Its been a few weeks since the last update and the market continues to move higher after finding a double bottom on February 11th. However, there are points of resistance on the chart ahead as seen in the chart below as we move to test both the 200 day moving average (blue line) and trend line resistance (white lines) in the coming sessions. These barriers converge around $200 (purple horizontal line) on the S&P 500 ETF (SPY). This price point on the chart is significant and will provide further confirmation of a downtrend if the bearish technical pattern discussed next takes place.
Technical Pattern Alert: Gartley Pattern
As you can see from the pattern on the right side of the previous chart, you can make out what looks to be the letter “W” starting to form since early January. Believe it or not, this is a pattern in technical analysis called a “Gartley Pattern” named after H.M. Hartley in 1935. A cleaner version of this pattern is seen below and affectionately known as a derivative of a Gartley Pattern called a “Bearish Bat”. In the pattern below, if you assume point “D” is equivalent to $200 (or a little higher) on the SPY ETF from the previous chart, you can see how the current uptrend may be in jeopardy.
I don’t expect stock markets to roll over after tapping $200 on the SPY ETF but there is significant resistance at this price point. Right now, the odds favor not being in the stock market until further notice.
What Could Change the Chart?
Despite the negative technical picture, central banks could intervene and push stocks higher if additional stimulus measures are undertaken. My opinion is that any additional measures by central banks will have diminishing benefits to global equity markets and will cause more harm than good in the long-run. So what is on the central banking calendar for March?
- European Central Bank (ECB): 3/10
- Bank of Japan (BOJ): 3/15
- Federal Reserve (FOMC): 3/16
Each are regularly scheduled meetings which could provide the fuel to propel markets higher. Oh, and let’s not forget the monthly options expiration (OPEX) on 3/18 which has acted as a magnet for markets to move higher for months.
Up or Down? What Next?
Confused? You are not alone. I like to look at the long term charts as a reminder of where we are in the cycle to filter out all the noise generated from week to week (from northmantrader.com):
This chart highlights a rounded top just like we saw in 2007-2008 (see left). This means staying liquid and nimble is the best course of action until this technical pattern is resolved.
What Looks Good?
Below is an 8 Yr Chart of the Utility ETF, XLU. The chart shows the sector is within its multi-year trend lines (in white) with good volume. In this chart, each bar is one month of price action (see below):
In this low interest rate environment, utilities are yielding an attractive 4%+ when 10 Yr treasury bonds yield 1.76%. I have most accounts invested in this sector right now.
Enough Charts, Already….
A few highlights and fun facts from these past few weeks…
- LinKedIn (LNKD) stock was nearly cut in half after their earnings announcement where management guided the market to a weaker outlook. Further evidence that growth stocks are under tremendous pressure and subject to large drawdowns.
- The energy sector continues to show its weakness. Conoco Phillips (COP) slashed its dividend 66% while Diamond Offshore Drillers (DO) AND Anadarko Petroleum (APC) both eliminated their dividends entirely. A sure sign of capital preservation for the energy sector. I expect more of this behavior as long as the price of oil remains below $50.
- Diversified mining companies Rio Tinto (RIO) and BHP Billiton (BHP) also abandon their dividend policy of progressive payouts to their shareholders. The last time BHP cut their dividend was in 1988.
- The total value of all the world’s oil reserves has fallen over $100 Trillion in value over the last 18 months. That’s oil in the ground, not drilled. That stings more than the housing crisis by a long-shot.
- There are $4 Trillion in sovereign wealth funds created by the petrodollar and oil today. These funds hold vast amounts of stocks and bonds that may be sold to meet the growing deficits of countries that rely on the price of oil to fund their governments. Growing pressure on global stock markets?
- Money continues to flow into utilities, telecom and consumer staple stocks. These are considered defensive allocations within the stock market.
- Credit default swaps and credit spreads continue to move higher signaling a weakening of corporate credits in the bond markets. U.S. investment grade credit risk spreads have spiked to 5Yr highs (+124 area).
- One of the largest hedge funds in the world, Third Point Capital, discloses $4.5B in single name shorts in stocks.
- Both reported and operating EPS for the S&P 500 reached an all-time high in third-quarter of 2014. Earnings then steadily declined by 14% and 9%, respectively, in the 12 months ending third-quarter 2015. Over the past 25 years, drops of this magnitude only occurred in 1991, 2001–2002, and 2008–2009; each drop roughly coincided with double-digit price declines in the U.S. equity market (David Stockman – Contra Corner).
- There are $12.3 Trillion of asset purchased by global central banks in the past 8 years.
- $8.3 Trillion of global government debt is currently yielding 0% or less! The Swiss 2 YR government bond is the lowest yielding at -0.92%.
- 82% of the gains in the S&P 500 since 2009 have been during times of Quantitative Easing. The Federal Reserve ended this program in Q4 of 2014.
- From The Financial Times: The value of goods that crossed international borders last year fell 13.8% in dollar terms — the first contraction since 2009 according to the Netherlands Bureau of Economic Policy Analysis’s World Trade Monitor. Much of the slump was due to a slowdown in China and other emerging economies. The data represents the first snapshot of global trade for 2015. But the figures also come amid growing concerns that 2016 is already shaping up to be more fraught with dangers for the global economy than previously expected.
- From The Financial Times: Brazil, is now experiencing its worst recession in more than a century as imports from China have collapsed. January exports from China to Brazil fell 60% compared to January of 2015 according to Maersk Line, the world’s largest shipping company.
The End is Near…..(for this edition, anyway)….
I was reviewing several charts from across the globe this weekend and I noticed that the following countries all have bear markets in their stock indexes: Italy, Germany, London, South Korea, Indonesia, Spain, Hong Kong, France, Brazil, Greece, Australia, Japan, Russia, Switzerland, China, Singapore and the United States.
In the next edition I will take a closer look at gold, silver and gold mining stocks which may be the next big opportunity if the US dollar weakens. Gold has been in a down-cycle since 2011 and is starting to make a turn for the better.
Economic data this week includes the monthly payrolls report which should show us how the job picture is holding up in this environment. Other economic data of note are the Chicago PMI, ISM services, durable goods orders and the unemployment rate.
