Written by Gary
Closing Market Commentary For 03-04-2014
The more things change the more they remain the same. Investors are still worried about the Ukraine thing and that the Ruskies shot off a ballistic missile today. The SP500, yet again, slithered up to make a new high at 1876.04 and the green volume, for a change, was very heavy, second only this year to the February 3, 2014 red blast that marked the end to the 6% correction.
By 4 pm the averages were well over the 1.4% mark and some investors were still partying when the final bell rang celebrating a new closing historical high. Prevailing market weakness is obvious, but it seems no one is paying much attention right now, but isn't that always the case?
This may be where the hangover starts, again, time will tell.
As the markets push once again into record territory the question of valuations becomes ever more important.
While valuations are a poor timing tool in the short term for investors, in the long run valuation levels have everything to do with future returns. The current levels of profits, as a share of GDP, are at record levels.
This is interesting because corporate profits should be a reflection of the underlying economic strength. However, in recent years, due to financial engineering, wage and employment suppression and increase in productivity, corporate profits have become extremely deviated.
This deviation begs the question of sustainability. As we know from repeatedly from history, extrapolated projections rarely happen. Could this time be different? Sure.
However, believing that historical tendencies have evolved into a new paradigm will likely have the same results as playing leapfrog with a Unicorn.
There is mounting evidence, from valuations being paid in M&A deals, junk bond yields, margin debt and price extensions from long term means, "irrational exuberance" is once again returning to the financial markets.
The short term indicators are leaning towards the hold side at the closing. The all important signs of reversal, up or down, have not been observed so we are mostly at best neutral and conservatively at hold. The 50DMA, MACD, volume and a host of other studies have not turned, only a 6% correction (and recovery) and that is not enough for me to start shorting. I would advise caution in taking any position during this volatile transition period although Barchart.com shows a 72% sell.
Several notes of negativity are that the daily volume is very low matching the period of historical highs in the past which could set the stage for addition weakness and market decline. The longer MACD view is starting uphill, but not convincingly signaling a continued up trend as it is very weak. Lastly, the markets are oversold and the margin debt for stock purchases are at an all time high.
I still believe that Mr. Market is STILL not through playing with us and even newer historical highs are a distinct possibility beyond what we have seen mainly because the amount of bond buying the Fed still does on a monthly basis. Past bullish sessions is a very important reminder of what QE has done in the past and remains a continuing and very powerful stimulus to the financial markets.
It is its ending that worries me the most as the financial institution can not continue to push upwards without the Fed's 'Market Viagra'. Even if the Fed reduces its purchases by $10 billion every month for the rest of 2014, the Fed will have acquired $320 billion more for its portfolio. Note, that in 2013, the Fed added more than $1.0 trillion in securities to its portfolio. The debt stands at 4 trillion and will be at 5 trillion by the time the taper is completed and that is one hell of a debt that 'someone' has to pay.
There is continuing pressure to climb higher, but we may have to see some more 'consolidation' or sideways trading before we can start counting our 'Bulls'. The latest question investors have lately is, will the SP500 go above the 'new' resistance at 1874 and close there?
The old historical closing high at 1859 (now 1874) is no longer and there are many serious doubts that the SP500 can go higher much higher, but of course, that is what they were saying last week and the week before that. I am not saying it can't go higher but that it will be tough sledging in light of prevailing financial winds. Agreed the current level of bond buying by the Feds is keeping markets becalmed, but at some point the trend will reverse.
In looking at the 50 DMA the current SP500 is somewhat above that line, but way above the 200 DMA and on 02-06-14 crossed above the 100. I can not see, as of right now where the MA's are rolling over to indicate any permanent bear run in fact quiet the opposite. The 50 DMA is climbing slightly, but not descending which is always the first sign the bears are smacking their lips in anticipation of a medium rare steak.
The longer 6 month outlook is now 35-65 sell and will remain slightly bearish until we can see what the effects are in the game of the Fed's 'Tapering'. Again, I would also take chart and other technical indicators with a lessor degree of reliability for the time being and watch what the Janet Yellen's Fed does over the next couple of months. All she did in the February testimony to a Senate panel is flap her lips but the charts and other technical indicators completely failed us this time around. Read at DailyFX, "wouldn't it be easier if the Fed would just announce the proper level for the S&P and spare us all the policy announcements and market gyrations?"
Also, many pundits have stated that we may have seen the top - but I wouldn't count it as long as the Fed continues to hand out 'Market Viagra', even if it is being reduced somewhat! I would like to see a blowout candle (shooting star) to verify a top along with heavy volume to signify a market top.
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The DOW at 4:00 is at 16396 up 228 or 1.41%.
The SP500 is at 1874 up 28 or 1.53%.
SPY is at 187.63 up 2.60 or 1.41%.
The $RUT is at 1208 up 32 or 2.75%.
NASDAQ is at 4352 up 75 or 1.75%.
NASDAQ 100 is at 3720 up 52 or 1.41%.
$VIX 'Fear Index' is at 14.10 down 1.90 or -11.88%. Neutral Movement
The longer trend is up, the past months trend is sideways, the past 5 sessions have been mixed and the current bias is slightly down.
WTI oil is trading between 104.95 and 102.91 today. The session bias is negative and is currently trading up at 103.30.
Brent Crude is trading between 111.33 and 109.06 today. The session bias is negative and is currently trading down at 109.15.
Gold fell from 1351.37 earlier to 1331.56 and is currently trading down at 1334.90. The current intra-session trend is sideways.
Dr. Copper is at 3.212 rising from 3.166 earlier.
The US dollar is trading between 80.22 and 79.92 and is currently trading up at 80.17, the bias is currently neutral.
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Written by Gary