and fans drawn from the lowest point to the highest on the chart.  Prices are now in the middle of both the Fib lines and fans.  In addition we are just a bit below the 200 day EMA, which usually works like a center of gravity for prices.

Jobless claims at 264,000 set new low

 - by New Deal democrat

The 4 week moving average also set a new post-recession low.

But, oh yeah, we're sliding into recession. Sure.  Sweet jeebus, Doomers are stupid.

Wednesday, October 15, 2014

Neil Irwin of the New York Times has never heard of this thing called "gasoline"

 - by New Deal democrat

Today Neil Irwin of "the Upshot" tells his readers in the NYT that:
You knew all that back in December, so you would have expected that interest rates would be steady or even up significantly this year. And you would have been very wrong: Ten-yearTreasury bonds yielded 3 percent to start the year, a figure now down to 2.2 percent.
So something else is going on unrelated to the Fed or to the growth picture in the United States. And it seems to involve the outlook for inflation. 
O]the last few months [there] has been ... a sharp drop in inflation expectations. But why would that be? After all, standard economic theory would suggest that if the economy is strengthening, it should push up inflation. Workers have a better shot at getting a raise now that the unemployment rate is under 6 percent than they did when it was double digits, for example.
 That’s true, of course, but the United States is no island. And right now, there are some powerful forces pulling prices down from around the world.
Hers's a clue as to what "something else is going on."  First of all, my long leading indicators are mixed, and literally none of the short leading indicators have rolled over.

Now, to the point:  when the Fed announced it was considering the "taper" in May of 2013, Treasury yields jumped from 1.5% to over 3.0%.  In short, they grossly overreacted and have been compensating for that all of this year.

Since 1974, consumer inflation in the United States has always and everywhere been about the price of Oil.  Here's a graph of core (i.e., ex-food and energy) vs. headline inflation from Doug Short:

With Europe and possibly China weakening, the US looks pretty good.  Hence the flight to the safety of US Treasuries.

As a result of which, there has been a boomlet in refinancing mortgages, not to mention the money people who buy gas are now keeping in their pockets to be saved or spent otherwise.

Apparently Neil Irwin has never heard of this.

The US Economy Is In Decent Shape

This is over at

In saying the US economy is in "decent shape" I am not saying it is without problems.  Like most advanced economies, the employment situation could use improvement, and the lack of meaningful wage growth could crimp the expansion going forward.  But, the leading and coincident indicators say that for the next 6-9 months we can expect slow but steady growth.