Markets – Macro – Technicals

Weekend Charts: Rollover

bullStocks rolled over on Friday and the context matters. And the context was good news in jobs was bad news. The market is sending one message loudly and clearly: It does not like coming rate rises. Why not? After all, past experience shows that initial rate raises are accompanied by raising stock prices. The simple truth is that we’re not seeing the growth that usually accompanies a rate raising environment.

Earnings expectations have come down hard for 2015. Yet ZIRP remains the principle backbone of this rally primarily by enabling the buyback bonanza. We have spoken about them ad nausea in recent weekend chart segments so I won’t rehash the concept here, but in many cases CEO’s are loading up company balance sheets with debt to reduce the public float of shares, thereby artificially inflating earning growth while personally enriching themselves selling their stock options into the rising prices. All under the auspice of shareholder value of course. Short term. Because presumably this debt has to be paid back at some point. Nice gig if you can get it.

But it’s an illusion. And it will stop working once taking on debt to buy back shares will become prohibitive via higher rates. And then this artificial earnings growth will have to come from somewhere else. Layoffs? You get the picture, this cycle could turn ugly fast over the next couple of years.

Another truth: Since July last year with each new high in index prices the number of stocks above their 200MA keep shrinking:

AR 200

Notice the high/lows reflect the same trend:

USHLs

How to reconcile this with new highs that were recently made? Simple, it’s an ugly divergence that points to this rally being rather hollow.

And the action speaks for itself: New highs were rejected and rather violently so, as stocks fell below their December highs:

INDU D

Last week we pointed out the weekly Doji on various charts and we saw the followthrough this week. Notable is the failure to take prices to the upper trend line that has been a hallmark of this bull market:

INDU W

No this smells of rejection across the board here. Examples abound:

$IWM:

IWM

$NYA:

NYA+

This latest push to new highs also came with sudden notable laggards: Utilities and financials:

SPX XLU

XLF

Financials in particular were a bit surprising given the fact that yields have been rising:

TNX

So why do charts such as $GS sport ugly patterns?

GS

On Friday it was announced what $AAPL would be added to $DJIA. The news didn’t change its pattern either:

AAPL

Take all these factors in context with the following $SPY chart and things point to a market looking for an excuse to rollover hard:

SPY

So what’s next? Well the market is on a sell and on notice. For now we have broken several short term trend lines and are in the middle of a short term correction:

SPX 120

Given the short term oversold conditions a bounce is very probable, $NYAD being one example:

NYAD

But make no mistake this market has a lot to prove here before the month is out. History provides some anecdotal evidence how critical the conclusion to the month may be.

For one, March marked the top in 2000 and the bottom in 2009. And so critically current monthly charts are issuing a distinct warning: The potential for a monthly double top:

SPX M

These types of double tops are rare, but they do happen and usually show potential for a lot more downside first:

OEX M

The good news for bulls: OPEX is coming soon enough and the algo buy programs like to jam it back up after they scared everyone the week before. But new highs they must make for the double top candles to be invalidated.

Should make for an interesting few weeks. In the meantime we keep observing that the $VXX refuses to make new lows with an every higher $SPX. For the near term the prospect of a meet and greet remains a distinct possibility:

SPX VXX

Buckle in. Roller coaster time.

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