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
The daily chart of the
(INDEXSP:.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
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
(NYSEARCA:IWM) versus the
SPDR S&P 500 Index ETF
(NYSEARCA: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.
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
) 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
(NYSEARCA:EEM) versus its international cousin, the
iShares MSCI EAFE Index ETF
(NYSEARCA: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
and how the components look technically versus the
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
), for example - the short-term performance would indicate
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,
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
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
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
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
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."
krona / franc indicator is still trending lower off of
recent peak - signaling more corrective action in equities to
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"
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
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
SPDR Barclays Capital High-Yield Bond ETF
iShares JPMorgan USD Emerging Market Bond ETF
(NYSEARCA: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.