Market Analysis

Weekend Charts: Rally Myth Busters

MythBustersIn today’s edition of weekend charts I want to contextualize this week’s ECB action and bust some myths that keep permeating this rally. Admittedly it is really difficult to have an intellectually sound debate in this age of no accountability. Why no accountability? Because the world has been steered by a group of bankers, central bankers, and government officials and policy makers in a way that is not producing positive results and nobody is ever held to account for the results and the continued failure of policy. The global picture and even here in the US is far from the rosy picture that is being portrayed. Yet I see so many shrug their shoulders and point to the ever rising stock market and claim this is evidence that things are getting better. It is simply not true and the data is very clear on this.

We live in the greatest technological age of all time. Things should be improving and vastly so, but they are not. They are getting worse and measurably so. Let me walk you through the facts:

Let’s start with this week’s ECB decision to cut rates and to announce a QE program conveniently scheduled to launch in October, the same month that the FOMC’s QE program is to end, a nice and convenient handover of the baton. What’s the core impact:


The cause: Europe’s growth is non existent. The solution: Make cash a depreciating asset class by making rates negative and force money to chase yield in the stock market. The desired outcome: Maybe we grow like the US where everybody has their money parked.

The problem? It’s all a myth and a dangerous one. Let me walk you through the actual evidence.

Firstly, since the launch of massive and unprecedented global central bank stimulus programs, global growth (further subsidized through enormous debt leveraging by global governments), has bounced back initially, but is falling:

GDP growth

But the US is so much better you say. Really? Not according to the US budget office which recently downgraded US GDP growth to just 1.5% for 2014. “But it’s the weather”. Please. Markets continue to want to rally on bad news, but what’s the trend in non farm payrolls?


But frankly these data points are just symptomatic of much larger long term issues lurking in the background and I want to highlight a few before we move to stock charts.

We have to acknowledge that records amount to debt and central bank stimulus over 30 years have produced the following results:

Wealth is ever more concentrated within the fewest amount of people while average families make exactly $200 more than they did in 1989:

Wealth concentrated

Median incomes are falling and have been falling:

Median incomes

But stock markets are at record prices, the wealth should be spreading right? No. The very top 1% have seen their incomes triple since 1979 while everyone else is struggling big time:

TOP 1%

This is how you end up with a society where the wealthiest 3 percent of households control 54.4 percent of the nation’s wealth (up from 51.8 percent in 2009). So one would think we at least see more and more millionaires? Nope, not true either:


Despite record stock prices every day the number of millionaire households is actually shrinking. So how’s the rest, i.e. most everybody, doing? Not well. Consider the following facts:

A record 92M Americans are not in the labor force, bringing the labor participation rate to a 36 year low:


And the ones that are employed? Many are part-time, free lancers, with no job security whatsoever. According to Forbes over one third of Americans now qualify as free lancers. That’s 53 million Americans. Is it any wonder then that the official poverty rate remains at 15%, child poverty at 20%, with millions of Americans living on $2 per day?

So this is the actual track record of results that have been produced with central banks ALL IN and US government debt having increased from $1 trillion under Ronald Reagan to over $17 trillion now. I may be out of touch, but this very fact should be deeply concerning to everyone.

Where’s the accountability? Why would anyone think these trends will improve in any shape or form by continuing with the same policies? They won’t and they aren’t.

The data above demonstrates that things are not improving. They have gotten worse for the vast majority of Americans. There are vast structural issues that have been masked by debt spending and central bank intervention, but masked in the worst possible way: It made some people vastly richer and left the many poorer and more insecure. Hence the continued policy of central bank intervention will continue to fail to bring about positive changes. Not until a real structural and honest debate on a societal level is had with an aim to actually improve society.

Don’t get me wrong: I’m not saying there should not be rich people or successful people. Of course there should be, but there must be a better balance. Right now we live in a world where large corporate entities have 0 loyalty to employees. There is no job security and everyone is expendable. The simple truth is that since the financial crisis of 2008 companies have learned that they can ask people to do more with less. Outsourcing, temp work, and scared and desperate people accepting lower paying jobs with fewer benefits because they have no alternative.

It is no wonder then that CNBC’s ratings dropped to 21 year lows. People are tired of the hype. It doesn’t apply to them, it’s a game for the few:

US stock ownership

So then how is the rally game going? Let’s have a look at some charts:

Firstly note that the rally almost got into trouble by breaching a 2 week price range to the downside on Friday morning. It could have resulted in a weekly close below key MAs, but no worry, the regularly scheduled rally program was resumed on the vast miss of non farm payrolls launching the largest and most vertical uninterrupted ramp of the 2 week period:

SPY 15 min

It was urgent timing as well as the $VIX was ready to see a MACD cross-over. Can’t have that happen:


Yes you find me a touch sarcastic here as the action is so obviously painted. But we all know this. All the gains recently have come from gap ups and Friday’s action just retraced this overnight value creation. But context is so very much important and I want to outline some of the key data points.

Firstly, the structure of the rally is undamaged. And clearly ramps like the one on Friday help keep this image intact:


It is a repetitive program that just keeps repeating itself. The negative divergences never seem to matter. The most common result of the repeated ramps is a reconnect with basic MAs. In this case the weekly 5EMA and 8MAs are the next most likely target if we continue on the structure. A push to the lower trend line is also a possibility.

Yet in my view there is a lot more going on than meets the eye. The monthly $SPX chart still shows a wider disconnect that will likely result in an eventual further test lower into its respective 5EMA/8MA:

SPX monthly

So trend forever? No. Context and data matter. Per the $WLSH chart I showed on Friday there are some larger signs of weakness building. This weakness is underscored by the divergences that are taking place across the board including Germany and the Russell 2000 which have notably disconnected over the past few months:


The larger issue remains that markets have not experienced any notable selling over several years now, all driven by central banks forcing all money to be shoved into stock and bond markets. It is getting eerie:


But note the declining participation in new highs similar to previous peaks. Given the steepness of this ascent the next major selling spout could get ugly and ugly fast. Now the notion of a larger correction remains academic until it happens, but the issue remains risk versus reward. The notion of a hated rally is as much as a myth as is the growth based recovery. There are no bears, and even if there are, they are not bearishly positioned:


The Rydex Bull bear ratio continues to show data comparable only to the year 2000 and the bullish bearish asset allocation data supports the conclusion: They are all in. Yet, we just saw a drop in the latter data point just as we are making new highs. Previous drops have resulted in a decline in price. Also note money flows are as high as they have been in a long time. Similar high reading shave resulted in month over month declines.

All this squares up nicely with the weekly chart of the $IWM which continues to exhibit behavior very similar to 2011:

IWM weekly

As the weekly MACD shows the next week or two could be very critical in how this plays out. $AAPL has its monster event and the Alibaba IPO will have to be orchestrated successfully by those benefiting from placing the enormous supply into the market (banks). There is plenty of incentive to keep prices and sentiment positive and hence Friday’s action was really not all that surprising.

There is sentiment, but there is seasonality as well and it looks to set the stage for an interesting battle ahead:

September Seasonality

On the trading front flexibility in direction has continued to generate results, yet I remain skeptical of risk/reward on the long side, but trade it as it makes sense. But the larger question looms: I’m wondering where the lions are:

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