October 28th, 2014
View From the Hill, 20-24 October 2014
by J. Clinton Hill
Regarding the global economic business cycle, China's expansion is decelerating towards lessdesirable and economically unsustainable levels and the European Union is stuck somewherebetween contraction and trough while the USA continues to sail along rather smoothly for nowwith the winds of QE at its back before the Fed actually begins to increase rates within the next 2 or 3 quarters. Economic expansions within a business cycle are typically driven by solid capital market themes or industry leaders.
Yet, this particular recovery has truly been a Frankensteinexperiment led by central bankers with PhD's in voodoo economics. Nevertheless, the USA still remains the most attractive market for capital investment. But what has changed is the realization of an imminent Fed exit and investors obliged to be much more judicious with their allocation of capital. My guess is that value will take center stage with volatility as its best supporting actor. The two tend to go hand in hand at this stage of the game. Can you say this is a stockpicker's or market timer's market?
The market has rebounded sharply since finding support at the 1820 to 1825 area and we have witnessed some signs of capitulation selling recently. Although I am very close to upgrading its status to "bullish", I would prefer to see it clear the resistance of its lower channel to confirm thatwe are not simply 'kissing the bottom of the bear'. Technically, the correction has done a lot damage to the market and it will need time to consolidate and recover. In the short term, the market is quickly approaching overbought territory, which makes it vulnerable to another bear raid. An important resistance test to pass will be 1973 to 1976 region. Strap on your helmets if you plan to continuing riding this bull.
*For your reference, "TWS" is a proprietary indicator that measures relative strength in a weighted manner over various time frames. "Vol %" compares weekly volume to average weekly volume and changes are expressed in percentages. At times, our investment bias indicator may temporarily display conflicting views between ETFs and the underlying indexes or securities they are designed to mimic or represent, but such divergences are temporarily short term and may be due to variances in price, volume and investment allocation to their component assets.