A Case in Favour of Extending QE But at What Cost to America?

It looks like the Fed will have to continue carrying the financial aspects of the economy for awhile due to softening manufacturing data released today. However, I haven't seen any constructive bi-partisan fiscal policy emanate from Capital Hill that even attempts to support the Fed's actions. Instead, they've been silent, uncooperative, and unproductive since the 2008/09 financial crisis. 

Without, not only that critical, but also, pro-active political support, and with markets near their all-time highs, I don't see a case for continued market strength. And, the Fed's attempts at financial stability may, ultimately, be undermined and sabotaged by continued fiscal paralysis. Where's the leadership and the loyalty by all to serve in the public interest?

Data Source: http://www.nasdaq.com/markets/us-economic-calendar.aspx

"Suggestion Box" ;-)

Addendum to "Money Flow for May Week 5"

Further to, and as an addendum to my latest Weekly Market Update, I've provided the following percentage gained/lost graphs (without commentary) for the purposes of simply seeing, at a glance, where money flow has been directed this past week, as well as for the month of May, in various world markets, and to see the "outliers"...that is, which markets gained or lost an exceptional amount compared to the others for both timeperiods.

You'll see the Weekly graph first, followed by the Monthly graph for the corresponding instruments.

It was mainly a "risk-off" week for world equity markets, Bonds, the U.S. $, and commodities.

Money Flow for May Week 5

Further to my last Weekly Market Update, this week's update will look at:

• 6 Major Indices
• 9 Major Sectors
• SPLV vs. SPX vs. CRX
• SPX:VIX Ratio
• Q2 Targets (channel update)
• Various World Markets -- N.B. Please refer to my next post entitled "Addendum to Money Flow for May Week 5" for details on these markets due to the length of both posts

SPLV vs. SPX vs. CRX

This Daily comparison chart of the SPLV (which is an ETF containing the top 100 lowest-volatility stocks in the S&P 500 Index) with the SPX  shows that they have traded pretty much in tandem since the ETF's inception.

However, that correlation diverged in mid-May and the SPLV has now made a lower closing swing low on this timeframe. Furthermore, the Momentum indicator has dropped below the zero level signalling potential further weakness ahead.

We'll see if the SPX follows and pulls back on any further SPLV weakness.

Now, if we throw the Commodity Index (CRX) into the mix, we can see that it, too, is still diverging from the SPX, as I've written about most recently on May 23rd. We'll see if an all-out bull market resumes in both equities and commodities any time soon (and potential parabolic move on the SPX), or whether we'll now see a pullback or correction in both, as the negative  divergences in the SPLV and CRX are indicating. 

When Will They Declare?

When will the US and UN declare "Enough's enough!" and confront China on hacking?

Money Flow for May Week 4

Further to my last Weekly Market Update, this week's update will look at:

• 6 Major Indices
• 9 Major Sectors
• Various World Markets

The Nikkei "Pop-and-Drop"

I last wrote about Japan's Nikkei e-mini Futures Index (NKD) on February 8th.

Since then, price rallied a staggering 4850 points to a high of 16020 (reached earlier this week) and promptly dropped 2020 points as of 12:45 pm EST today (Friday), as shown on the Weekly chart below. You can see that this week's candle is in the midst of forming an enormous outside bar, encompassing the past two weeks. This candle's low of 14000 has hit a confluence zone of several external Fibonacci retracement levels.

A failure to hold 14000 could send price down to the next confluence level at 12600 or lower.

Perhaps this meteoric rise in the NKD is what influenced a similar rise in the SPX, which would possibly answer my query posed in my post of May 23rd.

The Commodity/Equity Divergence Continues

I showed a 3-year comparison of price action on the SPX to the Commodities Index (CRX) in my post of April 5th.

In it, I mentioned the correlation between the two and the instances where, mainly, the CRX would lead an ultimate drop in equities, by putting in negative price divergence before the SPX.

The following chart shows that, since the time of my post, the CRX has put in another lower swing low and has not yet made a higher swing high in its present (large) negative divergence that begins from February of this year, while the SPX has continued its meteoric climb.

If commodities continue their weakness and equities do not follow suit, I will wonder what has changed since February to cause this disconnect between the two.

SPX:VIX Ratio -- Where's the Exuberance?

Today's action, so far (it's just after 11:00 am EST), on this Daily SPX:VIX ratio chart is NOT confirming today's exuberance in the SPX. Furthermore, the Momentum indicator has dropped below the zero level, hinting at further weakness.

A drop and hold below 122.50 could signal further downside to come in the SPX.

"Mortgage Rates are Suddenly Soaring"

Data released today (Wednesday) shows that "mortgage rates are suddenly soaring and are pulling down mortgage activity."

This kind of loan rate rise was something to which I alluded in my post of May 7th. Perhaps this is why we saw a rise in Mortgage Delinquencies on May 9th.

We'll see if rates stay elevated if "tapering in stimulus" is NOT mentioned as an imminent proposal in Ben Bernanke's speech/testimony today.

***UPDATE: No mention in Bernanke's speech about imminent tapering (it will be dependent upon economic data that the FOMC reviews at each meeting, according to him). So, the big question now becomes, "Will Banks lower mortgage rates?" Don't hold your breath. And, my last question is, "Will TV commentators stop talking and guesstimating about such a scenario anytime soon?" Don't hold your breath.

We'll see if the Homebuilders ETF (XHB) continues to soar or begins to pull back. A drop and hold below immediate support at the 61.8% Fibonacci retracement level of 31.81 and, subsequently 30.00, could trigger a decline to the lower Bollinger Band, or lower, as shown on the following Weekly chart...one to watch.

It's Different This Time...But Not for the Reasons I've Heard

The argument that I've heard repeated ad nauseam as a reason why stocks should simply go up "until the Fed takes the punch bowl away" (even at current market all-time highs) has been, "It's different this time." I even heard a comparison today that we're in a market environment like the mid-90s.

I'd just take a minute to remind traders that Baby Boomers, who were heavily into acquiring all kinds of assets/products/services/loans for themselves and their growing children/teenagers in the 90s, are now facing retirement and are no longer "spending like there's no tomorrow" on the same kind of stuff. To illustrate this point, I'd direct you to my post of July 17, 2011.

We also know now that it's been difficult for young people to get jobs, in spite of (what appears to be) a lowering of the unemployment rate since 2011.

Just once, I'd like to see a solid, quantifiable presentation of what it is (and how much) that consumers are now buying, and who those consumers are, that would support such "It's different this time" theme.

The only reason that it's different this time is the one I've presented above. And it does not support the theory that markets should keep going up because the "Fed has your back." If that's the case, and based on my earlier post today (Tuesday), then markets would be operating on a casino-like mentality, not on sound economic, fundamental, and technical reasons. And, how long can that last?

Q2 Targets Already Reached for Major Indices

My post of April 26th laid out a scenario for minimum and maximum target objectives to be reached by the Major Indices by the end of Q2, based on a number of assumptions.

The following is an update to report that the minimum target objectives have already been reached in 5 out of the 6 indices (Utilities, which had been on a parabolic rise, pulled back before reaching its minimum target), the maximum target was exceeded in the Nasdaq 100 and the Russell 2000, and the maximum target was nearly reached (within 12 points) on the S&P 500. ***UPDATE May 22nd: Maximum target for the SPX was hit Wednesday morning.

This would suggest that these indices have risen at a much faster rate than economic conditions would warrant (my assumptions were based on Q2 GDP mirroring Q1 GDP, thereby causing the indices to perform on a similar trajectory as they did in Q1...however, weakening economic data that we've seen, of late, may end up showing a weaker GDP for Q2). As such, a correction (or even a pullback/profit-taking), as I mentioned last week here and here, may be imminent.

The following Year-to-date Daily charts of the Major Indices show market action relative to their respective channels (which were the basis of my projected targets).

The following percentage gained/lost graph of the Major Indices shows how much these indices have gained, so far, for 2013 (as of Monday's close). Not a bad performance. No doubt, some will be taking profits at these over-extended levels.

Money Flow for May Week 3

Further to my last Weekly Market Update, its subsequent Addendum, and my mid-Week Money Flow update, this week's update will look at:

• 6 Major Indices
• 9 Major Sectors
• Various World Markets