Market Rally Continues Along With QE
There has been a long string of crummy economic data which has largely been ignored (“bad news is good”) by bulls. However, on Friday, bulls jumped on two reports, Leading Indicators and Consumer Sentiment, which released better than expected results (“good news is great”). The most noteworthy regarded the Consumer Sentiment report, which was the largest "beat" in its history. For the most part, the Consumer Sentiment report is less regarded by us than the Conference Board’s Consumer Confidence report since the former is heavily weighted by stock prices. With a rally in stocks, Consumer Sentiment data was likely to beat. And, given that, they tend to feed off each other.
In other news, there wasn’t any slowdown in QE on Friday, with a large POMO action pumping a cool $5.3 billion into the markets, along with options expiration, which generally creates more volatility. We have just another week or so of earnings news left for the first quarter, and as a result, there's not much left from the sector to support prices.
It’s a “risk on” environment for global equities. This is especially so for countries and regions where central banks are busy printing money. For “risk off” sectors, bonds and commodities are not feeling the love. And, those countries not in the QE game, Latin America and Australia for example, their markets are underperforming.
The dollar (UUP) rose substantially Friday as the euro (FXE) and yen (FXY) especially were weak. The strong dollar caused further selling in gold (GLD) and other commodities (DBC), while oil (USO) climbed higher. Though on a Friday, the latter isn’t unexpected with the Middle East still at a boil. Bonds (TLT) fell back as stocks rallied.
Leading equity sectors? Pick one, as everything jumped higher across the board. Lagging were Latin America (ILF) and Australia (EWA).
We’ve focused our ETF positions on sectors within the major indexes rather than the large indexes in isolation largely because we believe that these sub sectors can outperform the major indexes.
Volume was only slightly higher perhaps due to options expiration toward the close. Breadth per the WSJ was positive.
The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.
The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.
The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.
That was the week that was to quote the old TV series. Markets are quite speculative now and the game is being played by hedge funds, banks and overseas investors with free money from the Fed. It’s almost like musical chairs, for when the music stops there will be trouble. This is why you see so much QE pause/start rhetoric which is field testing investor behavior.
Aside from light volume there’s no argument with the tape. It’s quite positive but much overbought. Earnings news is beginning to wane leaving less for bulls to respond to. Many previous reliable technical indicators are succumbing to all the money printing. Looking at those markets where QE is not taking place perhaps reveals the real market conditions.
Next week will yield Fed Minutes, housing data and Durable Goods Orders.
Let’s see what happens.