Diary of a Financier

SPX Weekend Update: ECB’s OMT Unveiling Brings Back Buyers & Their Volume

In Capital Markets on Fri 7 Sep 2012 at 23:50

All this market really wanted was affirmation that the Eurocrats were actually working toward solutions. Mario Draghi gifted such progress unto the market on Thursday, when he announced the ECB’s Outright Monetary Transactions (OMT)–the subject to his “believe me, it will be enough” predicate.

Going into the ECB press conference on Thursday morning, the SPX was acting as if exhausted by these European event horizons. Having willingly suspended their disbelief so many times over the past 5 years, investors seemed predisposed to expect a non-event. ‘Germany will block a resolution, blah blah.’ Well, Mr. Draghi delivered, and the market loved it. I’ll talk a lot about this Keynesian OMT in coming weeks, but for now I’ll acknowledge it as a temporary stopgap that must be succeeded by structural reform. (Sounds like the US, doesn’t it?)

~~~~

On Wednesday afternoon, I finally started to act on my observations that the Shanghai Index (SHGIDX) has begun its bottoming process. When I noticed the China ETF’s (FXI) 30-min chart showing bull divergence, I pulled the trigger on a small position of 1%. I did the same for the domestic Metals & Mining Sector ETF (XME), which looks to have found right shoulder support in its inverted Head & Shoulders bottom.

As I mentioned weeks ago, underperforming managers account for much of the recent void left in market volume. Their abstinence represented pent-up demand that had to come to the fore, lest SPX suffer a retreat. Well, spurred by Mr. Draghi’s OMT, buyers’ volume exploded onto the scene this Thursday. Everything progressively scaled higher on Thursday upon the ECB’s announcement. I was buying into the rising market, adding to both FXI & XME positions periodically through week-end. I expect these positions to become material alpha drivers for maybe even a few quarters, since both are deep value.

~~~~

This week’s developments helped maintain the S&P 500’s (SPX) track. I notice the reemergence of the 2011 analogue over a week ago (now the January 2012 analogue). This continues to serve as a prescient guide, and it happens to suggest that only 1.5% upside remains in this rally. Echoing that caution, SPY’s primary & secondary trendlines meet ~$145.00, which isn’t very far from today’s close:

SPY daily- volume coming in to help MFI justify new highs; analogue is precise & suggests only 1.5% left in upside.

The daily & weekly fractals are both contending with bear divergence, and the monthly is at the top of its range, trying to breakout of the secular bear market’s limit. The weekly fractal pursuades me toward bearishness for the intermediate to longer term. Therein, I notice that bear divergence of this nature cast SPY into correction mode to start both the 2000 & 2007 bear markets. (N.B.- a correction failed to materialize in the 2005 bull market.)

SPY daily/weekly/monthly- all fractals are entrenched in firm bull trends but contending with bear divergence.

I aggregate all these observations, and they have me developing a thesis regarding US underperformance. I have much more analysis to do in this regard, but after a few years of outperforming most major markets, SPX might be ready for a breather. American equities are at 52-week highs–within sight of all-time highs–while international equities are at modern lows. Plus, I hear the whole 20120908-004100.jpgStreet in unison, calling for the continuation of this Eurocrisis. Sell-side analysts are always on the wrong side of the trade, especially when they’re piled on one end all together. I’m starting to think their “crisis” conviction may mark Europe’s capitulation–at least for the coming quarters.

~~~~

Week-end closing prices (4:00 est):

SPX= 1437.92
ES/= 1438.25

–Romeo

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  1. […] resonates to the intermediate-term prospects for the commodity complex.Β  Recall that I’ve recently opened positions in the Metals & Mining ETF (XME) and the China ETF (FXI).Β  While both have bounced […]

  2. […] week, I acknowledged the reemergence of the S&P 500′s (SPX) analogue to the 2nd quarter 2012: “I notice […]

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