Over the past week we saw a good move up in the S&P 500 Index (SPX), however, our core market health indicators didn’t show a lot of strength. They all moved up, but without conviction. Market internals continue to diverge from price which suggests further consolidation. Our measures of risk which fell sharply in our last update didn’t recover much this past week. They are all still positive, but at fairly low levels. This signals that market participants are finally starting to recognize the potential of a larger decline in the market. Our measures of the economy and market quality recovered slightly. Our measures of trend and strength rose from deep oversold levels, but not nearly as much as we would like given the strong price action. We suspect that a move well above 1600 in SPX will be necessary to move these indicators into positive territory. It is disconcerting to us that the market is so close to all time highs and our indicators are so far below zero.
On Thursday I posted a couple of signs I saw that are starting to paint a picture of the economic conditions in my area (and probably the rest of the United States). We’ll here’s another sign that made me laugh at first, then gave me pause. I’m not sure what it means. It is most likely a simple commentary on this retailer’s experience with crime. Regardless of the meaning, this is another sign of our times. As a side note, I’m not sure if he really has a gun. Take a look at the picture he drew. The trigger is backwards. Nevertheless, I won’t be testing him.
While out and about today I saw these two signs just across the street from each other. It made me wonder if there is a relationship between high gas prices and a retail store offering cash for gold. The cash for gold store wasn’t a jeweler who’s offering to buy gold, but an actual retail outlet set up for the express purpose of buying gold (and I assume turning around and selling it for cash). Is gold inflated to the point that it is profitable to trade it at a strip mall? Or is it that people are in such bad economic shape that they’re willing to sell their jewelery for much less than its worth? I can understand buying gold as an add on to a core business. To me it’s completely reasonable for a collectible coin shop or jeweler to buy junk gold as an extra source of income (since their core business pays their fixed costs) . But, a cash for gold retail outlet must pay only
The correction that began on 9/14/2012 has brought with it some surprisingly similar readings on our market health and risk indicators as the correction that occurred during November of 2010. What makes it eerie is that the November 2010 correction coincided with the QE2 official announcement. Now we’re seeing a sell the news event coincide with the QEternity announcement. Just for fun I’ve posted a chart of the S&P 500 Bullish Percent Index (BPSPX) with illustrations of the similarities. Notice first the divergence from the peak of April 2010 to the peak in November 2010. It looks very similar to the current divergence in that; it sprang from an oversold condition, followed by a strong rally, which culminated in a final burst upward, caused by a Federal Reserve Quantitative Easing announcement. Even the levels in which the BPSPX reached each time are similar. This is somewhat encouraging since the current BPSPX level gives the market room for one more leg higher before becoming overbought. In addition, we’re now seeing momentum
We’re watching emerging markets closely here looking for signs that the world economy is strengthening. EEM is a good instrument to watch for clues to the economy because it is heavily weighted to financials, information technology (chips), energy, and materials. These are all sectors that do well when the economy is growing. In addition, EEM is weighted to Asia and Brazil, two areas that are sensitive to world economic conditions. EEM has been in a down trend for well over a year even as SPX has worked its way higher. In March as SPX was breaking above the 2011 highs, EEM tested its down trend line. It was a failure that signaled the world economy was weakening. It appears that EEM will test the down trend line again if SPX makes new highs above 1422. We’re watching EEM closely because a break above the trend line would be one sign the economy has some underlying strength. Another failure or non confirmation by EEM would point to a continued stall in
In an up trending market HDGE an actively managed bear fund, and SH an inverse of the S&P 500, tend to move together and paint similar chart patterns. HDGE, however, under performs in an up trending market. During the rally from last October’s low to early February HDGE was down roughly 30% while SH was down only about 21%. In mid February as the S&P 500 was continuing to rally, HDGE started to out perform SH. Both bear positions were still falling, however HDGE slowed it’s decline. Then at the first of April as the market began to fall both securities started to rise. The small rally into the the first of May brought the arrival of big divergence between HDGE and SH that has continued until today. This isn’t a good sign for the markets as it signals to us that market participants are separating the good stocks from the bad. It is often one of the first signs of a weakening market so we’re watching this carefully. What makes
There is a lot of talk (actually hopes and dreams) of QE3 coming soon due to the signs of a weakening economy. I’m of the opinion that the economy isn’t what the fed is trying to help. The fed (and the European Central Bank) is trying to keep financial institutions solvent and sure up confidence in financial markets. Their actions over the past 3 years have not been targeting the economy and won’t be over the next few years. The economy is simply their justification for action. What the fed fears most is a loss of confidence that results in falling markets that destroy the balance sheets of financial institutions and even governments (can you say Greece, Italy, and Spain). While they’re standing back and watching the ECB and EU participants try to save European banks and countries, they are also implementing policies that make it easy for banks in the US to recapitalize through high earnings (ZIRP). They’re not implementing policies that help consumers…that would then strengthening the economy.