WORLD EQUITIES ARE ON BALANCE…HIGHER THIS MORNING:
In Europe – all the major bourses are higher, with Germany leading the way given Chancellor Gerhard Schroeder will call for every elections within the year. Most believe his poor performance in office will lead to a more ‘business favorable’ government, which has the DAX up over +1.0%. The UK and France too are higher, but only marginally so. In Asia – Japan tacked on over +1.0%, whereas the technology laden S. Korean KOSPI lost ground.
Turning to other asset classes, bond yields are rising very modestly, the US dollar is ‘mixed’ but gaining strength off its early morning lows. Gold prices are ‘unchanged’; the base metals are ‘mixed’; and crude oil is lower by 43 cents. Returning to the USD for just a moment; we noted Friday that we had been USD bulls and that we needed our conviction ‘reaffirmed’ by a breakout above its 70-week moving average per the US Dollar index (DXY). And on Friday, this certainly materialized and thus higher USD prices are forthcoming…possibly quite sharply. We are of the opinion that a rising USD is negative for stocks in the longer-term, but a slight positive in the short-term. The effects of a rising USD coupled with changes in the way options are accounted for will put earnings estimates lower in the coming months. Be prepared; it isn’t today’s business, but it is certainly an issue worth monitoring given the ‘best of all possible worlds’ is being discounted in a world of declining liquidity.
SIGNS OF HOUSING FROTH DOESN’T MEAN A ‘BUBBLE’ SAYS FED CHAIRMAN GREENSPAN:
His comments before the Economic Club of New York were by far the strongest to date by the Fed Chairman: “There are a number of things, which I think suggest at a minimum, there is a little froth is this market, [however], we don’t perceive there is a national bubble, but it’s hard not to see that there are a lot of local bubbles.” On the issue of the current level of housing prices, Mr. Greenspan said, “We don’t perceive of it as a serious macroeconomic issue.”. On housing prices, he noted that prices don’t necessarily have to fall.
And to this we disagree in majority given we have lived through periods of excess speculation in the housing market in the ‘oil patch’ of Houston back in the 1980’s where housing prices did fall and created havoc throughout the Houston economy for many many years. However, we do note that Houston wasn’t as diversified an economy as it is now, and thus ‘shocks’ to the system were somewhat larger. However, we would argue housing has become a much larger driver in the US economy than many perceive…and thus the fallout out from housing prices simply not rising would put a large damper upon consumer spending and manufacturing more so than we are currently witnessing. But this isn’t today’s business; it is simply an issue that will resolve itself in time. Will housing go higher – probably, but it fall harder than many expect - probably…the circumstance surrounding it we don’t know. We do know however that the risk-reward of single-family housing is skewed towards the risk end of the spectrum.
ETF : CHART COMMENTS OUTLOOK:
We remain long-term fundamentally and technically bearish; however, the overall technical market tenor is ‘positive’ which argues for a continuation of the current rally for a test and possible ‘break’ of this year’s highs.
GENERAL TECHNICAL COMMENTS:
Our short-term outlook is positive; and it is positive due to the technical facts that the Banking Index (BKX) and Semiconductor Index (SOX) are showing signs of strength that are being accompanied by strength in the weekly oscillators. Thus, given we aren’t long yet as we want to ‘gauge’ the strength of the rally; we will consider becoming long on a pullbacks.
Conversely, we may attempt to play this pullback from the short perspective once our BLI indicator turns lower from overbought levels and then consider covering and move long at the seemingly appropriate time. This would be the aggressive and ‘risky’ move to make. In terms of the S&P 500; it moved back above major ‘pivot point’ resistance at 1180; which is considered ‘technically bullish’; our target now becomes the highs at 1200-1220. Those compelling technicals start with the 275-day moving average coupled with the percentage of stocks above their 30-day moving average; they provides a sharp oversold condition that is relieving itself from major support. The question is whether it breaks down at some point. We believe so given the moving average is ‘flattening out’; and we would do even better to listen to our longer-term BLI that continues to rise. Once it turns lower...then a larger decline will be confirmed. The “ratios” are at modest extremes; gold shares are significantly oversold versus stocks; while stocks are attempting to put in a low against bonds. Thus, a different rotation is expect to materialize very soon.
[The remainder of this newsletter is reserved for subscribers only.]
About Richard Rhodes
