The equity market continues to levitate toward a test of the early April high of 1,597.35, despite the wailing and gnashing of teeth on the part of the bears. From an academic / analytical standpoint, we should be in for a correction in equities (even, as I've noted here previously, in the most bullish of long-term scenarios). However, as most of us have learned, theory doesn't always translate to riches in the market. In fact, many very high IQ types have had their dreams crushed by the market due to an insistence on the high accuracy of their analyses despite the market evidence telling them they were wrong.
The most relevant analysis of this market, in my humble opinion, was given to us by David Tepper a while back when he noted that (and I'm paraphrasing) the play was to buy stocks because either the economy would improve and stock prices would rise, or the economy would remain subdued and the Fed would continue to liquefy the system, thereby causing prices to rise. In either case, he noted, stock prices were very likely to continue to rise. The only caveat I would add to that rather logical (and profitable) analysis would be in the case of an unexpected exogenous event. We did see a bit of selling after the recent terrorist attack, but look where things are now. The type of event that would cause a more substantial sell-off would be something where traders / investors felt the impact would be longer-lasting (some kind of potentially transformational event). Outside of something like that happening, all the evidence in the world that the bears may bring to the fore will seemingly be outweighed by the simple (yet critical) fact that the global central banker cabal is working in unison to reflate the global economy, starting with paper assets. As long as that is the reality and we have an absence of transformational exogenous events, dips are likely going to remain shallow (and buyable).
The S&P is just below last week's highs as well as the early April peak; a more substantial correction is still my call.
The daily chart of the S&P 500 (^INX) is shown below. Clearly, the market is right at a critical juncture where it will either explode higher or stop on a dime and turn lower. The early April high was 1,597.35, and a close above that level into month's end would be a big, flashing green light for the bulls. Any failure to conquer that level, though, leaves open the possibility that a long-term triple top formation is the reality.
As you may know already, in this situation, I like to seek out bullish confirmation or bearish divergences – whatever the market is offering – to either build up or knock down the surface case for equities. Sometimes that is done by looking at the other asset classes (which I'll do later in this report) and sometimes it is done by looking at different parts of the equity market. Let's take a look at what other parts of the equity markets are telling us now.
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Small caps are lagging large caps on a macro basis, despite a short-term bounce in relative strength.
The chart below shows the iShares Russell 2000 Index ETF (IWM) versus the SPDR S&P 500 Index ETF (SPY) on a relative basis using a spread ratio line (red line). Clearly, there's been a little upswing in the line in the very short-term, but the overall condition of this chart is one of relative weakness for the small caps, which traditionally has been a "risk-off" signal for the markets.
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The QQQ ETF has shown a little strength versus the SPY recently but still lags on a macro basis.
This chart shows the NASDAQ-100 Index ETF (QQQ) versus the SPY, again using the spread ratio as our indicator. It appears to be the same story here as with the IWM comparison: relative weakness on the part of QQQ on a macro basis despite a potentially bullish turn higher in the very short term. More evidence is needed to call this one a "win" for the bulls.
Emerging markets are lagging the EFA, which is traditionally a "risk off" signal.
The next chart shows the iShares MSCI Emerging Markets ETF (EEM) versus its international cousin, the iShares MSCI EAFE Index ETF (EFA). This chart is less ambiguous; it's straight up bearish for EEM. This, too, has traditionally been a "risk-off" signal for investors to heed. However, can we really say that developed markets – especially in Europe – are "safe" compared to emerging markets / economies? The answer is probably still "yes" – although it's not as clear a "yes" as it used to be.
Plus, here's a look at Sea Change's Leading Index of equities / ETFs and how the components look technically versus the S&P.
My firm monitors a list of what we consider to be "leading" stocks in terms of when they top and when they bottom versus the broader market. Any clear divergences in this list can sometimes be a good indicator of things to come for the broader market. Take a look at the list and see my comments in the right column and below.
In terms of determining "leaders" and "laggards" on our Leading Index, I basically like to see is a trend in relative outperformance by the components to classify them as "leaders." A trend of underperformance will keep the "laggard" tag on the component even if – as in the case of Apple (AAPL), for example – the short-term performance would indicate otherwise.
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Right now, only three of the Sea Change Leading Index components have charts that are more bullish than the S&P 500. Meanwhile, eight of them still have to be considered "laggards" versus the market, some despite some short-term strength.
OVERALL FOR EQUITIES
So, despite the rise in the indices, just about every indicator I look at in the charts above tell me that things are just not "there" for stocks – at least in my book. Based on this information alone, I would still be calling for a correction in equities in the short term. Let's look at some of the other asset classes to see if they are singing a bullish or bearish tune.
Is the euro forming a "head & shoulders" top? Maybe, maybe not.
The chart of the euro futures (@EC) on a daily basis is shown below. To me, this is not a bullish chart on a macro basis, although there certainly appears to be room for the euro to rise before meaningful resistance is confronted. I spy a potential "head & shoulders" top formation developing – starting with the "left shoulder" in September, the "head" in late January / early February, and the potential "right shoulder" occurring in the weeks / months to come. In a perfect world, the euro would fall a bit further to the 1.2870 level for wave "b" and then rise up to the 1.3335 level for wave "c" and the "right shoulder." Things are almost never that pretty, though. Still, this is a chart worth monitoring in the short- to intermediate-term.
The Aussie dollar is deciding which way to go after failing at long-term resistance again.
As bullish as things were for risk assets going into April, I would have bet good money that the Australian dollar futures (@AD) would have broken through their key long-term resistance at 1.0495. But alas, no breakout occurred. Instead, we got a hard, short-term reversal to the downside. All is not lost for the bulls, however. If the Aussie buck can manage to hold up anywhere above the "correction" support at 1.0121, the bulls can still claim the upper hand on a macro basis and can retake control in the short-term. Right now, though, it's hard to call this a bullish confirmation of the action in stocks.
The Canadian dollar is rallying in the short term, but the chart remains bearish overall.
The Canadian dollar futures (@CD) are sporting one of the more bearish long-term charts around. However, it, too is rising in the short term, providing at least a little confirmation for stocks. Unless CD can take out the "correction resistance" and underbelly of the broken uptrend line (which converge at about .9924), this is a bearish technical set-up waiting to happen. Right now, consider CD also in "no man's land" in terms of reward / risk for either side.
The greenback is in "no man's land" right now – no edge for the bulls or the bears.
The US dollar is headed lower in the very short term, but appears to have room to rally (if my wave count is accurate) in the next few weeks. In theory, the DX should rise up to around the 83.760 level as wave 5 plays out. Maybe that will be helped along by a rate cut over in Europe this week. Right now, this chart doesn't help me much in terms of the "risk-on / risk-off" trade.
The yen is bouncing but is nearing key resistance quickly.
So, the rally in stocks would indicate "risk on," but yet we're seeing a rally in the yen in the short term – go figure. Right now, the yen futures (@JY) appear to be in the latter stages of wave "(iv)" (higher) of wave "v" to the downside. I would expect resistance for this wave to come in at around 1.0395, which should be followed by a final shot to the downside (to .9618) for wave "(v)" of "v." It's still a "risk-on" macro chart for JY.
Swiss franc pulled back to support and has started to bounce again.
The Swiss franc futures (@SF) pulled back sharply over the last week or so, but the decline stopped right at the uptrend line support. I have to call this a short-term win for the risk bears unless that uptrend line is violated on the downside. If I were trading forex, I would be looking for ways to get long of the Swiss France and would use the uptrend line as my "backstop."
Sea Change's krona / franc indicator is still trending lower off of recent peak – signaling more corrective action in equities to come.
The spin-off of the Franc analysis above is our firm's krona / franc indicator. When the dark red "spread" line in the middle of the chart below is trending higher, it's positive for stocks. When it's trending lower, it's negative for stocks (on a leading basis for each scenario). Right now, despite the short-term rise, the trend is lower for the spread line, which keeps this indicator in "risk-off" territory for now.
The British pound is nearing important "correction" resistance.
I thought I would throw in one more currency futures chart this week – that of the British pound (@BP). The pound is nearing critical "correction resistance" on the chart and theoretically (given the bearish overall nature of the chart) should turn and reverse lower soon. I would be looking for ways to play the short-side of the BP given what this chart is telling me (maybe shorting GBPCHF is the play considering this chart and that of SF).
The yield on the 10-year Treasury Note remains (artificially) subdued.
No surprises here: The FOMC has rates pegged near the recent lows. Clearly this is the case, but there's no use complaining.
OVERALL FOR CURRENCIES AND INTEREST RATES
I'm still not seeing clear bullish evidence coming from the currency or fixed income arenas, although I will note that the action in SPDR Barclays Capital High-Yield Bond ETF (JNK) and iShares JPMorgan USD Emerging Market Bond ETF (EMB) (not shown in today's article due to time / space constraints) are acting more bullishly. Treasury yields remaining low like this have to be attributed to the Fed. Other than that, I just cannot give this equity rally the "all clear" for future gains, based on the evidence from the equity markets themselves as well as on the currency markets.
All of that analysis aside, though, I go back to what I opened with: the Tepper analysis. Maybe we should just keep all of this other stuff in mind as we defer to the Tepper theory for now; it seems to be the most profitable play for now.