Home > Uncategorized > 2012/04/27: Quick Post: Bifurcated market psychology again: Govvies and Equities both strong

2012/04/27: Quick Post: Bifurcated market psychology again: Govvies and Equities both strong

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

In its way, it’s nothing less than breathtaking. The tremendous resilience of the govvies (at least the primary markets) in the face of the equities seeming to get back on track yesterday is impressive. Let’s allow that each of these asset classes is on a bit of a correction from recent highs. Even so, the degree to which govvies have maintained their overall bid while equities have rallied so strongly since the first of the year is quite a phenomenon. Maybe it is all just a reflection of the massive global central bank liquidity infusions and low interest rates; and that is causing investors to chase yield wherever they can find it.

However, there is very possibly another macro-technical factor at work: a classical corporate earnings announcement season split influence. That is to say positive earnings driving equities buying. At the same time troubling real world economic and political news causes other funds to seek the safety of the primary government bond markets. And that is more so typical of the short term cycle. As such, it is less surprising than might otherwise be the case. We have seen it before, and the operative question is, “What happens next?

Once again the classical consideration is that economic data and political news continues across time while earnings season reaches the end of its current cycle. So the more prevalent influence across time will soon become the “real world” (such as it is) warts and all. And there are certainly plenty of warts these days. The most recent iteration of that was this morning’s less than impressive first look at US Q1 Gross Domestic Product. And yet, even in the face of that downside miss (2.20% versus an estimate of 2.30%-2.50%), the equity market is holding yesterday’s impressive gains.

Of course, along the way we have seen yet more impressive earnings. And on balance it must be allowed that those are significantly above expectations overall for the quarter. As such, the critical question is becoming how much longer companies can churn out robust profits in a disappointing economic environment? And that is along with elevated commodity and energy costs. We will probably know a lot more next week on all of the important top of the month data that culminates with the US Employment report.

In the meantime, it might be instructive to revisit the context of how the primary government bond markets focus on the real world can offset the natural counterpoint influence from the strength in equities. We explored that at length in a post just about one year ago that is still an interesting resource for anyone who would like a bit more background. Of course, one of the most telling factors is what has happened to the equities for the past couple of years once the buoyant influence of the Q1 earnings was out of the way.

As far as the warts that might turn up to disfigure the face of the equities, we explored quite a bit of that in Wednesday’s post “Waitin’ on the Fed: Highlights and Headwinds… which will win out?” Anyone who has not already reviewed that extensive discussion might find it useful. And that was prior to the past couple of days’ rating agency downgrade of Spanish sovereign debt, continued weak economic data, the Bank of Japan statement on continued deflation and the need for more extensive quantitative easing, overall contention in Europe on whether austerity measures will continue to be implemented, and other factors. While that last bit won’t make a significant difference unless Spanish, and even more importantly French, sovereign debt yields spike above key “sustainability” levels, it all bears close monitoring as the end of earnings season approaches early next month.

General Market Observations

This is fairly straightforward at this juncture in the wake of yesterday’s upside push in the equities. While Europe and even Japan remain somewhat depressed compared to the US, the latter are trying to look very impressive once again. On more than a couple of fronts the June S&P 500 future push back above 1,390.20 is a strong indication. In the first instance, that was the weekly Close prior to the gap down after last month’s US Employment report (on Monday following the Good Friday holiday.)

As such, it is a psychological as well as a technical recovery. In terms of the sheer technical indications, yesterday’s push-up also shifted daily MACD back to UP, and stemmed the potential for a balanced weekly MACD to turn back DOWN. And while it is not exhibited on the other US stock indices, the June S&P 500 future was forming a bit of a distorted (i.e. naturally less than reliable) Head & Shoulders Top since back on the rally up to new highs in the February.

The classical Tolerance of that topping action is the high of the “right shoulder”; and that was ostensibly last Tuesday’s 1,388.70 high (i.e. very near the 1,390 level.) While even the Negation (i.e. overrunning of the Tolerance) of a technical pattern can be reversed, it doesn’t instill a certain psychology at present. The burden of proof (here we go again) is now on the bears to push the June S&P 500 future back below 1,390-1,385 congestion to get the ‘upside escape’ Genie back in the bottle. That is more critical now because the implication of a topping pattern being Negated is that the previous trading high at the apex of the pattern was not the end of the rally.

In other words, if it continues to hold no worse than the near term lower support, the June S&P 500 future is likely headed for a new high above 1417.50 (established on April 2nd.) And that relates back to the discussion above of whether the primary government bond markets and equities can indeed continue to keep their mutual bid. On past form, the govvies can hold up very well for quite some time. Yet they tend to drop rather sharply if after the end of earnings season the equities look like they are shaking off those weak real world implications. We shall see.

EXTENDED TREND IMPLICATIONS

All of this is currently updated in the fresh set of technical projections accessible via the Current Rohr Technical Projections – Key Levels & Select Comments link near the top of the right-hand column. The bottom line is that the weak sister June Gilt future may be lagging after holding 115.00-114.50 support, but the strong sister June Bund future is still right up against its key 141.00 area while the June T-note future continues to threaten its mid 132-00 resistance as well.

Foreign exchange appears to be more of a churn than anything else, yet with the British pound as the highlight strong sister (and other than on a purely technical trend basis, that’s quite a shocker.) Crude Oil also remains a churning market in a range between 105.00 and 101.50. And while the Gold is churning as well, it still appears rather constructive after holding its latest test near (if not really quite down into) the major 1,615-1,600 support.

Thanks for your interest.

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