Credit: Shutterstock photoDavid White submits:
The latest ramp up in US equities has been generated by speculation about positive Fed action (QE2). Some say this has already been priced in. The experts say the Fed QE2 will have only approximately a +.2% effect on GDP. Stocks have surpassed that expectation. Yet they continue to rise on momentum, emotion, historical remembrance of 2009, and HFT pressure. This seems a juggernaut that does not want to be derailed. The USD keeps going down on QE2 speculation and weak economic news. The falling USD tends to push the price of oil and other commodities up, as their prices may be flat to up in other currencies such as the Yuan, the Euro, and the Yen. This in turn tends to push commodity related equities up. It gives an upward bias to the overall market. China has shown economic promise in recent weeks, as have other emerging countries. EIA recently raised its global oil demand estimates. The surrounding factors seem to be playing into the QE2 speculation generated rise.
Any realist knows this cannot go on forever. The US economic news has been more negative than positive of late. Most significantly the Jobs# was much worse than expected at -94,000. General world economic news has even been negative, as the IMF has recently downgraded its world GDP forecast for 2011 by -0.1% to +4.2%. NABE has downgraded US economic estimates from +3.2% to +2.6% for both 2010 and 2011. UCLA downgraded its US Q3 GDP estimate to +0.7% Wednesday. This is far below the already meager forecasts by firms such as JPM for +1.5% Q3 GDP growth. A foreclosure moratorium for the US seems more likely every day. This seems likely only to further depress both the US economy and US real estate prices (a big fall on sudden backlog availability after a small up tick due to lower availability numbers). This foreclosure fiasco could cost banks anywhere from $10B to $100B or more, depending on exactly how it plays out. The irony is that States' Attorney Generals believe that they are acting in the public's best interest (or want the public to believe that). Another political SNAFU.
The UK growth forecast is now for GDP growth to turn negative in Q2 2011. From what I have seen lately, the return to negative growth in the UK may well occur sooner. Everyone knows Ireland is troubled. Ditto Greece. Portugal's sovereign CDS Spreads were right on Ireland's tail in the recent run up. France is less troubled, but the unions are often shutting the country down in protest of austerity measures. That can't be helping its GDP. Recent economic data from France bear this out. Even Germany is faltering. The recent rise in the Euro will hurt EU exports. This won't help EU GDP growth. Another crisis period is coming soon to the news for the EU. If the US can export more to the EU with a lower USD, that will help US companies. However, if the EU flounders due to economic troubles, further exacerbated short term by austerity measures, even a lower USD may not help the US export to the EU. China is holding the USD high vs. the Yuan, so that situation is a negative for US GDP growth. Further if we see a still more troubled EU, we may see a US bank write downs / write offs problems. The US banks have huge investments in the EU. Many pundits seem to be ignoring this for the moment.
Logically, the current juggernaut that is the US equities market cannot go on very long under these conditions. It seems mostly the Fed (and the propaganda spread about the Fed speak) that is pushing the market up, engendering almost insane optimism. Many point to the huge ride US equities got upward in QE1. However, at the time of QE1 oil started near $30/barrel. Copper started near $1.20. Now oil is $83+, and copper is $3.80+. If we were to see the kind of run up in commodities that QE1 helped achieve, oil would go to $200+. Copper would go to $10. Aren't those the kind of numbers that helped crash the US economy in this last recession? Are they something to wish for? I am sure the Fed does not think so. The Fed will not stick to a plan that would lead in this direction. In short if oil goes much higher, there may be no QE2. +.2% in GDP growth is not worth the risk. The weak US economy cannot support oil much over $100/barrel. It is unclear that it can even support that. Many businesses such as airlines and Fedex will flounder in that situation. Those stocks will start to fall, not rise. When businesses that utilize the above companies have to pay more, they too will feel the pinch. Manufacturers and builders (already hurt badly) will feel the pinch. The Fed will not willingly take this path.
We are standing on the precipice. Health Care cannot lead with all the troubles of the new Health Care bill. Technology cannot lead. Cloud has already run up, and many non-cloud hardware and software companies are being hurt by cloud computing, by the new Apple ( AAPL ) iPad, and by the economy. Netbook companies are ceding business to Apple's iPad and the "cloud". The overall hardware business is hurting. Tech cannot lead. Financials are being hurt by FinReg, and most of FinReg rules have yet to be written. The extra capital requirements are unquestionably curbing growth in financials, if not engendering shrinkage. After the elections, the House will turn Republican according to pundits. The Senate may. However, this will not guarantee a repeal of HC or FinReg. There may be some softening of these.
Still, given the history of the Congress they will largely remain for the near term. Plus Obama will oppose their removal. The hoped for Congressional rescue upon the elections from FinReg and HC is largely a pipe dream. The damage those bills will do to the economy, especially financials, will be felt like a hard kick to the ribs. The current foreclosure moratorium either voluntary and/or possibly enforced will hurt banks. Plus financials have exposure to the EU crisis. Many ignore this, but it is there. Financials cannot lead the markets up. Materials and Energy are already over extended. They may continue to go up in an inflation speculation driven rally, but a significant rise from current levels would likely preclude Fed QE2 action. Materials and Energy cannot lead for long, if the markets expects to get QE2. Keep in mind that QE2 is only supposed to result in a +.2% difference in US GDP. This would not support a huge increase in materials and energy costs. In sum I do not see a major sector that will lead the market upward for long. Lacking leadership, the US markets seem likely to retrace very near term. The only question is exactly when.
If only the Fed is driving the markets, then increased inflation indications may cause a down turn. Ditto too high commodity prices. A significant worsening of employment data may cause a down turn. Even an improvement in employment data (if not too great) could cause a down turn, as it might mean lowered expectations of or no QE2 action from the Fed. It is very strange when good is bad, as long as it's not too good. However, that may currently be the case.
Pumpers are hoping for the Initial Claims number, the PPI data, and the CPI data, to come in at estimates so they can keep pumping with their current story. Any significant deviation from this may dictate a market turn. PPI and CPI numbers, which have been largely ignored for the last year, may come to the fore in the next 2 days. The current "pump" story dictates that. If they indicate significant inflation, the "story" and the markets may take a hit. There has certainly been more than enough negative economic news to justify a retracement. Only the QE2 and elections propaganda has prevented it. Watch the PPI and CPI closely this time.
The chart of the [[SPY]] below indicates the over bought nature of the SPY currently:
click to enlarge
The SPY is currently at its upper Bollinger Band. Its Williams %R reading is near 0. The fast stochastic reading is over 80. The Relative Strength Index is over 70. All of these indicate an over bought condition. They make a reversal more likely, although not a certainty. They support a retracement thesis. The VIX going up on an up day supports a retracement thesis.
Good Luck Trading.
Disclosure: I am currently short the SPY.
See also QE2 Is About Assets, Not Banks on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
