The stock market is continuing its upward march.
I almost feel like the boy who cried wolf after watching US equity markets jump over 2% in the last two trading days.
But I remain firm in my view that a weekly close under 1422 in the S+P 500 will be the catalyst for much further downside.
Let me explain why…
Last week I wrote:
‘If we look at where the S+P 500 is currently you’ll notice that it’s trading above the high made in April this year of 1422. I have been talking about this level for quite a while now and I still believe that a failure below this level could spell some serious trouble for the S+P 500.’
I think it’s interesting to note that that comment was written when the S+P 500 was at 1440. Over the next few days the S+P 500 sold off to a low of 1425 (just 3 points above the key level) and then bounced back to where it is now at 1455:
So the key level of 1422 has held. For now.
The fact that the stock market bounced from 1425 has actually added to my conviction that the next test of this level could see a sharp move to the downside. Think of it like shaking up a coke bottle. The more you shake it up the higher the energy release when the bottle is finally opened.
But the situation is such that I need to wait for this confirmation before acting aggressively from the short side. The intermediate trend is still up because the 10 day moving average is holding above the 35 day moving average. While that remains the case higher prices are possible.
But be careful.
Trading volumes in the Australian stock market remain nothing short of pathetic at around $3.5 billion a day, when I would usually expect to see levels above $6 billion.
The institutional traders are not convinced by this rally and they’re not chasing it higher. If the big end of town is sceptical that this rally has legs then I think you should remain a little sceptical too.
But I do have to say I remain in awe of the ability of the central bankers to keep asset prices rising. I have been a bear for many years and I have consistently called each correction in the stock market over the past few years. The only thing is the market blindsides me by quickly shrugging off bad news and marching higher to the beat of the US Feds drums.
These volatile moves have forced stock market bears into hibernation. 90% of hedge funds are currently underperforming the S+P 500. That means 90% of the smartest guys in the room are not able to beat the market index. That’s quite a shocking figure.
People who have been analysing markets for years are left scratching their head while equity markets go in the opposite direction to most macroeconomic figures. This situation can’t go on forever. But John Maynard Keynes said it best when he noted that markets can stay irrational longer than you can stay liquid.
My gut feeling after watching and trading in markets for twenty years is that we’re very close to a multi-month market top. We may see another few weeks of upside before turning back down, but the line in the sand remains 1422 in the S+P 500.
I’m not sure what the catalyst will be for the selling to begin, because we remain firmly in the twilight zone where good news is good news and bad news is better.
The stock market just can’t wait for Spain to ask for a bailout. Every time a rumour begins that Spain will admit it is bankrupt the stock market rallies! Can you imagine that being the case a few years ago?
Perhaps we need the whole world to go bankrupt so that the markets will go through the roof!
I suspect that a Spanish bailout is already priced in to their bond market, since rates have fallen so dramatically of late. Everyone wants to front run the ECB into buying Spanish debt so they can offload their holdings onto the ECB for a profit.
Perhaps an initial rally in Spanish bonds after a Spanish request for a bailout will quickly reverse into a major sell-off as every man and his dog offers their bonds to a money printing ECB. Unlimited bond buying equals unlimited money printing. Just like their friends at the US Fed.
Gold will probably start to catch a strong bid in these circumstances.
Also we should keep our eyes on the situation in Greece. It looks like a meeting between Troika officials and Greece’s Labor minister Yiannis Vroutsis have broken down for a second time in a matter of days.
The Guardian Eurozone crisis running blog stated that:
‘A second meeting between the heads of the EU-IMF troika mission in Athens and Greek Labour Minister Yiannis Vroutsis on Tuesday afternoon ended abruptly a few minutes ago, after the two sides hit deadlock for the second time in the same day.
‘Sources in the labour ministry cited “complete disagreement” between the two sides on the issue of three-year wage maturation periods. They said that the labour ministry had been prepared to continue the talks but the representatives of Greece’s creditors had departed.’
I’m sure the current negotiations are just a bit of argy bargy and a compromise will be reached before the wheels fall off, but you never know.
As an aside I think it is scandalous that the lowest paid Greeks are being forced to take huge pay cuts to try and bring the books back into balance while the very wealthiest Greeks have siphoned off billions of dollars to foreign countries.
I have no qualms about people getting their money out of the country but it’s a bit rich when the wealthy have been declaring annual income to the tax department of less than 30,000 euros while transferring over 50 million euros abroad, as one individual did.
The politicians have got in on the act as well. As Spiegel online reported:
‘Greek tax authorities are currently investigating the assets of some 60 politicians, and the probe apparently extends beyond suspicions of tax evasion alone. The speaker of the Greek Parliament, Evangelos Meimarakis — a member of the governing conservative Nea Dimokratia, or New Democracy party — recently stepped down due to corruption allegations, and he is not the only one implicated. A number of high-ranking former ministers are also suspected of involvement in sham transactions and money-laundering schemes.
‘Corruption allegations still don’t necessarily interfere with a political career in Greece, as exemplified by the case of the former prefect of Thessaloniki, Panagiotis Psomiadis. He allegedly personally received nearly €1 million for public works projects that were never built. Psomiadis is also suspected of being connected with a mafia ring of loan sharks. None of this has apparently damaged him. In May, Prime Minister Samaras made him his election campaign organizer for northern Greece.’
The above quotes were taken from Mish’s Global Economic trend analysis website.
So as always of late there are plenty of issues that can derail the current stock market rally, and you can never guess beforehand what the reason will be. But the charts are right in the sell zone so I’ll continue to tread very carefully.
Murray Dawes
Editor, Slipstream Trader
From the Port Phillip Publishing Library
Special Report:
How to Make Money from the End of the Mining Boom
Daily Reckoning:
Discordian Religious Advice for the Investor
Money Morning:
The Territorial Spat Between Japan and China Putting Australia at Risk
Pursuit of Happiness:
Why it’s OK to Smoke, Drink and Play Frisbee