[12:53 pm ET Sunday] It should come as no big surprise that just as the broad market prices hit over-bought levels as seen by many technical indicators and the US economic data was showing sudden weakness (Hurricane Sandy followed by payroll tax changes combining for a ‘perfect storm’?), the global stock market hit a speed bump. But the bigger issue I think is what may have happened at the Moscow G20 meetings last weekend (versus the innocuous-looking statement they produced). I say ‘may’ because we are not being told.
The Oscars will be handed out tonight in Hollywood, but some Academy Awards could have been earned in Moscow for what the G20 reps hid behind the curtains. They told us there will be no currency war, or no trade war, and that they have all the toughest global economic challenges of the day well in hand.
Was Arnold Schwarzenegger in the house? “True Lies” could have been the title of the G20 Communiqué.
http://en.wikipedia.org/wiki/True_Lies
www.g20.org/load/781209773
I think the global audience deserves better.
I gave it to you straight in the WIR of last week:
What I do think has got many players roiled is the instability in currency markets and the inability of the major nation governments to control fiscal deficits. Clearly there has been a case of either forced selling or manipulated prices in the precious metals market that does not have rhyme nor reason attached to it.
What concerns me is that I don’t know and haven’t got a clue as to what is going on today behind the curtain. The market is clearly agitated. The US Dollar is strengthening, and capital is flowing back into bonds and from commodity and economy-sensitive equities into the defensive sectors (Consumer Staples, Utilities and Telecom). Commodities, including Crude Oil (-3.1% W/W), and the Precious Metals ($GOLD -2.0% and $SILVER -3.8%) were very weak.
The Canadian dollar ($CDW) has plunged almost -4% from its high of the past nine weeks, and yet now the Talking Heads are opining that the Loonie was way over-priced and is headed for a collapse. Where does this stuff come from? Compared to the US, the Cdn economy is in good shape. The banks are much more solid. Corporations are flush. The 50 and 200 day Moving Averages of the Loonie are at 100.53 and 100.09 American, respectively, which shows stability.
A couple weeks ago, as most of the broker-dealer analysts were recommending Gold, Credit Suisse argued that it was the end of the Gold Bull, and soon after, tied to the G20 session in Moscow, the price of gold collapses.
I look around and wonder who is writing the script.
I don’t think any of us really know what’s happening behind the curtain. So, what I plan to do today is simply give you the facts. I could say that perhaps the recent period of weakness is over, but there is nothing in the data that compels me to opine that – only to recommend extra caution.
As to the broad market, today the S&P 500 is at 1515.60, down -0.28% W/W from 1519.79, which had been up +0.12% the previous week. In other words, not much has been happening around the G20 meeting in Moscow.
The Monthly, Weekly and Daily RSI-7 for the S&P 500 are 76.0. 73.9. and 52.6, respectively, down this week from 76.5, 77.5 and 65.9, which had been 76.3, 77.1 and 67.2 the week before that. Clearly, the prices are side-tracking.
A week ago in this space, amid all the stories that prices were collapsing or about to collapse, I opined:
These indicator numbers are very high, but they could go higher or the pressure could be eased should equity prices side-track for a week or so. The third possibility is that prices could start falling, but I don’t think the market is ready for a Bear run.
One week ago, “there were five rising and five falling sectors, but except for Telecom (IYZ -3.47% W/W), the moves were relatively small.” This week, there were three rising sectors and seven that dropped. But on Friday all ten were up on a very strong day, where the S&P 500 jumped +0.98%.
On Friday the Dow 30 average was bumped by a huge gain in Hewlett-Packard (HPQ +12.3% on the day) [do you recall my recent opinion that HPQ was the likeliest double in the Dow 30 this year?]. For individual Dow 30 stock performances, there were 25 up and 5 down on Friday.
Again, I say: “We remain bullish but are certainly cautious.” We did however increase our cash to over 29% and our Bonds position to over 19% in the All-Weather portfolios. For the weakest US sectors this week, Basic Materials (XLB -2.85% W/W) and Consumer Discretionary (XLY -1.43%) we hold just one position in each, and that would be Dow Chemical and Brunswick Corp.
Internationally, there were six of the eleven equity markets I follow that lifted this week. Three of the losers (China -4.9%, Hong Kong -2.8% and Brazil -2.1%) were down a lot. Those markets, in my view, are the sites where investors are most naturally nervous. One might say ‘cautious’ but I think ‘naturally nervous’ is a more accurate description.
If the Aussies were ‘naturally nervous’ they might have panicked this week. The Sydney index is up about +25% in six months. But the $AORD dropped just -0.4% this week.
In the currency war that the G20 refuses to acknowledge, this week the British Pound ($XBP -2.40%), Canadian Dollar ($CDW -1.50%), and Euro ($XEU -1.27% W/W) plunged, and the US Dollar ($USD +1.12%) soared.
The market speaks the truth. The dumb G20 Communiqué was a bad joke.
Now to the charts that I keep in front of you each WIR.
As you know, I recommend studying certain key ratio charts in capital markets to assess “the weight of the evidence” before you firmly establish a mind-set on Bull or Bear. Most of these indicators have been bullish recently.
For these studies I look at the ratio charts of:
•US Bonds ($USB) vs the US S&P 500 ($SPX)
•Global Dow Index ($GDOW) vs US 20-year Treasury Bonds (TLT)
•MSCI World Equity ex-US ($MSWORLD) vs the US S&P 500 ($SPX)
•US small cap Index ($RUT) vs the US large cap S&P 500 ($SPX)
•Canada (EWC, in USD) vs US S&P 500 (SPY)
•US Industrials (XLI) vs S&P 500 (SPY)
•Consumer Discretionary (XLY) vs Consumer Staples (XLP)
•Euro ($XEU) vs US Dollar ($USD)
•US Treasury Inflation Protected Bonds (TIP) vs US 20-yr Treasury Bonds (TLT)
•Goldminers (GDX) vs Gold Bullion ($GOLD)
•Silver Bullion ($SILVER) vs Gold Bullion ($GOLD)
•Junior Gold Miners (GDXJ) vs Senior Gold Miners (GDX)
•Oil Services Companies ($OSX) vs Integrated Oil companies ($XOI)
•Semi-Conductor Tech Companies (SMH) vs Major Tech Companies (XLK)
With these ratio charts, the good thing is that you are looking at the market speak, not the media. You can see for yourself the unfolding of relationships – i.e., what is actually happening in the market today, and from there you can study the reasons for it, such as the corporate or industry reports, the commodity prices, interest and dividend yields, impact of regulation and government policy, and so forth. Not all charts will give you a bullish or bearish picture, at least most of the time, but you take it all under consideration and go from there. There are different time frames – short, intermediate and long – and you are trying to time your entry or exit with the simultaneous reversal of all three. Also, if the big picture gets too extreme one way or the other, the trend is not likely to last in that direction and you ought to be looking for signs of a reversal.
A ratio chart, which is simply the first data series divided by the second, will show you clearly what is happening in terms of market drivers over the time period I am studying. It could be Daily, Weekly or Monthly data, but until there is a market cycle reversal that may be forthcoming I’ll be using a Daily data series.
If the line is rising, the first data series is strengthening. The S&P 500 by itself is in the solid thin orange line in the background. In the case of a Bull phase for equities, which some are calling the ‘risk on trade’, the line should be rising for the particular studies that follow, and the line should be above the 8-month Exponential Moving Average.
The following short-term Daily data series charts show a definite change to ‘risk on’ in mid-November – a point in time when I noted that the pundits were over-the-top with their negative doom-and-gloom forecasts:
1. Daily US S&P 500 ($SPX) vs Daily US Bonds ($USB)—conclusion: remains bullish, but could be said to be somewhat neutral this week. This chart shows capital has been flowing out of US bonds and into US equities since mid-November.
2. Daily MSCI World Equity ex-US ($MSWORLD) vs US 20-year Treasury Bond (TLT)—conclusion: Now is modestly Bearish. This chart will be watched on Monday to see if the Friday move to equities in the US is followed by investors around the world.
3. Daily MSCI World Equity ex-US ($MSWORLD) vs US S&P 500 ($SPX)—conclusion: The Daily chart remains Bearish. The Europeans must start buying stocks for this indicator to revert to the Bull. However, while the CAC and DAX picked up on Friday, the Euro was soft this week, and it too must strengthen, I feel.
4. Daily US small cap Index ($RUT) vs the US large cap S&P 500 ($SPX)—conclusion: A week ago I remarked: “Interestingly, late last week I noted some CNBC talking heads referring to this indicator as having gone bearish. I remarked a week ago, “seeing the data is knowing” – and that data is Bullish.” Yes, the data is softer, but it is still Bullish. On Friday this week, $RUT jumped +1.19% while $SPX was up +0.88%.
5. Daily Canada (EWC, in USD) vs US S&P 500 (SPY) —conclusion: Sharply Bearish again this week. Toronto was up +0.1% while the S&P 500 was up +0.9% this week.
6. Daily US Industrials (XLI) vs S&P 500 (SPY)—conclusion: Now Neutral.
7. Daily Consumer Discretionary (XLY) vs Consumer Staples (XLP)—conclusion: From Neutral a week ago to Bearish.
8.Daily Euro ($XEU) vs US Dollar ($USD)—conclusion: Bearish to the point of being possibly too much. Start looking for a reversal here.
9. Daily US Treasury Inflation Protected Bonds (TIP) vs US 20-yr Treasuries (TLT)—conclusion: From Neutral to modestly Bearish this week.
10. Daily Goldminers (GDX) vs Gold Bullion ($GOLD)—conclusion: This chart is extremely Bearish. Every strengthening move in the Goldminers in recent months has been thwarted by sellers. This week there was a strong US Dollar to explain it, but other results in past weeks leads some to believe that a major gold trading hedge fund is going under, causing forced selling. I don’t think anybody knows or at least is saying much. Next Sunday is the start of PDAC, so I’ll be asking around.
11. Daily Silver Bullion ($SILVER) vs Gold Bullion ($GOLD)—conclusion: The Daily data chart is clearly Bearish, but may be ready to reverse.
12. Daily Junior Gold Miners (GDXJ) vs Senior Gold Miners (GDX)—conclusion: The Daily data chart, which had been clearly Bearish, may be ready to reverse.
13. Daily Oil Services Companies ($OSX) vs Integrated Oil companies ($XOI)—conclusion: From Bullish since mid-Dec to possibly going Neutral.
14. Daily Semi-Conductor Tech Companies (SMH) vs Major Tech Companies (XLK)—conclusion: Remains Bullish, but has weakened a bit.
Using the ratio chart data this week, I sum up the Bull:Bear picture as having gone from 6 of 14 Bullish and 6 Bearish with 2 Neutral to 4 Bullish, nine Bearish and 1 Neutral.
There is no doubt that the technical indicators are signaling a period of weakness, which I think is due to (i) consolidation of the strong Bull run from mid-Nov to early Feb, and (ii) wariness over currency relationships and how rapid exchange rate changes are causing havoc among international traders in goods and services.
I don’t think it’s fair to conclude that the global equity market has gone Bearish, but there are clearly weak spots now. Caution is urged.
Now it’s time to look at what happened this week with the US economic reports, which, this week, were soft due to the recent rise in payroll taxes.
For an objective presentation, here is the US summary and the headlines from the Econoday analysts:
The bottom line: Markets likely overreacted to Wednesday’s Fed minutes. The Fed is not going to tighten anytime soon. But the Fed needs to plan ahead for when it actually does unwind its balance sheet expansion. Meanwhile, housing still appears to be on a moderate uptrend while manufacturing is mixed nationally versus various regions. Inflation in January was subdued at the consumer level but upward movement is likely in February due to higher energy costs.
For this week, the econ headlines were as follows:
•FOMC minutes reflect debate on unwinding
•Housing starts ease in January but permits gain
•Existing home sales slow on limited supply
•Markit flash PMI for Feb. at 55.2 vs 55.8 for the final Jan. reading
•Philly Fed contracts faster in February
•CPI inflation soft at headline but may be temporary
•PPI inflation rebounds in January on food prices
•Leading indicators slow but stay positive in January
… Looking Ahead: Week of February 25 through March 1– Key sectors for housing, manufacturing and the consumer get updates. Permits and existing home sales pointed to upward momentum for housing last week and this may be confirmed with upcoming new home sales, pending home sales, FHFA prices, and Case-Shiller. National manufacturing dipped in January. The durables orders report will indicate whether momentum is up or down. The consumer is being hit by higher payroll taxes, higher gasoline prices, and delays in income tax refunds. These issues boost the importance of readings on personal income, consumer confidence, and motor vehicle sales. Finally, expectations are for fourth quarter GDP to be revised up into the positive column and this could have a minor psychological boost on markets.
From recent weeks, the econ headlines were as follows:
•Retail sales slow in January after strong November & December
•Consumer sentiment bounces back—somewhat
•Industrial production slips in January after two strong months
•Empire State manufacturing rebounds in February
•Business inventories remain lean in December
•Import prices point to higher headline CPI for January
•Trade gap narrows sharply in December, reversing November
•ISM non-manufacturing slips but still moderately positive
•Productivity plunges while labor costs spike in Q4
•Consumer credit continues moderately strong growth
•Fourth quarter GDP posts first decline since 2009
•January employment gain moderate, 2012 revised up
•Personal income in December boosted by January tax increases
•Consumer confidence and sentiment mixed in January
•Durable goods orders jump in December and are broad based
•Markit PMI and ISM manufacturing improve in January
•Chicago PMI surprisingly strong in January
•Pending home sales retreat on limited supply
•Case-Shiller in November continues upward trend
•Construction spending posts healthy gain in December
•The Fed shows no let up on quantitative easing
Because of the track-record of independence and objectivity, I encourage you to read the Econoday reports on the US economy. If we had more time in a day, we’d also be looking at the econ data for the rest of the world – at least more of it.
As for our studies this week, we’ll first look at the detailed economic data for the week that passed and the one ahead. Then we’ll get into the market prices, and the trends and cycles of Currencies, Bonds, Equities, Commodities and Precious Metals.
One final point before we get into our weekly study of markets, when it comes to trading equities I believe that the term “stock-picking” is lacking in the extreme. Instead, since a company is not a stock – i.e., a stock is just a price — you need to be “company picking” and “market timing”. I cannot stress that more.
While pure traders might disagree, I strongly believe that investor success is a consequence of asset allocation and portfolio management as much or more than simply trading execution.
Global Economics Review
Global Report from Econoday Chief Economist Anne Picker:
Global markets were mixed last week. Many indexes responded to currency movements along with the U.S. FOMC minutes. The latter jolted investors as they interpreted discussion of alternatives for eminent action. A knee jerk reaction followed the minutes’ release. Equities dropped in the U.S. followed by those in the Asia Pacific region and Europe. Equities continued downward on Thursday as disappointing Eurozone and U.S. data added further to the downward impetus. While most equities rallied Friday, it was too late to undo the previous two days of losses for many indexes… The Group of 20 nations declared on Saturday there would be no currency war. Japan’s expansive policies, which have driven down the yen, escaped direct criticism in the G-20 statement thrashed out in Moscow. Analysts said the yen, which has dropped about 20% as a result of aggressive monetary and fiscal policies to reflate the Japanese economy, may now continue to fall. The final communiqué included a G20 commitment to refrain from competitive devaluations and stated monetary policy would be directed only at price stability and growth. It said disorderly exchange rate movements and excess volatility in financial flows could harm economic and financial stability… In the ensuing days since the G-20 statement, several central bank governors have spoken out about their current currency rates. On Wednesday, Reserve Bank of New Zealand Governor Graeme Wheeler said he is ready to intervene in foreign exchange markets, adding to comments by officials from South Korea to South America warning their currencies are too strong. The NZ dollar (aka kiwi) declined after the governor said “the kiwi is not a one-way bet.” The country is not a member of the G-20. The kiwi has surged almost 45% against the U.S. dollar since the end of 2008, the biggest advance after its Australian counterpart among over 150 currencies tracked by Bloomberg… After Japan’s leaders pledged steps to boost the economy that caused the yen to tumble, policy makers in South Korea and the Philippines are weighing curbs to capital inflows. Other Asian policy makers have also vowed to curb currency swings in the past month as inflows from developed markets fueled the risk of asset bubbles and of decreased export competitiveness. Speculative trading in the currency market “should be curbed in any means,” Bank of Korea Governor Kim Choong Soo said at a meeting with economists in Seoul. Other Asian central bank governors have also spoken out including the Philippine central bank and Bank Indonesia… In Europe, the central bank of Norway (Norges) said it is ready to lower interest rates to counter the krone’s strength if it interferes with the bank’s inflation target. Norway’s currency rose 6.7% in the past six months against the dollar. While the Swiss franc weakened against the euro this year after the region’s debt crisis eased, the Swiss National Bank said the currency remains at risk of strengthening as European leaders struggle to restore confidence. The SNB said it will continue to enforce a cap at 1.20 francs per euro.
Econoday’s Global Perspective is written by chief economist Anne Picker.