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Net New Highs Indicator & The S&P500's stuttering rally since June 4th |
Since my last update in July, stock markets have managed to zig-zag higher and are now within spitting distance of their yearly highs set back in the Spring.
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| Net New Highs indicator as shown in May 31st Update |
Several times it looked as though everything was about to play out according to my glorious vision - until the two lead actors in the saga decided to change the script. Ben (O, he of the beard of purest white) Bernanke and Mario (Puff! the Magic) Draghi waved their wands over the land of stocks and all was suddenly made good.
The behaviour of the S&P500 began to morph, and in the last few days it has started to show the typical signs of a momentum market. These are exemplified by the freakish, straight-line-up rallies such as we saw in Q1's of 2010, 2011 and 2012, fed by the financial viagra of Quantitative Easing.
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| Momo market emerging? |
Never mind: while the great buying opportunity I'd anticipated is unlikely to materialize (technically there's still a chance of a sharp drop, though it's hard to see where it would come from) we find ourselves instead in the midst of a potentially major rally which - as it now has the double threat of both Fed and ECB action behind it - simply has to be respected.
So far though, there's no actual beef from Ben or Mario. Nevertheless, Pavlov's dogs have salivated and US stocks are already pushing towards new highs; Spanish & Italian bond yields have subsided from crisis levels and European shares have rallied strongly.
This sets up a very interesting dynamic, a Catch 22 in which central banks 'stand ready' but won't act until there's a market crisis, yet a market crisis is receding as stocks go higher and yields lower because investors think central banks will act. This is an inherently unstable situation.
MIXED SIGNALS, BEARISH SIGNS
My indicators of momentum, breadth, volume and sentiment paint a fuzzy picture and, although warning signs are popping up, they are not yet extreme or broad-based enough to make me think a major top is imminent. So this sleepy summer rally does appear to have room to run, although turbulence should hit as we attempt to breach the April highs.
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Equity Put/Call Ratio, with recent sell signals. Suggests rising bullishness which is positive for stocks and not yet extreme |
Back in November, I suggested that 2012 would be a binary one for stock market returns. The bulls are now making their play, relying on a double-layered central bank safety net stretched wide across the Atlantic. Bears look to be on the retreat, with US recession fears slowly receding and Draghi's firm hand on the ECB tiller.
Under the hood however, all may not be quite as it seems. Corporate profits appear to have peaked, while revenue growth, forward guidance and pre-announcements are not encouraging. Also September, with its deserved reputation as the most treacherous month for stock markets, is lining up to be very interesting indeed, with some major catalysts set to fire including these four crackers on September 12th:
- The German Constitutional Court decides whether the ESM, the EU's bailout funding vehicle, is legal. If they reject it, or impose draconian conditions, expect all hell to break loose;
- The Federal Reserve begins a two-day meeting and will decide whether or not the stock market goose needs feeding. It has made heavy hints that its finger is twitching on the QE3 trigger, but if economic data improves over the next few weeks and stocks continue to rally, there is a significant chance investors will be disappointed;
- The Netherlands elects a new government, in a poll where most parties are now anti-austerity, if not outright anti-euro. Holland has been a lynchpin of EU solidarity and financial stability and a change here could derail attempts at tighter European integration;
- Apple, now a $500bn company by market cap (19% of the Nasdaq and 4% of the S&P500) unveils important new products, having disappointed investors recently with uninspiring product upgrades and underwhelming sales. Traditionally, their announcements are 'sell-the-news' events
What's more, I've long thought that the Greek crisis would only come to a climax when everyone was looking the other way. Investors seem to believe that Greece was 'solved' and now the focus has shifted firmly to Spain and Italy. But I have a feeling this little piggy is going to come back to bite us before the year is out.
And finally, hovering over the US indexes is the strange specter of Three Peaks & a Domed House - a price pattern with a name and a reputation so doom-laden it might have come straight out of Hammer's House of Horror. Its incredible record of success at predicting major declines, however, is such that only a fool would discount it. I'll leave you with the latest enthralling episode...
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