Home > Uncategorized > 2012/04/03: Just Do It vs. Triple-E

2012/04/03: Just Do It vs. Triple-E

© 2012 ROHR International, Inc. All International rights reserved.

Whatever the other asset classes may be doing, it is a very interesting equity markets right now. And spite of some still formidable tail risks on Europe and the like, the market does have reasons to be encouraged. As we noted in our formal research, this week sees the information equivalent of carpet bombing by the liquidity infusion-oriented major central banks.

For those who’ve been reticent about diving into the equities since the first of the year, there seems a compelling (Nike-inspired) “Just Do It” imperative to not miss the further appreciation. And various factors this week would seem to support the idea the equities will find encouragement from quite a few quarters. After FOMC minutes this afternoon, it’s the ECB meeting and press conference tomorrow, all followed by the Bank of England meeting and somewhat limited statement on Thursday.

What we know for certain is moderate (Goldilocks “not too hot, not too cold”) US growth was highlighted again in the FOMC minutes. That will be seen as constructive, while allowing (‘50s pop group) Benny & the Doves to maintain further QE (quantitative easing) potential. Even if that was played down in the minutes, the rate hike horizon being pulled forward to late 2013 somehow does not seem much of a threat. The perception remains QE will be implemented if the economy weakens. There is still a ‘Bernanke Put’ out there.

There will also likely be another upbeat ADP Employment Change report tomorrow, driving bullish anticipation for Friday’s US Employment report. So after relatively constructive global Manufacturing PMI’s and other economic data, the only question becomes why aren’t the equities stronger?

It seems that on both the data and the central bank influences a June S&P 500 future that Closed yesterday above the 1,400-07 resistance for the second time in the current rally should have been doing better. Might it be that there are some broadly acknowledged tail risks out there, even if they are not dominant at present? Maybe it’s the Triple-E threat!

That’s right, Triple-E. Yeah, we know, it sounds more like the nickname of a long forgotten steam locomotive. But it’s real, and mirrors the crisis drivers of the past several years. While long held market axioms are often proven wrong, this one seems to be working very well: it takes not one, not two, yet rather three prominent problems to derail the near term aggressive bull trend in equities.

And in that regard, we seem to be walking backward through the alphabet for the past few years. Back in 2010 it was the Triple-G Crisis which temporarily knocked the foundation from under the bullish equities psychology. That was Greece, Goldman, and finally the massive Gulf oil spill from the BP deep water drilling disaster.

And only once the extent of the latter became clear did the equities enter their sharp summer 2010 correction. Similarly in 2011, the early year Arab Spring selloff was a bit of a scary annoyance. However, only the combination of factors in the Triple-F Crisis triggered the larger selloff. Those were Fuel, Fiscal and Facility; as in high energy prices, the inability of the US Congress to address the US ‘fiscal’ deficit, and the realization that the European Financial Stability ‘Facility’ was neither well-funded nor functional enough to head off the renewed problems in Greece. And when the latter two hit together in August of last year, all hell broke loose.

Is there another potential destructive triplet facing the equities at the top of the current impressive yet churning rally? Possibly. We surmise that would be the Triple-E Crisis in waiting. It will be comprised of Energy, Earnings and Europe. The first is much the same as the previous high Fuel prices, which certainly have the potential to bring Earnings under pressure from an elevated cost base. And the latter would be the premature return of funding problems, especially for one of Europe’s TBTS (Too Big to Save) countries.

It should be lost on no one that one reason for the ECB pushing its meeting up by one day instead of deferring it for a full week into next Thursday might be concerns over that factor. It is apparent that especially the Spanish government’s cost of funds in the open market has been rising again. That is in spite of it delivering a 2012 budget that looked acceptable to the folks capitalizing the bailout funds. And the one thing that everybody agreed at the EU finance ministers’ and central bankers’ meeting last weekend was that €700 billion was plenty of funding…

…as long as the country needing rescue was Portugal; or possibly a top up of the recent Greek bailout after their early May election. However on the periphery of that meeting last weekend, something else was also quietly agreed: there was nowhere near enough funding to stem a real crisis in either Spain or Italy. Those remain the sort of tail risk that could weigh on the banking system in spite of the best efforts of the ECB; and even the recent more forthcoming funding from the northern European ‘deep pockets’.

How ironic. The Germans and their northern tier cohorts finally step to the line and do the right thing in their Jerry Maguire (“show me the money“) Moment. Yet, many had warned them at more than a few junctures that the delays in providing ample capital to the European bailout facilities would impugn the credibility even once they were funded.

So while equities continue to act well at present, real risks still loom. And in light of today’s post-FOMC minutes selloff, it is going to be very interesting to hear what Signore Draghi has to say at tomorrow’s ECB post-rate decision press conference. Especially so now that the ECB has assumed the role of Liquidity-Provider-in-Chief to the most critical region. The US will still suffer as well in any renewed crisis. Yet, it is no longer at the center of the crisis, and the Fed finds it hard to justify more extensive largesse in the current economic context. Must be tough for Helicopter Ben.

General Market Observations

June S&P 500 future has chopped around 1,400-07 resistance, which we cautioned before the market reached it was an interim (i.e. not major) area. No surprise that after sagging below it intraday last Thursday, it did not Close last week below the previous Friday’s 1394.10 weekly Close. That is important, because it was a window of opportunity for the bears to reverse the current resilient up trend.

Failing to do so left the market in good shape from last Thursday’s Close into early this week. It remains an interesting support this side of more major support down in the 1375-67 range (major resistance violated on the way up three weeks ago. And European headwinds will be well worth watching now that DAX failed to hold its recent push back above 7,000, and FTSE is slipping back below 5,860. It’s putting additional decision pressure the US upside leader.

EXTENDED TREND IMPLICATIONS

The technical trend picture in govvies remains the same as noted previous. Of course, equities stalling against resistance was an influence on govvies holding at the bottom of their sharp selloff a couple of weeks ago. Even so, while the June T-note future had pushed back above the 129-00 area, it was then challenging more prominent resistance in the 129-20/130-00 area. That is both the major gap lower from three weeks ago Wednesday, and heavy contract and continuation congestion. Even prior to the FOMC minutes release today, it was hard to imagine much more upside potential in the govvies right now. Back below 129-00 there is still plenty of support back into the 128-00 area.

That worked hand in glove with tendencies in the most resilient June Bund future. After the push back above 137.00 area resistance (still support) two weeks ago, the current retest of the hefty congestion at 138.50 is stalling; even if that did leave room for a test secondary resistance up into the 139.00 area. Weak sister June Gilt future has fared worst of all. After a gap lower opening three weeks ago Wednesday (like the T-note) below the 114.50 area, it also finished below its late February 112.81 low. Even though it recovered back above 113.00-112.50 resistance (also still support now), it only filled part of that gap lower from three weeks ago as part of testing the major resistance in the 114.50-115.00 area. They all stalled the key levels on the recovery rally so far.

There are only a select number of interesting developments in the foreign exchange. Even though EUR/USD and US Dollar Index are back through some recent interesting congestion levels, that does not appear to be very critical for any extended major move. Far more interesting is the secular weakness in the Japanese yen we have been highlighting since late February. And that overall down trend looks intact in spite of the yen’s upside correction over the past several weeks.

In a nutshell, USD/JPY has held multiple tests back down into to important support in the 82.25-.00 area, with next major resistance not until the mid-upper 85.00 area. EUR/JPY has held multiple retests of the low 109.00 area as well. While it stalls lately near its major 111.62 October 2011 high, much above that there is no further resistance until the low 114.00 area.

And most telling of all might be the weaker sister Australian dollar continuing to hold AUD/JPY 85.00. It is both significant previous congestion and a current up channel technical support level. It is also a potential DOWN Break from a short-term (six week) Head & Shoulders Top. If that continues to hold (i.e. aborts the topping action) we suspect it will exceed recent mid-88.00 highs for a push to the more prominent .9000 area.

Thanks for your interest.

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