How many central banks do you need to raise the $SPX by 11 handles? Apparently 20. Janet Yellen’s testimony produced new highs on $SPX (as it always does), but nothing stuck and by the end of the week stocks were slightly down clocking in a meager 11 handles above December’s record breaking highs despite 20 central banks cutting rates since January.
Yes it’s true, stocks stop going up when there is not new central bank action to feed them. Fear not. China is the latest central bank to cut rates over the weekend and ECB QE will start in earnest this coming Thursday.
It still hasn’t mattered that earnings estimates for 2015 have come down as much as stocks have risen in February. It also hasn’t mattered that over 85% of macro reports have come in negative in February including Friday’s massive miss on the PMI. It’s just the weather they say.
So the dichotomy continues to widen while bullishness permeates the landscape. I can’t count how many articles I’ve seen in the past couple of weeks on “why it’s different this time”, but a quick Google search yields plenty:
I get the arguments, but as in Shakespeare’s play deception may be at work here.
Let’s review the facts. First off, there is indeed plenty of bullish justification as we are seeing key chart breakouts.
These are the kind of charts that wholeheartedly support the notion of a 2000 like blow-off move. With all central banks all in and QE about to start the reality of liquidity may well prompt such a move. So don’t anyone suggest I’m mega bearish here. Unless there is a crack in the construct one can’t be.
Still let’s be clinical in what markets are actually doing besides the two überbullish examples above.
First, let’s recognize this is still very much a currency game. US stocks benefit from a stronger dollar at the moment and decline on a weaker dollar:
The dollar remains vastly overbought, but these technical readings are secondary to the massive global rate cutting move by 21 central banks in 2015 and ECB QE to launch next week:
This central bank market distortion has succeeded in levitating asset prices as a result of probably the greatest front run in history. The #DAX, for example, is now experiencing its widest dislocation from basic moving averages ever, almost 1,000 points from it monthly 5 EMA:
A lot of what has been written lately has centered around the fact that there is no alternative. Everything and everybody is forced into stocks, and with companies reducing float with buybacks the race to buy steepens the multiple curve. With earning projections actually declining we are then witnessing a pure multiple expansion. I may well be in the in minority here, but “forcing” people into one asset class reeks counter to anything I’ve ever learned about free market principles and capitalism. True, it may result in a vertical move, but structurally it seems more akin to a global prison camp where all the exits have been closed and millions have to buy their cigarettes at highly inflated prices from “Tiny”, your horrifically scary prison pal and supplier of all necessities. Buy from Tiny at inflated prices or get worked over in the shower room.
While all this is going on I am, however, noticing some interesting contrarian things going on under the surface. Firstly, as I outlined above, despite all these central banking moves we have barely seen net gains in most stocks and the $SPX is only slightly above December’s highs. In fact, last week’s close signaled weekly Dojis:
Also the $SPY suddenly closed below a key trend line I had been observing for the past couple of months:
Signals remain rather lackluster.
$NYMO is not expanding:
$BPSPX is rejecting where it has been as of late, including lasts spring:
No, it’s very much ado about nothing.
Volatility of course was crushed in all this non directional chopping. However note something odd happening here as well. This entire bull market over the past 6 years have been defined by 2 certainties. The $SPX going up and the $VXX going down:
So it is a bit odd perhaps that in the face of new highs in the past few months the $VXX has stopped making new lows. Knowing its inbuilt decay structure this is definitely sticking out. As a result of this change in behavior we can now also note a sudden ping pong between the $VXX and the $SPX:
The gap between the two is now as wide as it was in October. Not sure if this means we are about to see a meet and greet, but that has been the pattern since June.
The next thing that is really sticking out is the channel that the $SPX is now moving in. The lower trend line in particular is striking as it seems to show how much an outlier the October correction was. It was of course quickly fixed with Bullard’s now famous “QE4” comments. The already established trend line was saved and, aside from October, has been as consistent as they come since May. Ding, ding, ding, ding, ding, etc. You can count them yourself, I count 15 up and down “dings”:
Now note I added some speculative price action going forward. This is based on a seeming repeat of the August structure of declining net adds and weakening RSI. This structure suggests some minor pullback followed by new highs and then a larger correction toward the lower trend line. At some point I presume this trend line will break, but for now it is the most consistent thing going in this market.
And so the program continues. Until it doesn’t:
Unless this time is different of course. We shall see:
Categories: Market Analysis