WORLD CAPITAL MARKETS ARE UNDER ATTACK
THIS MORNING: Whereas yesterday we saw Asian stocks
leading the downside charge, while European shares bucked
the trend; today, the exact opposite is occurring. Asia closing
higher with a sharp burst of late buying, but Europe is
under a good deal of selling pressure. Actually, we take that
back – European shares are under an extreme amount of
selling pressure with losses ranging from -1.8% to -2.0%.
This has pushed the S&P futures down by 2 points…which
is now 7 points below fair value. If this holds up – stocks will
open at levels not seen since November-2005.
Not only are share markets falling, but so too are all of the
commodity markets: gold is lower by -$12/oz; silver is lower
by -56 cents; copper is lower by -29 cents after yesterday’s
absolutely “stunning” +40 cent rise…about +12% for those
counting. Crude oil and its products are trading lower as
well: crude is 75 cents lower; gasoline and natural gas are
lower as well. Even the grain markets are all lower except for
soybeans. This “liquidation phase” is benefiting the bond
market, where 10-year yields have declined back below the
5.0% level. Today as they say…could be “very very interesting”.
THE LONGER-TERM TECHNICALS ARE “BREAKING
DOWN”: Over the past many months, we have noted
that the advance/declined figures were less than “optimal”,
and that perhaps the Middle Eastern markets were the proverbial
“canary in the coal mine” in terms of an impending
slowdown in the US. Finally, price action is starting to weaken
as expected, but the many believe that a bounce is due to
be the market being oversold. It is; however, we make that
statement with the caveat that bear markets stay oversold
for far longer than anyone anticipates – hence it begs the
question as to whether a bear market has begun for
stocks.
We fear it has given the long-term technical patterns
currently forming. First, all the world stock market
averages are forming what we consider to be the
“granddaddy” of bearish technical price patterns –
the “monthly key reversal”. This suggests a short
and a long period of price deterioration, and it does
so for the US, Europe, Asia and a host of emerging
markets. We are fearful substantial declines are
ahead; in fact, the NASDAQ 100 has broken down
out of a bearish wedge pattern and is now trading
but 6 points above upon major weekly moving average
support at 1563. It shall likely be broken today.
Also, with today’s early morning weakness – the
probability of the S&P 500 closing below it’s 200-
day moving average at 1257 is rather high.
These factors will soon turn those hedge fund “moving
average black box models” into the bearish camp,
which means rallies will be sold rather aggressively,
whereas dips will be bought rather tepidly and in no
size whatsoever. We have seen this in the NASDAQs, and
we are soon to see it in the S&P 500, S&P 400 mid caps
and the Russell 2000 small caps. Be afraid…be very afraid.
The strategy from this point forward is to sell rallies; perhaps
it is too late to become aggressively short, but there will be
rallies upon which the proper position to take will be on the
short side.
ECONOMIC PREVIEW: Today, we have two major
reports of interest leading up to the June 28-29 Fed meeting
on interest rate policy. First, the April Durable Goods Orders
figure is expected to have resumed its downward trend after
March’s rise; consensus is for an overall of -0.5% vs. March’s
+6.5% rise. Ex-aircraft the figure is expected to show a gain
of +0.5%. However, we believe this figures are a bit too optimistic;
we look for a decline of -2.5% overall and -2.0% exaircraft
– and it is the latter figure the bond market will focus
upon.
Also, April New Home Sales are expected to have fallen from
March’s surprising jump to a 1.213 million rate; consensus
pegs the number at 1.150 million. We think a bit of a larger
giveback is in order, and look for 1.100 million. However, the
most watched part of the report will be upon the median
home sales price, which declined -2.2% y/y for the first time
in over 2 years last month. Further, the month’s supply of
inventory will be closely watched; last month’s figure decline
to 5.5 months of supply from February’s 6.3 months.
After listening to Toll Brothers (TOL) Chairman and CEO
Robert Toll yesterday aid that traffic was down 20/30% year
over year in FY Q2 and FY Q3 – we fear the number could
very well approach 6.3 once again. But being reasonable –
let’s average the two months and arrive at a 5.9 month’s
supply figure. Anything larger would certainly be bond market
friendly.
And finally, the Treasury is slated to auction $22 billion in 2-
year notes today. This should be monitored carefully for the
bid-to-cover ratio and the direct/indirect participation rate.
The former is simply the demand for the issue which is currently
trading near 4.90%, while the latter will tell us more
about whether world central banks are participating. With
the recent Treasury data suggesting lukewarm demand for
US treasury securities…this could have an outsized effect.
We won’t bet on it given the recent “swoon” in world equity
prices, but at least we understand the potential risk involved
for today’s trade.
[The Rest of the Global ETF charts are Reserved for Subscribers]
About Richard Rhodes and The Rhodes Report
