Markets – Macro – Technicals

Weekend Charts: Autopilot

In the previous Weekend Charts segment we mused whether Janet Yellen would let markets fly again. In 2015 US markets have been woefully lagging Japan, Germany and most of Europe after all. And Janet Yellen did not disappoint. By week’s end EVERYTHING was flying: Stocks, bonds, metals, oil, you name it. If it had a ticker it moved.

The macro background:

Economic data has been lagging severely (think 3 negative retail sales reports in a row) and earnings estimates have been coming down hard. According to FactSet 83 out of 99 companies in the $SPX (^GSPC) have now issued negative earnings guidance for Q1. One of the main culprits: The strength of the US dollar largely driven by active QE programs of the ECB and BOJ. Currency wars at their best.

So we learned something new this week: The FOMC felt it necessary to put a stop to the dollar’s ascent. And they did it primarily by taken down their forward rate forecast and the dollar reacted promptly (UUP):

UUP M

International markets had been flying for weeks on end with active QE programs in place:

Germany’s DAX (^GDAXI):

DAX

The Nikkei (^N225):

NIKK

Note all these charts have something in common: Unidirectional ascent without breathing, without correction, significantly inflating asset prices via P/E expansion creating chart patterns vastly disconnected from basic moving averages and priced to perfection. The DAX, for example is now up 10 weeks in a row. QE is working as it is thrashing the Euro and European yields to record lows, supported by central banks cutting rates and the ECB buying bonds. In short: Cash is forced into stocks.

What’s the conclusion for US stock investors and traders?

Firstly we have to recognize that the Fed remains the primary price discovery mechanism for US markets. This is simply an observable fact when viewing the SPY chart in context of either FOMC meetings, press conferences, or key press mutterings.

SPY D

Be it in anticipation or in reaction, key bottoms have occurred in conjunction with a Fed finding new ways to stay dovish and easy. From Bullard’s QE4 comment at the October bottom, to Janet Yellen’s “patient” to now the Fed reducing their rate forecasts for 2015 and beyond the FOMC remains the key pivot point for major rallies.

In the process they have created a market that has been on autopilot for years. A brief look at 2 timeframes with key moving averages makes this perfectly clear:

The SPX (^GSPC) on a monthly basis: The 8MA and 5EMA remain the single key pivot points for this market. The monthly low this past week: The monthly 8MA as so many times before with an ascending trend line that makes the 2175 area a potential target:

$SPX M

On a quarterly basis the picture is exactly the same. With monotone precision the autopilot executes in steadily fashion along key moving averages:

SPX Q

As with European markets and Japan all downside risk seems to have been permanently removed.

In fact one could go as far to say that all news, currency moves, earnings, etc are just theater to distract traders from the structural program that seems to be in a repeat pattern.

As traders we’ve been able to take advantage of some of these structural patterns and as long as they work why shouldn’t we?

The latest pattern appears to be a structural replay of 2014: Strong rally in February with a peak in early March, followed by a small pullback into the middle of March, before a strong bounce into March OPEX for a lower high. Well, that’s exactly what markets did here:

SPX 14:15

Now structural patterns don’t imply a day by day repeat, but a general direction. As in 2014 we had early January weakness in 2015 as well. So what does the pattern imply going forward?

Some weakness next week after last week’s OPEX and then a powerful rally to new highs into month end and early April, followed by a sharp pullback before bouncing higher again. See 2014:

2014

The weekly chart on the SPX certainly supports higher prices here as well as the upper trend line tends to be the next logical target of this seemingly unalterable channel:

SPX W

Add to the fact that small caps and the Nasdaq have broken out to new highs the upside seems well supported.

The worst investors seem to have to potentially contend with in 2015 is a move into the weekly 50MA or, imagine the terror, the weekly 100MA. Both appear to be solid long entry opportunities should they be in the offing.

And this is really the only conclusion one can come to in a market that is on autopilot. The flip side remains an argument based on truth.

A glimmer of such honesty was found on CNBC on Friday with former Dallas Federal Reserve President Richard Fisher who had this to say:

“Are we vulnerable in my personal opinion to a significant equity market correction? I do believe we are, and the reason for that is people have gotten lazy. They’ve depended totally on the Fed,”..”Yes, we have … conditioned the markets.”

And there he has perfectly summarized what the charts above outline:  Markets on autopilot in the belief that central banks will always show up at the right moving average to lift equities back on autopilot toward new highs and so far so good.

Yet every autopilot program eventually comes to an end as the plane must land. Passengers of this stratospheric flight may want to check whether there’s actually a pilot on board that can land this flight safely.

New highs or not there are indeed some storms clouds on the horizon:

Friday’s OPEX pushed the VIX (^VIX) overtly into gap fill territory:

VIX D

As strong as the buying has been this week, stocks above their 200MA continue to negatively diverge from high to high:

AR 200

And while negative divergences have not mattered in a long time, history suggests that, when they do, things can get painful fast, see the Wilshire 5000 (^W5000):

WLSH M

Another risk factor: The very stretched international markets outlined earlier. 10 weeks up is quite a feat. Germany is up 23% year to date. It’s only mid March. QE or not, this may not be a sustainable pace.

For now, however, the flight seems safe. Next week is a pilot convention after all. Public Fed speakers next week include: Mester, Fisher, Bullard, Williams, Evans, Lockhart, and to close the week: Yellen herself speaking in San Francisco. But don’t be surprised if something breaks along the way.

Airplane-autopilot

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  1. Weekend Charts: The Army of the 12 Monkeys | NorthmanTrader
  2. Weekend Charts: Misconceptions | NorthmanTrader

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