2016/09/14 Quick Update: Equities Still a Tightrope Walk (late)
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COMMENTARY: Wednesday, September 14, 2016
Equities Still a Tightrope Walk
The US equities maintained their equilibrium into lower supports today. Yet continued weakness below the bottom of the most important mid-July through early September trading range congestion (front month 2,155) by the December contract (front month after September contract expiration tomorrow) still leaves near-term stability of markets a real ‘tightrope walk’. And if it slips below the key lower supports, the next phase is likely to be quite a bit more troubling than the ‘day at the beach’ for the talented tightrope walker in the picture. We note this for two reasons, with the first being sheer Evolutionary Trend View technical factors. The second is how that is going to be impacted by late week economic data releases on the Federal Reserve’s rate decision next Wednesday.
On latter we noted in Monday’s Commentary: So What Just Happened? that ‘Goldilocks’ got mugged by the Fed hawks. In yet another display of the Fed’s rampant ‘normalcy bias’. Since the Jackson Hole Hawk-fest the Fed’s minions have continued to beat the drum on as many as two more rate hikes this year. Hawkish members among the Fed’s minions weren’t going to let silly things like two weeks of serial weak economic data get in the way of their attempt to convince everyone that things are back to ‘normal’, and at risk strengthening much further. Monday’s post already reviewed the litany of woes that has been the US economic data since the Jackson Hole Policy Symposium.
However, into Thursday morning’s extended macro influences that will become a bit of a ‘rearview mirror’ influence. Possibly that weakness will offset any strength in the next set of US data on Thursday that is preceded by Australian Employment, the Swiss National Bank rate decisions, UK Retail Sales, Euro-zone CPI and Trade Balance, Spanish and French bond auctions, and Bank of England’s rate decision and statement only (no press conference this time.) Then it will be onto US Retail Sales, PPI, Empire (NY State) Manufacturing Index, Philadelphia Fed Index, Industrial Production and Capacity Utilization, and Business Inventories.
All of which leads into much less data on Friday, and also creates room for reassessment of the Fed’s rate intentions next week. Will the equities maintain their recent balance?
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NOTE: Back on the evening of December 8th we posted our major Extended Perspective Commentary. That reviews a broad array of factors to consider Will 2016 be 2007 Redux? For many who believe that the US economy is really strengthening and can once again lead the rest of the world to more extensive recoveries, this may seem a bit odd.
Yet there are combined factors from many areas we have been focused on since the early part of last year which are less than constructive for the global economy and equity markets. We suggest a read if you have not done so already.
We pointed out in December in the face of another likely Santa Claus Rally this was not an actionable view during the year-end equities rally. Yet it was (and remains) important background to utilize into 2016. This is much like our major late 2006 perspective on Smooth Rebalancing? …or… The Crash of ‘07? In that instance the economic factors built up, but the actual crash was deferred into 2008. It is starting to feel this one may be deferred as well.
▪ As we always want to see the proverbial ‘proof in the pudding’ in the form of the actual market response, whether the December S&P 500 future can indeed hold the key lower supports like it managed to do into the beginning of this week will be critical. In fact, Monday’s 2,100.25 trading low was right into the bottom of the lower significant support (more on that immediately below.) While there is some additional Tolerance at internal front month weekly chart congestion, any sustained slippage below 2,105-00 would likely point to a swing back to at least the low 2,000 area or even much lower levels.
The key consideration is of course the Fed psychology. Even though many among the Fed’s minions ignored the previous weak US economic data noted above (and explored at length in Monday’s post), there still seems to be a “bad news is good news” psychology in place since early this week which has assisted US equities in holding key lower support.
That was likely also due to Fed Über-Dove Lael Brainard revisiting all of the reasons for the Fed to remain more patient than the hawks would prefer in her extensive Monday monetary policy speech. (That links to our mildly marked-up version.) That was also critical as the last communication from a voting FOMC member prior to the Fed’s self-imposed ‘quiet period’ prior to next Wednesday’s major FOMC meeting. That is a full projections revision and press conference meeting.
And Ms. Brainard is not just some outlier. There are also not just other Fed governors who are not convinced that the FOMC should be raising rates next Wednesday, especially in light of recent serial weak US data. Consider the indications reviewed in Monday’s post on the much greater importance of structural reforms expressed by Waste Management CEO David Steiner, who was a guest host on last Friday morning’s CNBC Squawk Box. As the head of a firm who needs to deal with regulations all of the time who also has solid real economy views on what drives investment, his comments in just one of the clips from his sojourn as guest host are worth viewing.
Monday’s post also highlighted last Saturday’s Financial Times’ lead FT Weekend editorial that was also very instructive on The mistake the Federal Reserve should avoid. (This also links to our mildly marked-up version.)
With any additional ad hoc Federal Reserve communication now on hold until after next Wednesday afternoon, the bottom line for late this week would seem to be the US and global economic data. As we do not expect any surprises from the already dovish Swiss National Bank and Bank of England, it likely boils down to the US economic data and market response.
And in the current “bad news is good news” equities psychology, we suspect somewhat weaker than expected indication on important indications like US Retail Sales and Empire Manufacturing (reinforcing the weaker aspects of the recent Employment report) will more likely allow the US equities to maintain their balance on the tightrope. Of course any raft of weaker data will also encourage the recent holding action in the govvies as well, and vice versa. We shall see.
EQUITIES
▪ September S&P 500 future resistance was the interim 2,185.00 congestion from mid-late August that was mildly exceeded last Thursday morning before the ECB disappointment. With the market below the lower weekly Oscillator threshold that is up to 2,175-80 late last week and the key lower 2,155 congestion as well, next support was not until the early August 2,141.50 trading low (also weekly MA-13.) Yet the impromptu announcement of Ms. Brainard’s speech last Friday led to that level being violated as well.
Back in early August that 2,141.50 trading low meant it never quite reached the more prominent 2,120 pre-Brexit break trading high, and especially the 2,105-00 more major recent and historic congestion area. As noted above, the December S&P 500 future that has been trading at a $7 discount to the September contract (expiring Thursday) did indeed trade all the way down into the bottom of that more major lower support.
That was in overnight electronic trading Monday morning, and it was back up into and above the 2,120 area on the Regular Trading Hours (RTH) opening. Even though it rallied all the way back up into the 2,155 area by Monday’s Close, it then failed badly on Tuesday by ranging all the way somewhat below 2,120 once again. And that is what makes the past couple of sessions’ stabilization so important on the overall Evolutionary Trend View.
Is the current holding action just a pause in what will be a broader break, or is it the near term stabilization that speaks of the pernicious Fed ‘normalcy bias’ being reversed once again due to all of the serial weak data. Thursday’s economic releases and market response are likely to be a telling indication, and the US equities will likely continue to set the tone for the other equities.
GOVVIES
▪ The September T-note future had been swinging around the same sort of technical levels as the June contract of late. That alone is very interesting, because the appetite for locked in yields even at these low levels indicates an overall flight to safety. In the case of the June expiration the typical half-point to full-point discount in the second month September future near expiration didn’t exist. In fact, the September contract was trading at a slight premium to the June contract prior to the latter’s expiration.
That is the sort very atypical of ‘flight to safety’ premium that continues to keep yields low in spite of the current more typical discounts in the second months.
Its weakness below the 132-00 area has only progressed to the interim 131-00 support. That shows quite a bit of resilience in light of the extreme weakness of the equities; it is probably also driven by that equities weakness. While the September contract does not expire until Wednesday the 21st (that’s right, FOMC announcement day), it is important to note the full point discount in the December contract.
Even so, at least so far that only leaves the December contract testing the more prominent 130-00/129-16 support. Pending whether further US and global economic data remains as weak as recent indication, it is likely the govvies (Europe as well) will be alright. While the premium priced European govvies have slipped more aggressively, September Gilt future stalling into next weekly Oscillator resistance in the 132.00 area has only left it back into the 129.50-130.00 range that it held through all of July into early August. Next lower support is not until the mid-low 128.00 area.
And the December Bund future discount that has seen it significantly below the premium 167.50-168.50 (tested by the September contract prior to its expiration on Thursday) has slipped back below the 164.50 weekly continuation congestion support. Yet the more prominent weekly continuation congestion is down into the 163.50-.00 range the market is now approaching. The next lower contract support is back in the low 162.00 area, with the more major continuation support into the 161.50 and 160.50 areas.
The weaker the economic data and the weaker the equities, the more likely it is that the govvies are still at least alright on the selloff. And we also point out the historic tendency we have revisited on many occasions: As long as the second month taking over as front month holds key lower trend support, the overall trend can remain up.
FOREIGN EXCHANGE
▪ The same sort of anomalies between the equities and govvies also goes for the foreign exchange, where the US Dollar Index is only back up into the top of the interim over-under .9500-50 congestion after being temporarily below the .9460 UP Break once again. After being the more active area after Jackson Hole, this looks a bit more subdued compared to the equities and govvies over the past week or so since recovering back up into that .9550-00 range.
We suspect this is also a response to the Fed’s ‘normalcy bias’ in the face of serial weak economic data in the US for the past couple of weeks. As such, we refer back to the Market Observations in the lower section of Wednesday morning’s Commentary Goldie’s Back! post. In spite of the recent modest recovery of the US dollar, not much has changed in this area.
And the Evolutionary Trend View remains much the same as in Monday’s Commentary: So What Just Happened? post in spite of the recent short term price activity.
Thanks for your interest.
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