Another week rolls past and we have a pick up in price volatility here and much continued weakness and threatened breakdown for commodities. We are starting to see the 2016 to 2017 reflation trade or “escape velocity” narrative that has underpinned much of this wave 5 starting to look very weak indeed.
Technically we should be seeing rising inflation expectations alongside rising commodity prices with US$ liquidity supporting a general rise in world risk prices. We have mixed signals across asset classes with Financials still supportive of rising interest rate expectations but defensive sectors also doing well and ten year rates compressing downward globally. Key cyclicals stocks and sectors have, for now, lost momentum and breadth is weakening considerably. Note worthy that the broader more US domestically focused sp600 (also nyse) has been displaying ever weakening breadth for all of 2017. Macro wise the US date has been starting to weaken considerably alongside Yellen’s continued baby step rate rises and jaw boning of reducing FED balance sheet size.
For my book its a moment to reign in some of the leverage level exposure to risk, especially US risk and therefore take some profits on US risk which i have done in the last week.
Consolidation patterns can produce shake outs but is this something more? The commodity weakness and sector picture and breadth all point to some more meaningful in my view. We can speculate all we like as to why the technical picture has weakened like this. For my money its the failure of the Trump administration to match or even come remotely close to market expectations of personal and corporate tax cuts, fiscal stimulus and cutting corporate red tape.
International risk looks better technically and at a macro level but its US health and US$ liquidity that has usually fueled international bull market. We would need to see the US$ really debase here to sustain this bull market and as yet Yellen appears not to want to play ball with this scenario. Trump ineffectual to debase via policy which doesn’t emerge or jaw boning which is discounted almost immediately by the FED.
Europe and Asia remain with very constructive patterns and with Asia in breakout so for as long as these conditions hold and commodities don’t break down any more than they have this bull can live on but its on knife edge now and US risk needs some policy either fiscal or monetary to come to its rescue most likely.
Here the Swiss team’s comments and levels. (Please note they have a week’s holiday next week so I will be mirroring their vacation unless we get a step change in mkt volatility).
And here Meisels, considerably more bullish:
I have to strongly disagree on his reading of nyse tech strength. Its true stocks above 50dma increased slightly but this is weak breadth on most other measures. Nyse stocks hitting 52 wk lows hit their yr record yesterday. Or nyse stocks above their 200 dma hit their weakest level for the year yesterday. Something is wrong in domestic US businesses.
Here Louis:
And here Yardeni tech
Note the fall in global LEIs
And here Yardeni earnings.
Note the cliff drop fall in Sp600 earnings projections for 2017. Recall these after very weak 2016 earnings due greatly to the strength of the US$ then.
Too early to call time on this bull but technically she is wounded here and with the Swiss team’s comment of a top within 2 weeks has an ever rising probability it seems. It wasn’t my baseline expectation but that’s fine. Ultimately we can only take what is on offer.
Best wishes to all
Rich