Market Analysis

Keeping It Real

realAs long time followers and readers know I’d like to keep it light, but real. And in the spirit of keeping it real I offer this latest analysis of markets.

Having traded for many years I’ve come to accept that around 2-3 times a year I’m not in sync with markets. March has been one of those periods for me. While January and February offered wild volatility in both directions (which I love as a trader) March has been a one sided affair with the occasional intra-day dip, but one central bank induced rally after another. And believe me for the FOMC to move from a 4 rate hike expectation to practically zero is action. It is effective easing in terms of expectations.

What has worked well so far this year? In my 2016 technical outlook I highlighted the downside risks. During the January and February corrections I outlined the market’s propensity to want to reconnect with key moving averages and wanting to fill the January gap and this formed the basis for our long strategy at the February lows.

Then came the big rally which wasn’t a big surprise in light of the analysis. Filling the January gap was also not a surprise. But what has been a surprise has been the straight-line up move of this rally and the extension above the January gap without a basic retrace or pullback so far.

According to the public narrative the correction is over and central banks have given the green light to buy stocks. No really:

And look, I get the argument: Don’t fight the Fed, but there is an inherent danger of getting all gloomy at bottoms and all bullish after a big move:

From a trader’s perspective I find these public calls to be completely meaningless and, if anything, they can be useful from a contrarian perspective.

Remember we said exactly the opposite at the time of the February lows:

In the meantime, for all the reasons outlined, I will remain a buyer of weakness should we drop into 1780-1810 today.

I present all this so you have a sense of the popular narrative and context at the moment.

Here’s my problem with all this: Despite all the giddiness I see a group of canaries in the coal mine here and they are singing a concerted song that’s taking on an ever more disturbing pitch. For what it’s worth here’s what I’m seeing and you can judge yourself of course if I’m on the right track here or not.

Let’s start with one question: Have central banks won? The answer is I don’t know yet, but their effort has been coordinated in time and response and this much is self evident:


The $SPX has moved virtually uncorrected from February 11 – April 1. 264 handles on the $SPX or 14.5%. If it sounds enormous it is because it is. But it’s also not unprecedented. After all, in 2008 we saw a similar sized rally from the March lows into the May highs: 14.6%

SPX 2008

Here’s the interesting part: That rally back then occurred despite an emerging decline in GAAP earnings and that was the big canary back then.

Here’s the story now:


A 18% decline in GAAP earnings since the peak last year. The immediate consequence: Markets are now more expensive than they were last year.

The long term trend comparison:


So GAAP earnings will either continue to decline or they will rise. My argument is they HAVE to rise from here to sustain this move in price. If they decline then the path forward should be pretty clear. Declining earnings is one big canary.

The reason all this is interesting is the fact that companies recently have resorted to reporting pro forma earnings ignoring $GAAP earnings. The simple explanation: Make things look better than they are.

And the gap between reality and make believe is widening at a rather alarming rate:


And so for me at least, Q2 is all about earnings. And if earnings suddenly improve then they will likely push this market to new highs. If they don’t my sense is we fall apart.

So far the evidence is this:

And if GAAP earnings are a key canary then perhaps so are financials. Where’s the rally I keep asking?




Maybe banks mean nothing, but in case they do here’s the quarterly price performance for key European banks:


And maybe, just maybe these canaries will prove meaningful as some of this data suggests:


Another canary: The consumer. We hear how consumer confidence is better and how lower oil prices will cause more spending. Really? Crude just jumped 50% and we didn’t see any evidence of increased consumer spending as highlighted by a 0.6% GDP growth in the first quarter.

No the data that is coming out for the consumer suggests something very sinister: Incipient inflation in Fed ignored spending categories that are killing the consumer:

Families Families 2

These are enormous and profound trends and not easily reversed.

It will take substantial amount of wage growth to counter these effects and wage growth remains a very lagging component.

And finally, data collected seems to suggest that 93% of net notional buying this quarter came from one source: Fed enabled buybacks:


Another canary.

Now the technical context:

Markets can stay overbought and oversold for a long time and the past few weeks have been testimony to that assessment. Yet, at the end of day, trading is about risk versus reward. And warning signs keep mounting:

Money flow have negatively diverged with RSIs over 70:


$BPSPX has negatively diverged from price:


Hi/Lows are pushed into close to max territory:


Cumulative net adds have reached the highs of last summer while price has not:


$NYSI is crammed to the wall:


Stocks above their 50MA made a lower high while $SPX made a slightly higher high:


And while $SPX has cracked above the arch:


…one has to question its sustainability given the failure of equal weight to re-caputure its quarterly 5 EMA:


and the $VIX screaming complacency:


All this when stocks are about to hit much larger confluences of resistance:




So what’s the takeaway here?

For me it is this: The FOMC tested the waters with a teeny rate hike in December and global stock markets completely fell apart highlighting how thin this thread is. Central banks coordinated a global response with more QE, negative rates and taking away any notion of a rate hike in the US to re-inflate asset prices. They have succeeded so far, but let’s be very clear: Without this action prices would not be where they are now.

So if you want to buy long here you must do it in the belief that central banks are maintaining control over a construct that would fall apart if they didn’t keep pressing the button.

The main argument for control at the moment is that Janet Yellen’s policy reversal will continue to pressure the dollar and this will improve earnings. Perhaps. At the same time we have seen rallies in commodities and a slight uptick in wage growth which will act counter to currency benefits. In a tight margin world with little revenue growth we’ll have to look for the net net benefit during this next earnings season.

For now we can observe that this recent rally is increasingly confined to US markets as European and Japanese markets are struggling despite QE and negative rates:



But not to worry. The next OPEX ramp may just be around the corner. Who needs earnings:


All joking aside: Markets remain at a key crossroads here and in principle the steeper a rally is the more rude the awakening generally is.

For now all we can observe is that since the end of QE3 it’s been tough slugging for stocks:


Lower highs and lower earnings. That’s the reality. And so far central banks, despite all their best efforts, have not been able to change this fact.

Q2 then will likely shape up to be precisely about whether earnings can grow. They better.

Let’s see what’s real.

14 replies »

  1. Perfect summary. Great job! Earnings decline (now 4 quarters?) and earning QUALITY is especially telling. Don’t forget that corp earnings are “the most mean-reverting series in all of finance” and they are indeed reverting. Retail sales remain at recession levels. Inflation in food, rent, health ins are killing people’s finances. We’re really in a stagflation and idiot Yellen thinks we need more inflation!! That stupid ****!

    China exports are down 25% in the past year. This is due to Western consumers being “tapped out” and due to the entire Eurodollar complex is shrinking rapidly as banks such as DB, UBS, and all the others are trying to shrink their risk exposure as fast as possible. Shrinking finance= shrinking economy. Big banks are losing money, raising capital, cutting dividends and laying off employees reminiscent of 2008 in the run-up to Lehman. And it continues. Liquidity is already low and Yellen hikes?? Idiots everywhere. Trump is right when he says that we are led by very, very stupid people.

    The most profound risk is financial crises or turmoil, not unlike 2000 and 2008. All these people so cocksure of no recession in sight will undoubtedly miss it AGAIN.

    Everything is wrong, nothing is fixed. We can only hope that we can personally survive the next depression.

    Keep up the great work!!

  2. Hi northy
    Still great comment as usual. A really Nice moment when i read you.
    Just to add to your analyses have a look at $yen, the pair is really important and the sp500 VALUE indice as Well.
    M’y guess, They ve been holding the market to close Q1 and trap on the first Day of Q2. For me This upmove was over on friday close from several argues i can provide

    Best respects to all you do and mella too.

    • Just to correct a little bit myself
      A vix gap under 13 is Still alive
      Need to be filled before sp goes very down
      So a Last wave up near 2090 should occur soon…before reverse

  3. great research, buybacks should improve the look of earnings, coincident? fast money reports hiring in the retail sector contrary to lower sales making reports confusing.

  4. Sounds like a frenetic attempt to justify being so wrong and hoping that the markets will reverse so that he can claim victory, albeit belatedly. Like Tim said, he should admit he was wrong and stop trying to justify his wrong call and hoping that he will be eventually right. His problem is that the markets usually predict what will happen 6 months out and his analysis is all backward looking and only what the current trend says. Anyone, including Cramer can be a trend rider but you can get severely burnt when the tide comes in and the trend changes. The true pundits have insight into when the trend changes and that is where the true money is made. Foreign markets have been down for some time and there is evidence that Brazil, China , and Europe are turning. If they do, there may be some real upside surprises instead of the dismal picture that is portrayed. Another factor is that if oil is looked at as an anomaly on the upside and now on the downside and are taken out of the equation, it is an entirely different picture.

  5. Great job. Thanks for all the hard work.

    What I am doing is taking my homework, not just to the readers, but to the candidates for President, and other elected officials. Since were all working from the same numbers, we have to make more sense than the talking heads. Personally, I am stressing, the “free Trade Agreements” don’t just export jobs, they also undermine the USA’s GDP, and future growth. The FTA’s also undermine USA companies’ GAAP as well as non-GAAP earnings … all of which relates to USA domestic taxes, and therein tax revenues, the USA’s ability to pay down debt, narrow the budget deficit, repair crumbling infrastructure, … and more. Even more of a disaster for USA citizens and residents, is the President’s newest proposal, wherein foreign companies relocating manufacturing to the USA … do NOT have to abide by EPA rules and regulations, potentially polluting the air, land, and water … with NO accountability.

    I would hope your people, and readers, can bring some of your great analysis work to the attention of the candidates. We need more elected officials running the USA government like a business, seizing opportunities to shift the burden from the taxpayers’ backs, … and a lot fewer politicians that don’t even show up for votes.

  6. Incipient inflation and poor wage growth is killing the consumer. Just look at what it costs to get a decent pair of socks these days. Also, the record profit margins enjoyed by corporations were largely a result of product debasement. Mass market products are generally crap nowadays.

  7. From the ” off the beaten track” pile, I buy and sell expensive collector cars. Interestingly, the percentage of cars going unsold at the big auctions ( reserve not met) has been at or above 70% of the cars presented for sale. In 2007 / 08 it was like this after a big run. Prices subsequently dived as much as 80% depending on the car. The reason I am pointing this out is wealthy car owners are not unlike large mutual funds who like to sell when they can, not when they have too. And now supply has met demand. The only way these cars will be sold is at lower prices. Also of note is US domestic car sales have taken a surprising dive despite price concessions and free financing. Sub prime auto loans are showing a rapid acceleration in default rates. Except for a few tight markets, home sales are slowing everywhere. As far as being “wrong” on a market, who isn’t? They don’t ring a bell when its time to get on or off. But I would say your and Mella’s analysis is about the best fact based information you are likely to find. Pretty much devoid of opinion. I have been trading for 35 years. The only people I met who consistently called market bottoms and market tops were liars. The best analogy I ever heard about the markets was that they move like the tide. And if you are surfing, you want to get off before you hit the beach. ( Frankie Joe) Keep up the good work. Its high tide now. And the tide will be going out in the not too distant future.. Warm regards, Mike


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