New record highs on the $SPX. Financials up 12 days in a row, trannies up 16% since the October bottom and the $DJIA up over 1,700 points in 17 days. A stunning rally by any definition and indeed one could make the argument it is different this time. Just a look at the monthly $VIX reveals a monthly candle thumping the likes of which has never been seen before:
And a look at a basic monthly $SPX chart shows nothing but the usual 5EMA and 8MA save. Cut off that candlestick and nothing has ever changed:
The initial rally case off of the October bottom was well supported and while the continued levitation action this week was mind numbing for anyone still following any semblance of trading discipline the uninterrupted ramp was no surprise to the swing trading goddess (Mella_TA) who masterfully termed it the “empty space” move well ahead of time in the member feed. What a call:
So the headline storyline is pretty straightforward, a massive rally, everyone is bullish, smooth sailing throughout the rest of the year is the narrative, yet one has to wonder if late buyers chasing the red ball may be setting themselves up for a bit of a tumble:
I went on the record this week and called out some red flags and in today’s post I want to dissect the action on a bit more granular level.
Firstly, let’s recognize that the past 6 days of this rally has been a central banking driven ramp affair. The key highs were made not during trading action, but via overnight gaps and these highs were sold throughout the day and ramped toward higher prices in the last few minutes of trading.
A 15 min $SPY chart reveals the key drivers of price:
We can debate the merits of all this central bank action all day long, but the plain fact remains: Central banks have been the central price determinant this past week. But how strong was this last push?
Not very. Let’s start with the high/lows. It was the negative divergence in them throughout the summer that signaled the eventual October correction. How have they fared during these latest highs? In one word: Poorly
While the $SPX and the $DJIA managed to crank out new highs a review of the tech and small cap sectors reveals that the peak price action was really over with the BOJ driven gap and new highs were simply a function of overnight gap action and in both cases they closed this week below last week’s Friday open:
This represents a notable divergence which can be summarized nicely in this chart:
But even this chart is a bit misleading as it overstates, in my view, what was really accomplished by the $SPX. The $ES gives a much clearer view. On the heels of the BOJ action the $ES spiked hard into the 2016.5 area. Friday night’s closing $ES print shows a 2026 print. So despite ECB QE talk and Yellen “all tools” jawboning the $ES barely managed a 10 handle, or less than 0.5% gain Friday over Friday:
Not all that impressive is it now? And how well has all this new QE actually been received I ask? It seems the main recipients of this QE action have found all that spirit lifting to be somewhat short lived.
So now what? As we are in unchartered territory any projection may not last a day of course, who knows what these central bankers will think of next after all. But I do want to suggest that all of this rally action actually has a bit of a familiar ring. Indeed this vertical ramp off of an October bottom has been seen before, in 2011 to be precise and, to a lesser degree, in the spring of 2013:
What is noteworthy here is that both of these ramps pushed the MACD into the 21+ zone and both resulted in a Fib retrace of at least 61.8% before moving higher. A similar retrace would produce a move into the low 1900’s by sometime in December. Quite a different move than that currently suggested in the current public narrative. It is the 2011 case that strikes a particular relevant tone as the timing and structure is so incredibly similar. And of course it was the time that US QE3 was launched. Now it is Japan and Europe carrying the baton.
Is it enough to keep producing ever higher prices?
Nobody can know for sure, but I’d like to point out two interesting factoids. One I pointed out on twitter:
The $SPX is now up 89% from its October 2011 low while its EPS have increased less than 27% during the same period.
— Northy (@NorthmanTrader) November 7, 2014
Said in another way: Knowing that buybacks have been a key contributor to earnings growth by reducing float, what will replace them when rates are rising and buybacks will be reduced as a result?
Janet Yellen seems well aware of this problem as she outlined the second factoid: Normalization could lead to more financial volatility.
Which is of course another way of admitting that the Fed’s policy of “non-normalization” has artificially depressed volatility. No shit, Sherlock. What should be clear from Yellen’s comments is that 1. It was always about market prices 2. They are concerned about any corrective market activity. 3. They will continue to try to “communicate” (jawbone in plain talk) this market to minimize any corrective action. How will they do it? By talking incessantly apparently. Next week we have a minimum of 2 Fed speakers a day. Like Bullard put a floor under the market in mid October with his “QE extension” comments, every single day there is a Fed speaker to save the day if need be.
Fans of free markets can only weep, but so it is and this is the game plan going forward: A Fed that will keep jawboning to distract the masses from the impact of rising rates: Fewer buybacks and no visible means of offsetting its eventual consequence: Lay-offs, corporate America’s favorite tool to improve earnings per share outside of buybacks.
I suspect the reconciliation of this gap between narrative and reality will make for a fascinating trading journey in the months ahead.
Categories: Market Analysis