The classically better equities market attitude into the top of corporate earnings announcement season was on full display yesterday. It had been a long time since the DJIA had gained more than 300 points from anything more than a previous sharp drop. That occurred yesterday after holding up well around the middle of the previous broad trading range, as was the case for a December S&P 500 future which also pushed up above the 1,155-45 range; which it had singularly failed to do in the wake of last Friday’s strong US Employment report.
However, there is a question as to whether this all confirms the return to a bull market, or is just another swing in a consolidation range that might still leave the general equities trend bearish? While only time will tell, there are quite a few indications which leave the current rally suspect. Not the least of those is the significant lack of volume on such a massive rally yesterday. That’s just not typical of truly bullish technical trend tendencies.
Beyond that, there are more than a few fundamental reasons to take the early earnings season euphoria with more than a grain of salt. Which is not to say the positive news should be completely dismissed, but more so that the balance of some very significant influences would still seem to favor a bearish outcome in the intermediate term.
As it is important to keep all this in context, the first thing we might recommend it is reviewing our May 4, 2011 post on why the govvies can rally right along with equities once we get a bit further into earnings season. While that won’t be quite so critical for another couple of weeks, it will be an important earmark as to whether the real world news will or will not support a more sustained bullish trend in the equities.
For now it is more important to consider the current economic indications, especially in the wake of that lackluster response to what should have been considered much improved US jobs news last Friday. In the first instance, there is yesterday’s OECD Composite Leading Indicators (CLI) release that pointed to a continued global slowdown. As noted previous, this is now not just surprising weakness which has cropped up in Europe along with the US and UK.
The emerging market economies that had been counted upon to buffer weakness in the developed world are now in as bad a shape or worse. And of course, also as often cited, OECD CLI is a six month forward view. As such, it is a fairly good indication of the same sort of expectations equity markets tend to anticipate; in addition to the fact that it is consistently accurate in its perspective. Not something that can be traded off of day-by-day, yet excellent anticipatory indications for where things end up six months out.
It has been noted from more than a few quarters that US housing continues to deteriorate. The degree to which that is no longer based strictly on flaky finance for folks who probably shouldn’t have purchased homes in the first place is especially disturbing. That is all within the context of the continued weakness of the US employment situation, which then spills over into affecting homeowners’ ability to service their mortgages. Certainly no news there, except for the continued devolution into a worsening situation.
The degree to which that is now becoming more critical was highlighted in a Financial Times’ Short View column today. Once again the FT has included a video with graphical displays to illustrate the point made by columnist Tracy Alloway. Her indications on specifically how “…concerns about the mortgage market are spreading from subprime to better quality home loans…” is scary in part because it speaks of potential for further deterioration of consumer sentiment. However, it obviously also relates to a portion of major money center bank portfolios which had been considered relatively safe up to this point. Certainly worth a look.
On the other hand, there seem to be some good news this morning from the National Federation of Independent Businesses’ (NFIB) Small Business Optimism Index; or was there? Obviously any improvement is better than a decline. So the shift from last month’s 88.1 to 88.9 is ostensibly a positive sign. That said, it is important to keep in mind that 100.0 is the balance point for this index, and on recent form it has even been accepted that anything much above 91.0 is relatively positive in the current context.
However, the continued weakness reflected in the very minor gain has some very significant implications for small business activity; including capital investment and hiring that are so critical to any sustained turnaround in the US jobs and economic picture. As usual, NFIB head William Dunkelberg was on CNBC this morning to discuss the various components of the report.
He was very pointed about the slight improvement not signaling any sort of turnaround of small business sentiment; especially the degree to which most small businesses still do not believe that overall business conditions or their business turnover will be improved in six months. That fits in pretty well with the OECD CLI indications. He pointed out this is also a significant reason that banks’ loan volumes are down; small-to-medium-sized businesses just aren’t interested in borrowing, because they don’t see the prospect of a return on the investment.
Maybe that’s a good cue for the Obama administration and its allies in Congress to agree to the recent suggestions of a regulatory implementation hiatus. As noted more than a few times previous, even more so than higher taxes, the looming regulatory expansion is an area where medium and small business feel most uncertain and burdened.
Along with another brawl over the Bush tax cuts lapsing at the end of 2012, it highlights the degree to which the major problem is the dysfunctional, highly partisan nature of the US political process right now. The inability to get together on the major issues that are hamstringing the US economy, such as higher taxes, more regulation and likely a greater momentum of truly pernicious protectionism is the unpalatable yet more likely way forward.
‘Taxulationism’ still rules, as the combined impact of all of the above will continue to create negative sentiment unless something constructively changes. While there is always hope, it is in very short supply as both sides seem to have retreated into their respective “energize the base” modes of operation very early in this election cycle.
General Market Observations
So it is no surprise that a bit more practical cooperation in Europe on the Greek wing of the sovereign debt crisis has assisted with the typical strong temporary rally in equities at the top of the earnings announcement season. That may see the December S&P future swing back up above the upper 1,100 area it has seen already to possibly even test the low 1,200 area once again.
With the classical intermarket influences reinstated of late, that has also been a burden on govvies and the US dollar, and assisted commodities, energy markets and Gold. The last bit is very interesting insofar as after its recent sharp fall the improvement along with equities would tend to reinforce the degree to which the inflation factor is now a key to its near-term movement; as we had suspected might be the case.
p.s. the Current International Calendar has been amended to show Wednesday as the correct release date for the FOMC September 20-21 meeting minutes.
EXTENDED TREND IMPLICATIONS
EQUITIES: Even downside leader DAX had been holding him better than the US equities with its orderly slippage back below the 5,600 and 5,500 areas to no worse than the historically important 5,100 area last week. That is important due to the degree to which the DAX is now trying to form a bottom after the push above 5,500 and 5,600 again last week. This has reconfirmed that it is out of its very weak ‘declining channel’ pattern (opposite of a firmer upward consolidation), even if it has stalled so far at no better than the lower of its 5,850 and 6,000 area resistances.
Long Dated Government Bonds: In light of the recovery in the equities, the weakness of the developed world government bond markets was no surprise. While the Euro-govvies had somewhat more of a correction than we have seen in some time, it is very typical that temporary rallies in equities are not enough to completely reverse the trends in ultimately strong government bonds. Please see our May 4, 2011 post suggested above for further insight on how the trends might evolve over the next couple of weeks.
In brief, the December T-note future finally dropping below 128-16 looks like it can head into somewhat significantly lower ground, with the next major support in the mid-low 126-00 area. The same applies to the other fixed income futures, where December Gilt future below the mid-128.00 area might reasonably head back down to its own mid-low 126.00 area lead contract support. Similarly for the December Bund future, the previous strong sister has now dropped below short-term support in the mid-low 135.00 area. However, as we have noted for a while now, its much more prominent intermediate-term support is back down into 134.00-133.30.
Foreign Exchange: As weaker economic expectations had permeated the markets, it was not much of a surprise that commodity currencies capitulated, as well as the euro not responding well to economic expectations that will not assist in the fiscal rebalancing attempts.
At least that is the implication we must draw from the euro’s very modest mid-September recovery from below the low end of important EUR/USD 1.3900-1.3837 support that held back in July. That remains resistance on any extended rally. The US Dollar Index has also been out above the high end of its .76-00-80 complementary resistance to all the way up around higher interim resistance in the .8000 area. While it has now dropped back below more prominent mid-upper .7800 congestion, it did hold important interim support in the mid-.7700 area yesterday, and .76-00-80 remains the more important support.
And while it has recovered markedly from down around the top of the more prominent trading range at .9400 area, the Australian dollar violation of support in the AUD/USD 1.0300-1.0200 area will remain a critical bellwether for whether its overall top and intermediate-term channel Break DOWN keeps this market a bear. Since that AUD/USD failure, the mid-.9750 area and .9600 area have been and will remain important interim technical levels.
Energy and Gold: November Crude Oil future has also now seen a significant recovery back above the prominent interim support in the 80.00-79.50 area after dropping below it to (and even slightly below) the 76.00-75.71 support last week. However, it is only just back up in the 85.00 area with the Tolerance of that resistance at the congestion and previous major DOWN Break in the mid-86.00 area. December Gold future is also somewhat muted in its recovery from the test of 1,600. And the Exhaustion Gap up in the 1,682-92 range will remain formidable resistance without a greater inflationary strength indication from equities.
Similarly, the December Copper future is less than impressive in its bounce from near 3.00, and has gapped back down 10 cents today from yesterday’s 3.3680 Close even though equities are only slightly weaker. It will also still have very significant resistance back up around the major 3.50 resistance violated on the way down. All of those do not speak well of the sustainability of the near-term equities rally.
Thanks for your interest.