Diary of a Financier

Broad market technical updates: SPX & TNX

In Capital Markets on Thu 5 Dec 2013 at 22:47

It’s been a while since I last checked-in on broad market technicals, so I thought I’d record some thoughts on a couple of charts…

S&P 500 ($SPX)

The market has rolled-over a bit, dropping -1.2% from its alltime closing high over the past 5 trading days.SPY daily/weekly/monthly  Only thing to really note is that $SPY remains in a throwover top after having broken-out above that daily, long term, rising wedge.

We don’t plan to brace ourselves for a more material pullback unless SPY breaks back down beneath that rising wedge’s trendline resistance-cum-support (>$177.2).

10-year Treasury yield ($TNX)

The 10y behaved in splendid accordance with my last assessment, giving us a nice entry point for some tactical scalps in the muni space when TNX slipped >3% in September.

TNX broke-down beneath a neckline of a Head & Shoulders top on 10/23, but it found support at a subsequent TNX daily/weekly/monthlyneckline in a pattern that had quickly morphed into a complex H&S top.  The bounce since then has been a successful confirmation of TNX’s breakout from its 10-year-long falling wedge, as seen in its weekly chart.

The 10y’s daily chart shows a Cup & Handle formation with a rim ~3.00.  Further, if you zoom out to the monthly fractal, you’ll find an interim bear channel (starting in 2008) with trendline resistance intersecting right at 3.00.  That 3% level has become a battleground.  If pierced, it will reverse the 2x bear divergence in TNX’s weekly, which is really the only technical deterrent to a rally.  Thereafter, as I said before:

“Further out, it looks like resistance @ 3.22 is a more intermediate-term target and perhaps a resting-ground for this rally. Thereafter, 3.75 and 4.00 are robust levels that pose longer-term snags, as best exhibited by the weekly chart.”

~~~~

This week’s market has been concerned about a Fed QE taper after the FOMC meeting December 17-18, given the raft of positive economic data we’ve received recently.  I unwaveringly maintain my thesis–in all its detail.  Assuming SPY holds that trendline support in the coming week(s), there are still plenty of reasons to remain bullish on this market in the shorter term, before we have to worry about valuations snapping-back down in a cyclical bear market.

First, we’ve only just transcended “Thrill” for “Euphoria,” and while a number of major bears just capitulated, there remains a [quantifiable] handful of doubters, whose surrender to the bull market’s momentum will mark the top.

Second, consider the demand left to be pulled-forward while credit’s still cheap. A taper is ostensibly a negative catalyst, although many strategists now disagree on its effect, including me myself–more and more now that the 10y is up at 2.86%.

My full answer regarding the taper’s effect is more nuanced. There is the intermediate term revaluation of asset prices and [everpresent] long term uncertainty.  A steepening yield curve (2s10s) will force an eventual valuation recalibration with equities’ earnings yields at least pausing their decline (i.e. multiple compression).

In the short term, however, we should see the fever pitch of exuberance that I like to call “The Last Chance Dance,” wherein a flurry of M&A deals and other transactions get pulled-forward–hastened by the perception that the cheap credit window is closing.

~~~~

Our core portfolio remains overweight its 60/40 benchmark at 69/27/4 (stocks/bonds/cash), with beta up at 0.92 vs 0.76 benchmark, and sigma 1.10 vs 0.49.

–Romeo

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