CAPITAL MARKET COMMENTARY
WORLD EQUITY MARKETS ARE ON THE RISE THIS MORNING:
In Europe – the bourses are following NY’s Friday lead by moving sharply higher. The FTSE, DAX and CAC are all higher by +0.3%, +1.1% and .8% respectively. Asia is ‘flat’; Japan and Hong Kong were lower by a few points, whereas S. Korea was higher by nearly +1.0%. Bonds are flat; gold is lower – and the base metals are ‘flat’ as well. In the US – the S&P 500 futures are showing a gain of over 3 points; this points to a higher open and an extension to Friday’s rally.
We will reiterate our fundamental bearishness given the slowing economy and a host of other structural metrics; however, from a trading perspective – we are turning modestly bullish given Friday’s inability of hold the decline and its ability to show wave after wave of sharp short covering in front of tomorrow’s FOMC meeting and rate announcement. The question is whether this is the beginning of a larger move higher or simply a short covering rally that will ‘end’ after the FOMC meeting.
We certainly wish we knew; but the balance of factors are weighted towards a larger rally after Friday’s decline in the Nasdaqs and Russell 2000 broke to new lows and reversed in or around our target ranges. This is bullish, which is further magnified given the important 275-day moving average has held once again with the longer-term 40-day BLI moving close to oversold levels. Also, the trade has gotten quite short on this recent decline, which in the past has been prelude to sharp short covering rallies. Therefore, the risk-reward dynamic is quite good for a sustainable rally predicated on Friday’s reversal – hence we are moving to an aggressive long position as a result. However, we don’t believe the highs will be broken, but they could certainly be tested given the oversized bearish sentiment on the street today.
TODAY’S ECONOMIC REPORTS ARE PRELUDE TO TOMORROW’S FOMC MEETING:
Today’s important report is the April ISM manufacturing survey. It is expected to print 55.0, which is the same as the prior month’s number. This should be a relatively ‘non event’ unless the number prints below 50.0…which is the ‘line-in-the-sand’ for expansion and contraction. Outside of this – the recent softness in the economic reports won’t deter the Fed from moving to raise interest rates for far longer than anyone expects at this point. In general, from average trough to peak time frame for fed funds is 19 months; we are but only 12 months into that cycle. Therefore, the FOMC meeting will result in a 25 basis point rise in the fed funds rate to 3.00%; with no material change in the accompanying statement.
ETF : CHART COMMENTS
OUTLOOK: Friday’s rally gave us no comfort on the short side; and it would appear prices are ready to move higher in earnest. We have been whipsawed; but this is preferable to remaining bearish for far too long given the changing risk-reward dynamics.
THE NUMBER OF S&P 1500 STOCKS ABOVE THEIR:
10-dma – 41.2%...up 12.0% [Minimum oversold conditions were found just last Tuesday; we are still monitoring for an emerging bottom formation]
200-dma – 48.2...up 2.5%
POSITIVES:
1) INTERMEDIATE-TERM BREADTH DOESN’T SUPPORT A MAJOR TOP THESIS JUST YET: The advance/decline line for SP 500 operating companies remains in a correction, but generally we find several months of deterioration before a larger high is formed. If this holds true...then we are wrong in our assessment a major high has formed and must look towards a ‘summer high’.
2) BEARISH SENTIMENT IS QUITE HIGH: From a contrarian’s point-of-view – this remains a distinct positive as ‘selling begat more selling’ for the lone reason prices were moving lower. However, the rally certainly hasn’t engendered any very positive signals yet.
NEGATIVES:
1) MAJOR SUPPORT LEVELS WERE BROKEN; MAJOR TOPPING PATTERNS WERE FORMED: The rally leaders consisting of the Nasdaqs and Small Caps in particular are showing quite a bit of weakness. When the leaders falter...then all falter; which suggests this rally is a ‘countertrend attempt’ that will fail sooner rather than later. Yesterday’s S&P 500 decline below the 200-dma solidifies the trend lower in our mind here.
2) OUR BLI INDICATORS ARE STARTING TO ‘ROLL OVER’ FROM NEGATIVE OVERSOLD NUMBERS: This can be very bearish; but also lends itself to lots of ‘whipsaw’ as it is generally prelude to a larger rally...but from lower levels.
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About Richard Rhodes
