With central bank money holding up the stock markets investors have long ago abandoned fundamental reasons for buying. Now the market is headline driven and the market is holding up in hopes there will be a successful effort to kick the can further down the road for Greece.
Wednesday's Market Stats
The market's volatility over the past three months has continued and the indexes are threatening to break out of bullish continuation patterns. But so far the breakout attempts have been on low volume and relatively weak market breadth, which gives pause to the idea that the bullish continuation patterns will work for the bulls. And if they don't work then the bears are going to pounce.
Part of the reason for the market's choppy behavior recently has to do with the news coming out of Europe, especially relative to Greece and its debt issue as well as what's happening in Ukraine and the beating of chests between the U.S. and Russia. The market doesn't like uncertainty and it makes it hard for the market to rally when there's real fear about what could happen to the EU if the dominoes start to fall, starting with Greece (which could lead the way for Portugal, Spain, Italy and others).
If Greece defaults on its loans, is forced out of the EU and then improves its economy by itself it will only embolden other countries to do the same. Nationalism is already coming to the fore as immigration issues, terrorist activities and labor protection prompts some to declare the need for border checks to be reinstituted. It's a slippery slope back to pre-EU days and that would only further push Europe, especially Germany (which is dependent on the rest of the EU to take their products), into a depression. The U.S. and the rest of the world would not be immune to significant trouble in Europe.
The big thing supporting the stock markets is all of the money coming out of central banks. Even without the Fed at the moment (they'll be back), there's now $60B/month of monetary stimulus coming from Japan and theoretically about $50B/month coming from Europe, which means about $110B of new money coming into the global financial markets every month. Much of that money is flowing into global stock markets, the U.S. included, and it's likely one reason why the stock markets have not been cratering on all of the worrisome news coming out of Europe recently. To say this new money is creating an extreme imbalance in the financial markets would be a gross understatement but for now it's certainly enough to keep the bears away.
The stock indexes have had a very volatile period since last November while prices have gone essentially nowhere. Today's closing price for SPX, at 2068, is where it was last Thanksgiving (the latter part of November). It's been a good trading environment if you were able to catch some of the swings but buy-and-holders have been marking time, with a couple of good scares thrown in there just to make things exciting.
What's still not clear, after nearly three months of this choppy whipsaw market, is whether or not we should expect higher highs. If yes then we should see them this month. If no then we should see prices below the 3-month trading range before the end of this month. The market is currently at the mercy of headline news and appears to be holding up under the assumption that the issues with Greece will be solved in a way to at least kick the can a little further down the road so that the Syriza party officials can tell the Greek people what a great job they're doing and the EU ministers can delay any resolution as to how Greece will pay back its debt. Each side has a strong desire to keep themselves in power and will do and say anything to make that happen.
In the meantime the market is having a tougher time justifying the higher stock prices when it comes to fundamental analysis. The chart below shows the expected earnings per share and sales growth for the coming year and as you can see, those expectations have been in decline since last September (interestingly, that's when the NYSE topped). The current projection is for zero sales growth and the EPS estimate is about a third of where it was in September (about 4% vs. more than 12%). And yet the DOW and SPX and others continue to hold near their highs and might even press higher this month. This is what the money from the central banks has done and this is why I say the disconnect between stock prices and reality will likely collapse quickly when (not if) it happens. The yield-chasing money managers simply continue to push prices higher regardless of value but as with all bubbles, this one too is simply looking for a pin to prick it.
Earnings per share and sales growth consensus for 2015, chart courtesy businessinsider.com
Another sign of the slowdown in the global economy (and we're all inextricably linked) is the continuing decline in the Baltic Dry Index (BDI), which has declined sharply since last November and is now below where it was at the end of 2008 and at the beginning of 2012. There's simply not as much product, especially commodities, that are shipping around the world. It's why we've seen such a large decline in commodity prices since the peak in prices in 2011. There's no good reason for stock prices to be as high as they are except for the fact that hot money (newly created from central banks) continues to chase prices higher. It's a game of musical chairs and everyone's hoping to grab a chair when the music stops.
But those are things to worry about if you're long the market and hope to see the writing on the wall before the bottom falls out. The scary thing is how many money managers are waiting for the same thing and I fear (for those who will get trapped in long positions) that when the music stops and money managers pull their money out of the market there will be no one on the other side of the trade to buy the stock from them. This is what creates the flash-crash scenario and we've had brief tastes of it in the past. But still, most people think the Fed will save them and they continue to buy without regard for downside risk. We could find out soon how well that works out for them.
Moving to the charts, as confusing as this market currently is, we still have the best chance of seeing where prices might turn or get confirmation when a new trend might start (at the present the trend is a choppy sideways move). The weekly chart is bullish if only because price is still above the uptrend line from March 2009 - October 2011, which was tested last week. This argues for another rally up to the trend line along the highs from April 2010 - May 2011, currently near 2143. But I also see the potential for a bear flag pattern for all of the choppy price action we've seen since mid-December and price is currently at the top of the flag. The bulls need to keep the rally going from here otherwise we might see another leg down to at least the 1970 area. The bulls are in control and the bears need to respect the upside potential but the bears would take back control if SPX drops below the February 2nd low near 1981.
S&P 500, SPX, Weekly chart
My daily chart is full of trend lines as I try to find where price will head next. When it gets choppy and whippy as it's been I find trend lines are often successful in identifying where and when price will reverse. It might not be a lasting reversal but it's often good for a day trade (or short swing trade). Instead of a bear flag pattern that I drew on the weekly chart, I've been watching an expanding triangle on the daily chart and SPX is currently banging its head at the top of the triangle (this is a bearish pattern). At the same time SPX is also back-testing its broken uptrend line from October through the January 6th low. You can see how price has reacted around these uptrend lines from October through the successive lows.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 2080
- bearish below 1972
The bearish setup is for another leg down at least equal to the December 29 - Jan 6 decline, which targets 1972 from here, and potentially down to the 1900 area in what could turn into a stronger reversal of the rally. The bullish pattern, also drawn on the daily chart, is a bullish descending wedge following the December high, and the breakout on February 5th was followed by a back-test and bullish kiss goodbye with this week's rally. It says we should rally up to at least the 2125 area (trend line across the highs from July-December 2014. It's an important inflection point and the news about Greece could be the catalyst for the next big move.
The 60-min chart below shows multiple patterns. "Pick one, any one" is what I feel like telling the market here. Just pick one and let's get the next move started. This jerking around inside a wild trading range is getting old so let's get a new trend started. Watch for the possibility of only a head-fake break above 2080 but a rally above that level that can hold above it would be bullish and I'd look for 2125 minimum. Below 2401 would be bearish with a bearish warning below today's low at 2058.
S&P 500, SPX, 60-min chart
The DOW's daily chart below shows a bull flag for its consolidation pattern following the December high. I could easily add the expanding triangle, similar to the one for SPX, so this is just one possibility. The breakout last week from the bull flag pattern was followed by a bullish back-test on Monday (along with its 50-dma) and that keeps it on a buy signal until negated with a drop below Monday's low at 17685, which would be better confirmed with a break back inside the flag pattern, which would indicate a failed breakout attempt, and below the 20-dma, currently at 17576.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 17,950
- bearish below 17,575
NDX finally made it up to the top of its descending triangle pattern yesterday and today's rally had it breaking out the top. That's bullish and if it can now hold above the top of the triangle (downtrend line from November-December), near 4281, it will stay bullish. But a drop back below 4280 would leave a failed breakout attempt and that would get the sellers all over it. Pooh Bear would see it as a honey pot and he'd be jumping in with both feet. Better confirmation for the bulls would be a rally above the December high at 4323 and for the bears it would be a decline below Monday's low at 4206.
Nasdaq-100, NDX, Daily chart
Key Levels for NDX:
- bullish above 4323
- bearish below 4206
SOX and BKX are two good indexes to keep an eye on when trying to guess the direction of the market. If they're in synch it's generally good to follow their lead. When they're not in synch it's usually a time of consolidation for the market (choppy whippy moves), like today. One of the biggest semiconductor stocks to watch is Intel (INTC) since it's typically a good barometer for the broader market. While the broader market got a strong rally last week, the same thing cannot be said for INTC and that's a bearish warning sign (or at least be careful about trusting the rally).
Last week INTC consolidated the previous week's loss, which was a big one (-9.4%). As can be seen on its monthly chart below, the rally into the December 2014 high had it poking above the top of a long-term parallel channel, which slopes slightly down from 2002. This channel is a very large consolidation before an expected 2nd leg down to complete a larger A-B-C pullback from 2000. INTC had also rallied up to its trend line along the highs from April 2010 - May 2012, with a slight poke above it in December. The brief throw-over above the line was followed by a selloff into the end of January and the drop back into the channel created a sell signal. On a longer-term basis, by this pattern, INTC is now on a sell signal that can only be negated with a rally above its December high at 37.90.
Intel Corp, INTC, Monthly chart
Moving in closer, the weekly chart of INTC below shows it's currently finding support at its uptrend line from February 2014, near 33, which is also the location of its 200-dma. If the bulls can't hold 33 we'll know INTC is in trouble but at the moment it would not be hard for me to argue for one more minor new high, just above 38, to complete a 3-drives-to-a-high topping pattern. That would be pure speculation from here but bears need to respect the possibility. You can see the significant bearish divergence at the December high vs. the prior highs in July and September 2014.
Intel Corp, INTC, Weekly chart
Last Thursday the RUT broke its downtrend line from December and this week it dropped back down to the line, currently near 1189, which so far is holding on the back-test. The bulls would like to see a bullish kiss goodbye and new highs, in which case we could be looking for a rally for the rest of this month, with the potential for the RUT to make it up to its broken uptrend line from March 2009 - October 2011, which will be near 1260 by the end of the month. That would be the 3rd back-test, following the ones in November and late December, which would create a 3-drives-to-a-high topping pattern. That's a setup we'll worry about if and when the RUT makes it up to there. But if last week's breakout attempt fails to hold and the RUT drops back below 1180 it will leave a bearish failure and the result would likely be strong selling to follow.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1217
- bearish below 1180
Recently I've been showing the TLT (20+ year Treasury ETF) weekly chart to point out how it had rallied up to potentially strong resistance at its trend line along the highs from December 2008 - July 2012, as well as its trend line along the highs from February-October 2014. It popped above the latter at the end of January and almost tagged the longer-term trend line but then fell back below both when it gapped down on February 3rd, creating a sell signal. This morning TLT dropped down to its 50-dma, near 129.10, and the short-term bullish divergence on its intraday charts suggested support at the 50-dma would likely hold, which it did. At the moment it's looking like we can expect at least a bounce correction to the decline from January 30th.
20+ Year Treasury ETF, TLT, Daily chart
I see the potential for TLT to rally to a minor new high, perhaps up to about 139.30 (depicted in green) to complete a 5-wave move up from September 2014 but this requires the current pullback to stay above the October 2014 high at 127.68. With today's low at 128.96 there's not much wiggle room left, which makes support at its 50-dma that much more important here. A drop below 127 would be more bearish and confirm an important high is in place for bonds.
The banks have been relatively weak compared to many of the other indexes and has underperformed SPX since September 2014. As can be seen on the BKX weekly chart below, it has essentially gone nowhere since the beginning of 2014 and in the process has created a bearish expanding triangle topping pattern. This can be viewed as the left half of what could develop into a diamond top. Last week BKX got a strong bounce but so far it's only good enough for a back-test of its broken uptrend line from March 2009 - October 2011, which was broken in January. This is a bearish setup and if BKX starts heading lower it would be a warning sign to not trust any rally in the broader market (follow the money).
KBW Bank index, BKX, Weekly chart
Very little has changed in the past week for the U.S. dollar. The pullback from its high on January 26th is a 3-wave pullback correction that found support at the top of its parallel up-channel from 2008-2011 and another leg up to the 97.35 area continues to look like the higher-odds scenario. The dollar would be in trouble below the February 3rd low at 93.38.
U.S. Dollar contract, DX, Weekly chart
Gold's high on January 22nd stopped a little short of its broken uptrend line from 2001-2005 (bold green line on the weekly chart below) and has since dropped back down, leaving a back-test and bearish kiss goodbye. It is now back down to its broken downtrend line from October 2012 - July 2014, near 1221, so now we'll see if the bulls can chase the gold bears away. In addition to support at its broken downtrend line the pullback from January has two equal legs down at 1217.80, which was achieved with today's low at 1216.50. It could be good for a bounce here but I think the larger bearish pattern continues to hold sway and another new low for gold is expected in the coming months. Gold needs to get above 1350 before I would turn bullish the shiny metal.
Gold continuous contract, GC, Weekly chart
So far the price action following the low in January for oil has been corrective and it's doing what I thought it might -- it looks like it's in the early stages of what should turn into a multi-month consolidation before heading lower later this year. Until and unless oil can climb back above price-level S/R near 58 I would not turn bullish on oil, especially since there's still the risk for oil to drop down to its January 2009 low at 33.20. Other than some short-term trades I don't see a good trading environment for oil here.
Oil continuous contract, CL, Weekly chart
Tomorrow's economic reports include unemployment claims and retail sales data before the open. The retail sales data could move the market but frankly I don't think the market cares one wit about economic data. It's driven by one thing only now -- how much cash is coming into the markets courtesy of the central banks. The only affect that economic reports have is based on what the market thinks about how it will affect the thinking of the Fed in regards to raising rates. My hope at this point is that Rand Paul generates enough support to audit the Fed and start the process of dismantling the central bank. There would be short-term hell to pay in the markets but once equilibrium is reestablished, through the free market system, we'd all be much better off and we'd stop the insane transfer of wealth for Mom and Pop saver to Wall Street bankers. It's probably a pipe dream but I have to remain hopeful that it will eventually happen.
Economic reports and Summary
The stock market has been stuck in the mud for almost 3 months but the wheels have been spinning fast and splattering lots of mud over both parties trying to help get it unstuck. There's a huge battle going on between the bulls and the bears as the bulls argue there's too much money coming into the markets (courtesy of the central banks) to ignore. It needs to get put to work and that will drive stock prices higher. Funnymentals be damned, full speed ahead.
The bears talk about the huge disconnect between stock prices and reality -- the global economy is heading for the toilet, central banks are creating a bubble and this is going to end in tears for the bulls. And guess what, both sides are correct and that's why the battle continues as each side remains somewhat convinced in their argument but not enough to overpower the other side.
The indexes are on the verge of breaking out and it needs just one good day to convince the bears to back off and let this thing ride. A new rally could be good for at least another +5% for the market and new all-time highs this month. Other than a quick pop up and then immediate strong decline, buying a breakout from here could be a good swing trade. But carrying overnight, with the inherent huge downside risk, would be very risky in my opinion.
If the current breakout attempts fail to hold and the indexes drop below Monday's lows I think traders would have a good swing trade on the short side for prices to drop at least marginally below the January lows. It could get much more bearish than that but for now I think that's a good downside target. Traders who are playing short term are the ones who are doing better than the ones swinging for the fences. Home run time will come but not yet.
For those who like numbers, here's an interesting one to think about -- 2094.78, which is about a point above the December 2013 high for SPX. Taking the March 2009 low at 666.79 and multiplying it by pi (3.14159...) gives us 2094.78. The fact that the December 2013 high for all intents and purposes achieved that level could be purely coincidental, or maybe not.
Good luck and I'll be back with you next Wednesday.
Keene H. Little, CMT
In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying