Home > Uncategorized > 2012/10/18: Weekly Perspective into Equities signaled changing dynamic

2012/10/18: Weekly Perspective into Equities signaled changing dynamic

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

The weekly Report & Event Summary Perspective is available through the link in the right hand column. The Technical Projections and Select Comments from last week are also available and still relevant… with the notable exception of the critical equities decision explored in the General Market Observations and EXTENDED TREND IMPLICATIONS below.

This is one of those weeks that saw equities benefit from the combined influence of the now well-established central-bank support along with somewhat better data. As it typically takes a couple of quarters for the central-bank actions to impact the various economies, it leads one to wonder whether the central bank actions were really all that necessary. However, in this case we must allow that the anticipation of worse things to come is enough of a psychological drag to justify at least some of the central-bank largesse. What is most interesting is not that the central bank and supra-national actions have created a ‘risk on’ psychology, but more so how little is being done about the underlying problems which caused the central banks to feel their massive involvement was necessary in the first place.

And those are apparent both in Europe and the US…  

…and in Europe it is all about the potential for a disorderly Greek bankruptcy if they do not get funds to cover their next round of debt servicing. Which is why the message out of the IMF and World Bank Group meetings over the weekend on more forbearance for Greece was so important to the very friendly equities action from Monday’s opening. In the event, the economic data has actually been a bit better than expected this week. Yet any near-term negatives will also likely be trumped by the ‘risk on’ psychology of ‘Buzz Lightyear’ Bernanke’s QE-Infinity program, along with those friendly accommodation suggestions from the IMF’s Madame Lagarde and even Chancellor Merkel (that recent convert to a kinder, gentler approach to fiscal reform.)

Of course there is also that same contentious issue regarding Spain not requesting an official bailout right now to trigger the European Stability Mechanism (ESM) purchase of their bonds. Yet, in the last week or so that has become more of a sideshow as an unspoken uneasy truce has taken place between them and the German leadership.

And the rationale seems to go something like this: The European Central Bank (ECB) is allowed to implement its Outright Monetary Transactions (OMT) program on even the commitment of a country to request a bailout if necessary. As such, the activation of ESM already provides the ECB with a major amount of firing power with which to force down Spanish yields if necessary. While that would ostensibly be only in the event of any disruption of the ‘monetary policy transmission mechanism’, the decision is at the sole discretion of the ECB.

And the proof in the pudding for typically anticipatory markets is the current significant slide in long-term Spanish yields. All of which amounts to a much better liquidity Band-Aid on the longer-term Spanish solvency problem. So with backing in place that would prevent a current yield spike disruption to Spain’s reform plans, it is content to not ask for the bailout; in Germany is certainly more than happy to not need to fund it. Interesting that as far away as Europe there should be such a wonderful example of a Mexican Standoff. And that seems to be enough to encourage confidence, and the ‘risk on’ trade for now.

US Fiscal Cliff

What should be of even more concern for markets is the looming US Fiscal Cliff. The automatic sequester of funds that will occur on January 1st if there is no significant compromise on lowering the US federal deficit is indeed pretty scary. The major cuts that will occur in both the social spending and defense budgets will undoubtedly have an immediate impact on a US economy still gradually gaining only modest upside momentum.

What is scarier still is that both sides are ignoring it “until after the election.” Is it lost on anyone that we have had two presidential and one vice presidential debate with no mention of it whatsoever? As we have noted on more than a few occasions, there is no basis to think any compromise will take place after such a hard-fought and highly contentious election. Unless one party controls both the White House and both houses of Congress, any chance for rapid action remains pretty slim.

And there are very many fewer voices expressing the opinion, “Failure is not an option.” At least they learned their lesson during the summer of 2011 run up into the end of July deadline where they could not believe that compromise had not been achieved on raising the US debt ceiling. What we had already surmised back then, and what the rest of the world learned, is just what is apparent in the current presidential race: there are two antithetical philosophies fighting for the soul of American policy. While there are unspoken similarities due to existing law and custom, one is definitively more ‘statist’ and the other is more so ‘free market’. That leaves significantly insufficient latitude for compromise in so many key areas that must be resolved avoid the automatic spending cuts and tax increases at the beginning of 2013.

And the statist view of the current administration has created what we consider an unhealthy economic interference of Taxulationism1over the past several years. While some of it may only be proposed, the anticipation of higher taxes along with more aggressive regulatory enforcement (which has already been the case in the environmental area) and what is now a more than modest bit of protectionism (note the recent Chinese company US wind farm project cancellation) just creates disincentives for business invest and hire in the US. Many will gripe if the rich do indeed get richer, which they (relatively) have already in the current economy through the weakening of middle class employment and incomes. However, unless ‘the rich’ are given greater stability in the tax and regulatory regime the amounts to incentives to invest, this will likely remain a very substandard US economic recovery and jobs market.

But in spite of all that, the markets have decided that the current massive round of central bank liquidity expansion along with the mitigation of the potential for an immediate crisis in Europe is grounds to chase yields. And what we also know right now is that folks who are chasing returns in a zero interest rate policy (ZIRP) environment are not going to worry about piddling things like the US Fiscal Cliff or the fact that Europe’s overall insolvency will remain a problem for the next several years across the cycle.

1Taxulationism © 2010 Alan Rohrbach & Jack Bouroudjian. All international rights reserved unless explicitly waived

Definition: The combined impact of increased taxation, regulation and protectionism exercised to a negative degree as official government policy.

General Market Observations

There has been more than a bit of improvement in equities from the top of this week. That is based on decent economic data and positive NGO (Non-Governmental Organization) influences after December S&P 500 future violation of the 1,424.50 late-September previous reaction low on Friday’s Close. It was back above that level early Monday morning, also pushing above Friday’s 1,430 DOWN Break below the intermediate-term daily up channel (from the significant 1,253 June selloff low.)

What was really critical for the equities was Tuesday’s Close back above the Tolerance of that DOWN Break at last Thursday’s 1,439 high. That represented a Negation of the DOWN Break, as the bears let a window of opportunity to keep the market under pressure close, and that has typically led to the next upside extension which we saw this week overall.

Not so surprisingly that rally still ran into trouble temporarily near the recent highs in the mid-1,460s. And it actually sagged back around the area of the previously Negated 1,451 UP Break on today’s Close. Slippage back below it on tomorrow’s (Friday) Close may signal the sort of short-term trend reversal that could bring a retest of the 1,430 area. That actually has kind of a broad berth, anywhere from filling the gap back down to Monday’s 1,435.50 Close to as low as a retest of the late-September 1,424.50 reaction low (which can also be considered the DOWN Break from a loose Double Top.)

However, that is a bit of hairsplitting in the short term. The real point is that the inability to maintain last Friday’s DOWN Break (whether weekly channel or Double Top) for even one day means the bears missed a chance to keep the down trend going. And that means the 1,430 area (give or take five dollars) will now likely act as excellent support on at least any initial pullback for a move back up to a minimum of somewhere near the recent highs.

What transpires after that is more problematic based on the US general election results and other factors. But whether the market pushes up for an extension to the upper-1,400 area or stalls again at no better than the 1,466-1,475 recent contract and continuation highs, that next test of the 1,430 area likely holds as long as the Fed, ECB, European governments and NGOs all maintain their accommodative stances in the near-term.


The implications for the other asset classes have all been included in the Concise Market View in the Weekly Summary Perspective. The obvious intermarket effect of the equities strength has been the weakness in the primary government bonds (especially Europe) and the US Dollar Index. However, the weakness of the govvies seemed to have run its course as the equities topped today. Note that the lower supports were vigorously tested and held in the December T-note future in the 132-00 area, weak sister December Gilt future major support around the 118.50-.25 major June low, and only marginally more resilient December Bund future down in the 140.00-139.60 range.

The question now becomes how high they might bounce on any equities selloff to retest that lower support? Rather than try and guess which violated support might be resistance, we suggest watching closely to see just how high they actually get on the December S&P 500 future swing back down to the 1435-25 range. The obvious implication will be the less strength in the govvies can show on an equities dip to solid support, the more so we might need to presume that the govvies are entering a more aggressively bearish phase. So for now it will pay to wait and watch rather than make any assumptions about which govvies resistance level will restrain the next rally.

The same goes for the strength in the euro on EUR/USD back above 1.2950-1.3000, and US Dollar Index failure from .8000 on the current round of December S&P 500 strength. While that had been less responsive to equities swings over the past several weeks, the fact that the strength is coming out of the becalmed state in Europe is very important. Here as well it will pay to observe just how far back toward or into those key areas the various currencies progress on any downside reaction in equities. The full discussion of the other currencies against the US dollar is included in the Weekly Summary Perspective.

Thanks for your interest.

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