Many commentators are asking whether this market is showing real signs of exhaustion, suggesting that it is time to get out, go to cash, and wait for a serious correction or collapse to jump back in.
To try to answer this question let us look at the situation from a more distant perspective than the standard one. Accordingly, I am going to adopt a 6 year view using the following charts set out below: 1. the Dow Transports, 2. the Dow Industrials, 3. the S&P 500, 4. the NASDAQ 100, 5. the Russell 2000 (weekly chart), the Russell 2000 (daily chart), 7. the NYSE A/D Line and 8. the index of the percentage of stocks above their 200 DMA.
Observations:
The bull market that commenced in March 2009 shows no sign of abating. On the Dow Transports and the Dow Industrials we see higher highs and higher lows and both indices are congruent.
This strength is confirmed by the S&P 500 and the NASDAQ 100 as both are reaching ever higher highs from ever higher lows.
The NYSE A/D Line shows no sign whatsoever of technical stress. If market breadth was seriously weakening we would begin to see compression of the 20, 50, 100 or 200 Daily Moving Average lines. There is no evidence of that happening at the moment. Therefore the 2009 bull trend is in place and firm.
However, there is some indication that the underlying economy may be weakening. The canary in the coal mine is the Russell 2000. Small cap stocks are far more sensitive to economic deterioration than large caps. Looking to the Russell 2000 daily chart we can see that the 50 DMA has crossed the 100 DMA and prices are struggling around the 200 DMA. Over the last two months the 50 DMA line and the 100 DMA line became points of price resistance instead of points of price support. Should near future price action experience the same resistance at the 200 DMA, this index will have entered a bear trend and that would be a cause for concern.
When we look at Chart 8; “The % of stocks above the 200 DMA”, we see more signs of deterioration. This market breadth indicator is showing us that fewer stocks are breaking above this significant DMA. Thus the market is not getting stronger; it is in fact getting weaker, which is another cause for pause, but not undue worry.
On balance, filtering all the information from the charts below, I believe the bull market is still intact. Sure, there are early signals indicating exhaustion, but there has been no serious technical damage in evidence to indicate near term price capitulation. On the contrary, should the European weakness discussed in the news items below become more pronounced it is possible that American GDP numbers going forward will weaken. However, this news is a double edged sword. Should Janet Yellen react to negative European growth data by slowing QE tapering the market could explode into the latter stages of a hyperbolic bull. This means to me that there is as much risk being out of the market as being in. Thus, I see no easy choices for investors and money managers. The existing “wall of worry” will continue for some time longer.
Chart 1. Dow Transports: Weekly
Chart 2.Dow Industrials: Weekly
Chart 3. S&P 500: Weekly
Chart 4. NASDAQ: Weekly
Chart 5. Russell 2000 Small Cap: Weekly
Chart 6. Russell 2000 Small Cap: Daily
Chart 7. NYSE A/D Line: Weekly
Chart 8. % Stocks Above 200 DMA: Weekly
Spiraling Euroland Crisis:
I have not written with regard to the EU for a long time. This is not because her problems have abated but because they have become so pervasive that it is difficult to cover them all. To give readers a feel of what is unfolding I have quoted below 4 short excerpts from blogs and the Irish Times to give a sense of what is actually developing.
The recent lackluster growth figures for the Euro-wide area will have serious political ramifications given that the new European Parliament is so divided. It is my opinion that as the crisis deepens it could seriously affect the American recovery and could possibly convince Janet Yellen to consider putting on hold her plans to phase out Quantitative Easing. Such action would have a major effect on all markets.
1. Economic data puts ECB into unknown:
The Irish Times, Dublin, Ireland, 5th. June 2014.
"Eurostat confirmed that growth was an anemic 0.2 per cent in the first quarter.
Mario Draghi, president of the European Central Bank (ECB), will have been given pause by recent data.
Eurostat yesterday confirmed that growth across the block was an anemic 0.2 per cent in the first quarter – just half the relatively unchallenging 0.4 per cent analysts had expected. Year on year, the growth came to just 0.9 per cent.
And what growth there was stemmed mainly from Germany, with a little help from Ireland’s recovering economy. France stagnated and, in Italy, the Netherlands, Finland and Portugal, economic output fell.
Even in Germany, which recorded growth of 0.8 per cent in the first three months of the year, economists expect the pace to slow over coming months.
Separate figures for industrial producer prices gave no succor either. Seen as a proxy for consumer price inflation, prices at factory gates in the euro zone fell again in April, by 0.1 per cent, the fourth successive retrenchment and a 1.2 per cent decline from this time last year. Of the five largest economies in the euro zone – Germany, France, Italy, Spain and the Netherlands – only the Spanish saw any increase in prices.
Actual inflation figures have been no better, with Eurostat data on Tuesday showing the annual rate dipping to 0.5 per cent from 0.7 per cent a month earlier. At a quarter of the ECB target rate of just under 2 per cent, the inflation figure is well within the danger zone.
Meanwhile unemployment remains stubbornly high.
Various ECB figures have over the past month stressed their determination not to be complacent about the risks of a protracted period of low inflation. Faced with this week’s wave of negative data, and having used most of the conventional policy levers, today’s meeting seems certain to signal a move by the bank into the realm of the unknown and possibly into the arena of negative interest rates."
2. A divided parliament following May 23rd elections:
Euro News: “It has been a night of seismic shocks for Europe as the election counts came in from all over the EU. One minor tremor that surprised many was that voter turnout was up by 0.1% defying projections of continued voter apathy.
But, the exit polls indicated that Eurosceptics were scooping up the majority of the votes in some of the biggest member states, yet the head of the largest pro-European party in parliament (EPP), still saw it as a reason for celebration.
“I would like to tell you. We’ve stopped the trend of lowering turnout. This was one of our main goals, in terms of democracy. Obviously, it’s not perfect, sure, we’re not satisfied, but at least it’s the first time we’ve stopped the tide of absenteeism,” said Joseph Daul speaking at the parliament in Brussels.
In France the far-right National Front swept away the two mainstream parties with 25% of the vote, standing on a platform against the EU, the euro, and immigration, whipping up feelings of nationalism in her rhetoric.
“Our people demand a single politics, the politics of French people for French people, with French people,” declared Marine Le Pen, continuing, “They no longer want to be directed externally, be submitted to laws they have not voted for, nor obey Commissioners who are not subjected to the legitimacy of universal suffrage”.
The question remains whether the Eurosceptic politicians will be able to form a Euro Tea Party group which could disrupt the Brussels’ assembly, but impact may be felt closer to home.
“We’re going to get a good number of Eurosceptics elected to the European parliament. Whether that makes big difference in European politics, remains to be seen,” explained Nigel Farage leader of the UK Independence party. “But it’s going to make a very big difference in domestic politics… Up until now European integration, whether one liked it or not, always seemed to be inevitable. Well, this inevitability will end with these results tonight,” he added.
Another anti-EU party swept the board in Greece. Alexis Tsipras Syriza parties took 26% of the vote. Elsewhere Eurosceptics in Denmark also clinched victory, sounding a wakeup call for pro-Europeans when the dust settles on election night.”
3. The Ukrainian crisis, an EU one:
STRATFOR, From Hungary, 21st. May 2014.
“The Ukrainian crisis can only be understood in terms of the failure of the European Union. Germany is doing well, but it isn't particularly willing to take risks. The rest of northern Europe has experienced significant unemployment, but it is Mediterranean Europe that has been devastated by unemployment. The European financial crisis has morphed into the European social crisis, and that social crisis has political consequences.
The middle class, and those who thought they would rise to the middle class, have been most affected. The contrast between the euphoric promises of the European Union and the more meager realities has created movements that are challenging not only membership in the European Union but also the principle of the bloc: a shared fate in which a European identity transcends other loyalties and carries with it the benefits of peace and prosperity. If that prosperity is a myth, and if it is every nation for itself, then parties emerge extolling nationalism. Nationalism in a continent of vast disparities carries with it deep mistrust. Thus the principle of open borders, the idea that everyone can work anywhere, and above all, the idea that the nation is not meaningful is challenged. The deeper the crisis, the deeper and more legitimate the fear.
Compound this with the re-emergence of a Russian threat to the east, and everyone on Ukraine's border begins asking who is coming to help them. The fragmentation of Europe nationally and socially weakens Europe to the point of irrelevance. This is where the failure of the European Union and the hollowing out of NATO become important. Europe has failed economically. If it also fails militarily, then what does it all matter? Europe is back where it started.”
4. ‘They are stealing everything, even our homes’:
By Afrodity Giannakis, from Thessaloniki, Greece. 21st. May 2014
“I wish I could leave Greece. I can’t go on living here. I work very long hours and live more frugally than ever, but I still can’t pay the bills, the income tax or the other taxes like the property poll tax. My tax debt keeps building up. I’ll end up losing my home. They are stealing our homes and they are not communists. And people are getting sadder and madder every day. I can’t go on like this.”
This was the response I got when I greeted a stall holder at an open-air market in my area. Due to my own extremely difficult working and commuting conditions, I hadn’t seen him in months. His anger and despair were much stronger than before, as is the case with most ordinary people in Greece.
My friend’s allusion to the communists concerns a decades-long anti-communist argument used by the power elites. The argument went that if the communists came to power, they would confiscate people’s homes. It was recently used by far-right health minister Adonis Georgiadis.
In fact, small real-estate property is being confiscated under capitalism. People are losing their homes to the banks for failing to meet mortgage payments, or to the taxation department for accumulated tax debts.
Home confiscations have been facilitated by a recent law enabling seizure of salaries, pensions, bank savings and property for even small debts to the state. There are specified debt amounts that incur property seizure or jailing. They vary according to the recipient (whether the money is owed to the taxation department, a public insurance fund etc.). The different amounts are often changed by the government. The latest ministerial circular (issued on April 15, 2014) concerning tax debts sets the line at 1500 euros.
The number of confiscated homes has risen in recent years. A big wave of new house seizures is expected soon. The finance ministry has made an agreement with the “troika” (the European Union, European Central Bank and the International Monetary Fund) to set the opening bid at auctions at 30% of the houses’ real values.
Financial hardship, combined with recent law changes, has led to a dramatic rise in debt-related jailings. People are kept in barbaric and unconstitutional prison conditions.”
Charts courtesy of Worden Bros.
© Christopher M. Quigley 5th. June 2014.
