THE BIG LESSON, QUESTION, AND CONCLUSIONS FOR THE COMING WEEK AND BEYOND
60 Pages Of Market Diary Summarized Into A 5 Minute Read
The Prior Week’s Key Market Movers, And Implied Lessons, Questions, And Conclusions For The Coming Week And Beyond
Ignore Them At Your Own Risk
What Moved Markets Last Week: Summary
Once again, markets moved only slightly higher, so the term ‘top market mover’ is strictly relative. Nothing moved markets that much. However these were still significant for the coming week for the lessons and guidance they offer.
So let’s get started.
The Entire Market Week In a Sentence
The short version: markets continue to move mostly on stimulus hopes, with moves bounded by near term technical support and resistance because there was no new news of material importance. However, for the second time in the past months, a new US stimulus announcement failed to lift risk appetite.
The rest is strictly commentary, but useful commentary that won’t take long to read, so consider doing so.
The slightly longer version: markets rose and fell with headlines that fed rising or falling hopes for additional government stimulus to prop up asset prices. These came from Japan, and more importantly, from the US. As there was no new news, markets essentially bounced off short term technical support and resistance.
What Moved Markets Last Week: Detail
Here’s a bit more detail.
1. Technical Resistance and Support Summarized
In order to better evaluate the big fundamental market movers of this past week, and more importantly, looking beyond it to the coming weeks, we need to consider the technical context.
The short version: Referring to the bellwether S&P 500 index as our risk appetite barometer, with markets only about 10% off decade highs, markets need a good reason to keep moving higher past near term resistance levels. The past week’s chief fundamental drivers didn’t provide it. In other words, the bullish drivers were not irrelevant; they just weren’t strong enough to overcome the long-term (and thus strong) technical resistance, especially given the prevailing bearish fundamentals of deteriorating global economic and earnings data.
We’ll say more on this interplay between technical price levels and fundamental market drivers in our section on the technical picture below.
2. New Japan Stimulus
For those focused on Asian markets, this is big. Arguably expectations of new stimulus from the Bank of Japan after the coming elections there are already priced in, but such anticipation continues to be given as an excuse for rallies in Japan. With the Nikkei around 8 month highs, few expect much more upside in the near term from anticipated BoJ stimulus until after the elections and we get more concrete details.
An even bigger bullish effect would come if we had specific news of new easing from China. Last week the new Premier hinted at this but so far nothing further, though markets expect it at some point.
The most important drivers of risk asset prices last week were headlines regarding two different kinds of US stimulus.
3. Anticipation And Results Of FOMC Meeting
Anticipated new stimulus announcement at Wednesday’s quarterly FOMC statement and press conference helped support risk assets in general and the EURUSD in particular, until the results came out Wednesday afternoon EST.
What Was Expected
Markets expected the Fed to expand QE 3 monthly bond purchases (from $40 bln per month) by the same $45 bln per month that would be lost from the end of Operation Twist (OT) later this month. The change meant more overall stimulus because OT had a set time limit, whereas QE 3 has no set time limit. Thus the Fed would be buying not just $40 bln but $85 bln for the foreseeable future.
The only question was whether the Fed would clarify
- How long QE 3 might continue?
- What kinds of US debt it would be buying?
For the first days of the week, these expectations helped support markets, with the bellwether S&P 500 making its biggest move higher the day before the Wednesday FOMC statement and press conference.
On Wednesday markets got their answer to both questions.
What We Got: Welcome To QE 4
How long would QE 4 continue? Rates would remain “exceptionally low” as long as inflation does not exceed 2.5%/year and unemployment stays above 6.5%. As long as both conditions apply, QE 3 is in effect and the Fed is buying $85 bln of US debt.
It’s unclear what would happen if one of these criteria changed dramatically.
This was in line with expectations. With most major global stock indexes (our best barometer of overall risk appetite or optimism) p near decade highs, that wasn’t enough to justify further gains, and so we predictably got a ‘sell the news’ move lower following the prior days’ ‘buy the rumor move up. As the above chart shows, both were minor moves still well within the past 10 week’s trading range, and December’s tight trading range.
After a brief rise, markets sold off for the rest of the week.
The move is ominous, and may have big implications for the coming week and beyond, as we discuss below in our Conclusions And Lessons section.
4. Fiscal Cliff: The Other Big Ongoing Stimulus Event
Once the FOMC meeting was done, markets moved lower on a combination of concern about the fiscal cliff standoff. The consensus is that there will still be a deal that avoids most of the spending cuts and tax increases, and thus any serious
- drag on the US’s tentative recovery
- progress on cutting the US’s deficit
However time is running down and so naturally the risk that these do hit is rising. With little other positive news of note, markets spent the coming days surrendering their modest gains from earlier in the week.
5. Data? Just A Bit
German ZEW data was better than expected, which helped sentiment a bit in Europe, and on Friday China manufacturing data surprised to the upside, however that alone does not explain the over 4% blast higher on the Shanghai exchange
6. Technical Picture Detailed: Strong Long Established Resistance Capping Upside For Most Risk Assets
Using the S&P 500 as our overall risk appetite gauge, it’s clear that markets will need a substantial reason to forge higher.
S&P 500 WEEKLY CHART JULY 2011 – PRESENT
Source: MetaQuotes Software Corp, thesensibleguidetoforex.com,
01 dec 15 2227
Here are a few obvious observations about the bearish technical picture.
A. Resistance Is Strong Because It Includes Multiple Layers
As noted above, the main reason the assorted bullish forces failed to move markets higher is the bearish technical environment. In other words, assets are at best fully priced, if not overpriced, as indicated by the firm resistance we’ve hit.
These layers of resistance include:
1. The 1400 Price Area Is Both Old And A Psychologically Significant Big Round Number
At just over 1400, markets are less than 10% below their decade-long highs around 1550 of Q4 2007, before the subprime crisis morphed into a global sovereign debt, banking, and solvency crisis. As we’ve noted repeatedly, none of the underlying causes or problems have been resolved. Policy makers have merely bought time, at an as yet unknown future cost of far higher deficits to be reduced in what will become a global version of the mother of all fiscal cliffs for the US, EU, and Japan at minimum.
In other words, the fundamental picture is much worse than when all looked great back in 2007, yet asset prices are nearly as high, due mostly to temporary government intervention rather than genuine prospects for sustainable wealth creation that would normally be the only thing that could justify these price levels.
2. 23.6% Fibonacci Retracement Level of Recent Rally That Was Based On Stimulus Hopes
The index has yet to decisively break through and stay above this key level, formed from the post -US election rally. This rally was in essence fueled by hopes for more stimulus because:
- The winner was pro-stimulus in general and so more could be expected
- The election’s conclusion suggested that the fiscal cliff would be resolved by deferring most of the austerity measures that would counteract ongoing and new stimulus. In other words, most of the ongoing tax cuts and spending would remain.
3. The 10 week (blue) and 20 week (yellow) Exponential Moving Averages (EMAs)
- Price has cleared these, but not decisively.
- Also, the 10 week EMA looks ready to cross below the slower moving 20 week EMA, suggesting that longer term momentum for risk appetite may be reversing. That makes sense unless we can anticipate new bullish fundamentals to justify a break higher.
B. Gravestone Doji Candle Formation Suggests Current Rally Over
Markets are in an overall downtrend since mid-September. Last week formed a gravestone doji-type candle (highlighted with mouse pointer) which suggests that markets have probed higher, rejected higher prices for now, and are ready to either move sideways or retreat. Barring significant new bullish news, the tendency is to take profits and pull back to at least the 50 week EMA (red) in the 1350 area.
C. Double Bollinger Bands Confirm Loss of Momentum
Note that the index has fallen out of the Upper Bollinger Band Buy Zone. See here for details on understanding Double Bollinger Bands.
The Big Lesson
Don’t let the minor price movement we saw last week fool you into thinking the week was insignificant. In fact it had some potent lessons and warnings.
Just one, but it’s big.
QE Announcements Losing Bullish Effect
Perhaps the biggest lesson of the past week is that for the second time in 4 months, a major new US stimulus announcement has failed to catalyze a meaningful rally. Like QE 3, QE 4 produced an anticipation rally, (aka buy-the-rumor rally) and looks like it too will be followed by a selloff (sell-the-news pullback) until new materially bullish news comes along.
The Big Question
Just one, but it’s also big.
So Where’s The Upside?
With both global economic and earnings data contracting, and the debt/solvency/banking crises in the US and EU deferred by unresolved, where will that new good news come from?
If it comes at all, most likely it will be news of yet more stimulus (a combination of money printing, low rates, and increased sovereign debt, all of which may create short term gains but which at some point must be reversed for future pain in what will be the great global mother of all fiscal cliffs.
As the chart above shows, after the September 13 2012 announcement of QE 3, markets sold off for the next month after having rallied in anticipation of this announcement – a classic ‘buy the rumor sell the news move.’
That pullback continued until (guess what?) hopes for new stimulus were stoked by a combination of
- The US election conclusion (the incumbent administration is more pro-stimulus/money printing)
- Hopes that any meaningful austerity measures that would come with the impending fiscal cliff would be deferred in a new deal.
These sparked a month long rally that still leaves the bellwether S&P 500 well below its pre QE 3 announcement highs, and stuck at firm overhead resistance as described above.
However, if yet more stimulus announcements are no longer moving markets higher, and both economic data and earnings are contracting, that suggests markets are at best either due to move sideways or moderately lower to test longer term support somewhere in the range of 1250 (the starting point for the last big rally from June to September) to 1150 (the lows of the summer of 2011.
EUR Rally An Exception
The big exception to the risk asset stall out was the Euro, but that’s because the Fed is far ahead of the ECB in debasing its currency. The Fed is already well into unlimited easing, while the ECB’s rough equivalent, its OMT program, has yet to get started.
In sum, there’s nothing supporting the current decade high asset prices except the hope of yet more government support. Specifically:
- Historically low rates which will need to rise substantially just to revert to their historic mean
- Historically high debt loads, which will need to be paid down through some combination of higher taxes, higher growth, or lower government spending.
Meanwhile, the US, Japan, and the EU plan to fund the gap between their expenses and revenues with assorted forms of debt and money printing, and so threaten to undermine their currencies in the process.
Beware The Coming Mother Of All Fiscal Cliffs
At some point the support will need to be withdrawn and inflict damage on growth at that time. In other words, low rates must rise, the debt repaid (albeit likely with debased currency while they can get away with it) and we plunge off of a far bigger fiscal cliff.
Assuming there are leaders willing to inflict that pain on their watch.
That’s an interesting assumption.
Meanwhile One Thing You Must Do To Protect Yourself
Meanwhile, until that happens, we can anticipate more debt, more printing, and more currency debasement undermining attempts to build wealth.
For those who have most of their assets denominated in or linked to the USD,EUR, JPY, or other currency at risk of long term debasement, that’s a problem, and potentially a disaster.
We all need to increase our exposure to assets denominated in more responsibly managed currencies, and have some of those currencies or very liquid assets denominated in them.
The problem is that:
- Most forex guides focus on trading styles that are too risky and demanding for most people.
- Most foreign investing guides focus on the fundamentals of a given recommended asset without giving enough consideration to the currency to which they’re linked.
Our bias remains towards safe-haven assets once the risk rally decisively reverses, and towards various currency hedges as long term insurance, shorter term trades, or both. Details in the book referenced above.
DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.