Big developments today, so I wanted to enter a couple quick Chart Updates to update my last updates:
- February 15¹: I don’t think a real correction is coming quite yet… [but equities are] due for a pause per the SPX analogue to 2010, wherein you find the Cup & Handle classical pattern awaiting takeoff… but intraday fractals and general momentum say that any near-term (i.e. this week) break in the action will be short and sweet.
- February 21: I expect a risk-market hiccup as we enter the last week of February/first week of March.
- February 27: The S&P 500 (SPX) is caught near the end of a bearish rising wedge, and that should check to the downside after POMO & LTRO’s shots-in-the-arm.
- February 29: #Beta getting hammered intraday. $IWM at trendline support of bull pennant.
Today’s session closed with SPX -1.54%, DJIA -1.57%, NASDAQ -1.36%. US Government securities were the only asset class in the black today, even including the Municipal front (MUB -0.13%). This year’s rally combine with today’s losses show capital markets’ remarkable ability for both discounting future expectations, and overweighting the short-term. Pricing-in a hefty premium for the liquidity, investors focused [myopically] on LTRO 2 since Christmas. Since that auction last week, we have now entered the “logistical gap” of which I warned:
Looking at the weeks ahead, I’m concerned with the logistical gap between Greece’s PSI haircut (a deflationary event) and their alleged second round of Troika bailout funds (a reflationary event). I call it a “logistical gap” because the PSI debt swap is currently underway, but the bailout funds won’t be disbursed until March 20, after vigorous opposition. Through the Ides of March, the global system will have to operate less the ~€100B being wiped out by Greece’s debt swap, until (if) the €130B Troika package is released. (Nobody knows whether the Troika will even agree to the bailout, or if CDS will trigger.)
I find the parallelism to the 2010 analogue surprisingly precise here. On November 2, 2010, the market rallied to its rim upon the enactment of QE2. A sign of exhaustion, SPX then pulled-back to support at its 50DMA, part of a classic Cup & Handle pattern. Today’s market shows the same characteristics, merely replacing QE2 with LTRO 2:
I fully expect SPX to hold support at 1320 (its 50DMA & trendline) and resume the ascent:
I have found it interesting to watch the increasing divide between Small-Caps (IWM) and Large-Caps (SPY). SPY kept chugging higher in February. At the beginning of the month, IWM hit its high, formed a rounded-top, then slid all the way into today’s close. I rarely see this kind of prolonged, inverse correlation between broad equity indices–mind you we’re not talking different sectors, just different market capitalizations. Since February 3, IWM -5.4% v. SPY +0.2%:
I could easily blame the Apple (AAPL) effect for the divergence, but risk assets around the globe rallied through February too, leaving small-caps in the dust. I don’t consider the IWM/SPY decoupling an alarming market anomaly. Rather, US Beta had simply grown overbought. I do take note of the hiccup though, and it tells me that fundamental equilibrium lay somewhere south of IWM’s ~$83 top.² Earnings and outlooks will have to substantiate a higher valuation in April.
A real alarm comes from the Transportation Index (TRAN), which rolled-over in coordination with IWM. There, I find a harbinger for inventories peaking by 1q2012 data reporting. Rising transportation (fuel) costs are the offender, but their trickle downstream takes time before increasing COGS (lower margins) appear. An overlay of the Transportation ETF (IYT) and Oil (CL/) provides a nice wormhole for the rest of March 2012, evident in the analogue to March 2011:
IYT will rip higher out of this daze.³ Another sign suggesting March will go out like a lion.
¹Markets have been flat since February 15.
²Equivalent to Russell 2000 (RUT) ~830.
³We own CSX.