Weekly Technical Analysis – “Mid Dec Buying Setup” 17th Dec13 …

Weekly Technical Analysis – “Mid Dec Buying Setup” 17th Dec13 …

Its that time of the week for the usual technical update across the major asset markets.

The Swiss team stick to their bullish theme of forecasting a likely near term bottom for the US indexes and a buying opportunity therefore. They also stick to their medium term view that a deeper Q1 2014 7 to 10% correction is a likely event.

Here the report:

UB-wklytech-17-12-13

Near term they expect the financials to make a new high in the next few weeks with the energy sector failing to score a new high. (Assuming the usual seasonal strength holds I would tend to agree with them on this sector issue. The energy vs sp500 chart is painful chart to look at for someone over weight energy. I would say however that inc dividends the annual return has been nearly double digit over the period on aggregate so I’m not complaining too much). This weakness is a theme they repeat on the European indexes. They sight the Ftse and Swiss indexes as oversold and having a trading entry point. I would add IBEX and MIB to this pair. But echoing an observation i made a few sessions ago a higher high now pre a correction seems a stretch for many European index. (The MIB intra day moving beyond her -10% level indicating an official correction had already started). For these beaten up Euro indexes to score new highs from these deep corrections seems unlikely. They are also badly under performing the US indexes now so some mean reversion seems likely on the downside and upside. Therefore they make a good trading entry in terms of ratios.

The sentiment works needs no comment. The copper issue is interesting but no levels broken here and it could still be a dead cat bounce for now, especially if we see the taper soon rather than latter. The UST is falling and has fallen, just, into the danger zone above the 2.83% yield area.  We need to watch this price action like hawks as credit and especially the UST defines prices globally. (The latest inflation data weak yet again and below consensus).

And I want to pick again a line they have repeated this week once again:

“No bull market ends with a high momentum top”.

This could be true but this isn’t the market we have right now.  My understanding of the technicals at present is that we indeed have falling momentum not rising momentum. We also see falling volume, higher margin, weaker and weaker breadth and internals, contrarian level sentiment and volatility. To add to this, the spread to many economic fundamental indicators as provided by Yardeni are at extreme divergences. Meanwhile the Fed talks taper and world wide rates rise as inflation falls. Its true earnings per share look ok on a historic basis but this is only as corporates are buying back their own shares. They are buying back rather than capex investment as the real economy and regulatory environment is so poor. They can borrow cheaply and get a better return on this capital by buying their own stock. This is yet another non sustainable enterprise and when rates rise this will be yet another knock to equity volumes that are already at multi year lows. And this is occurring as participation rates amongst consumers in the US stock market hits no multi decade lows. (Participation in housing looks very similar by the way).

You put it all together and I have to reach one conclusion. We are in a seasonal sweet spot now and only this (and fear of central bank dilution of cash) is holding these equity valuations where they are. So many different indicators are flashing amber and red here I feel I must act on my allocations. It would illogical for me not to for to ignore this evidence would render their usefulness as worthless. Unless the indicators change I am a seller into a year end bounce. I am driven by the technical and economic indicators I see all around me. I am no super bear at all. Ive been long equities from 2009 and with leverage from 2011 on the Sept lows. Its been a hell of beautiful ride but at this junction I have to shift allocations and become a net seller and de-lever. At least until the technical and economic situation changes.

To which point lets skip to Yardeni’s latest reports.

yardeni-mktindicators-16-12-13

yardeni-earnings-17-12-13

We all hopefully know how to read this rich content reports from Yardeni. They don’t need my comment.

I do want to briefly update the market breadth issues. They are weakest or rather provide the strongest sell signal in the middle and smaller cap stocks. The dow displays the strongest market breadth.  The Sp500 and Nas100 show great weakness and a conventional sell signal but the nyse composite shows a complete disaster a alarm bell sell signal.

Here the charts.

SP500

Nas100


NYSE

We might wonder the logic of this as world wide demand is weak whereas domestic US demand seems relatively stronger. Its just my assertion but, i suggest, the combination of large cap access to listed credit bond markets for cheap issuance and therefore their ability to perform large buybacks of their own stock with cheap credit is leading to out performance of the mega caps.  It is sustained by a relative improvement in their earnings per share due to these buybacks. Many NYSE stocks are not in this position to access credit markets in this way hence the relative struggle to sustain earnings growth vs the mega caps. 17 out of the dow 30 have buy back programs in 2013 underway. Cisco announced a few weeks ago that it was joining the buy back bonanza with a $15bn buy back program.  $15bn is 21/ 2 times what Cisco spent on R&D last year and it comes alongside a 5% lay off of its workforce, or 4,000 employees. Its also a usual phenomena to see revenue decline amongst US companies as earnings per share increases.  Capex to GDP declined again on the most recent data point and as a share of GDP is at multi decade lows.

And finally here on the macro front Europe continues her struggle to find a strategy that can work. The ECB is torn between the hard money requirement of Germany and a fiat monetary system that must expand money supply to survive year on year. The ECB’s hands are tied re QE and the European banking system cannot expand money supply as their balance sheets are so weak not helped by perpetual investigation and discussion of this issue by the ECB itself.

One chart here defines the problem, without ECB performing her own QE program.


Near term I hold long trading entries on cyclical stocks and indexes given the likely seasonal end year ‘window dressing’ rally. But beyond this I am in the departure lounge in respect of equity allocations. The case against holding is to great for me to ignore any longer. If price stretches further i may likely trade any ‘stretch’ with option puts and even futures given the right mix of signals. I don’t expect more than a 10% correction but given the leverage and sentiment in this market a deeper correction and ‘shock’ to the system could easily occur. (Of course central bank and policy action can extend even the most bearish of scenarios). I would also say, if the data and technicals change I’ll be very happy to re-enter this bull market.

As an additional report please find the brief UB 2014 view on the bullion markets.

UB-bullion-2014

In my considered opinion, not shared by UB and or any other major institution i should add, 2014 is likely to see the return of the bullion bull market. This recent bullion bear market has only produced a 37% correction to the gold price from her highs. The 1975 to 1976 bear market gold lost 45% of value so it may still have a little longer to run. But its worth recalling that in the following 30 months post her 75 bear market she recorded an 800% increase in value or a monthly compounding return of 7.5% as her bull market resumed. With sentiment a wash out and no major interested or forecasting a 2014 resurgent bullion bull market the stage is perfectly set now. In my view.

As this is a last weekly technical analysis, pre Xmas, I wish all non VIP members a happy holiday season.

For VIP and Forum members many new reports to follow in the next few days.

The very best to all

Rich

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Weekly Technical Analysis – “Mid Dec Buying Setup” 17th Dec13 …

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