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Citi "Skeptical Of The Sustainability Of This Uptrend"
As the S&P 500 continues to make higher highs, Citi's FX Technicals group attempts to identify important levels to watch. As they have highlighted before, while they respect the price action and the fact that the markets are making higher highs, there is an underlying degree of skepticism surrounding the sustainability of this uptrend from a more medium term perspective. Important levels/targets on the S&P 500 converge between 1,806 and 1,833. A convincing rally through this range (weekly close above) may open the way for a test of the 1,990 area (coincidentally the Fed balance-sheet-implied levels for end-2014); however, at this stage they are watching closely over the coming weeks as we approach the New Year.
Via Citi's FX Technicals group:
As regular readers are aware, the chart of consumer confidence is among our favourite Techamental charts. Confidence is a key underlying factor to any economy/market and in this case the similarities in the way it trends and behaves in each cycle is quite telling.
In each of the three cycles, consumer confidence rose for exactly 4 years and 4 months and then turned down.
The recent prints have taken out what were support levels at 72.00-73.10 which further suggests lower levels will be seen.
As the overlay clearly shows, there is a serious disconnect between where confidence lies (and other factors
such as small business confidence and economic performance) and where the S&P 500 trades. The lower the confidence index, the less comfortable we are and would be with the sustainability of the stock market rally, even though we must respect the near term price action.
A closer look at the chart reveals some difference between the previous two major highs in 2000 and 2007 and may shed some light on which time period we should be more focused on in terms of price action on the S&P 500...
– 2000: The Consumer confidence index peaked in the month of January and again at the same level in May (i.e. double top at 144.70). The S&P 500 peaked in March. However the real move down in the S&P 500 was not seen until October so equities traded sideways for more than 6 months before turning lower.
- 2007: Consumer confidence peaked in July and the S&P 500 made a higher high in October. On this occasion we saw a quicker turn off the highs in both the consumer confidence and the S&P 500 as the reality set in that the credit crisis was worse than expected, especially by the time we got into early 2008 (Bear Sterns, inversion of yield curves, coordinated emergency rate cuts among major central banks etc)
– 2011: So far this year the consumer confidence number peaked in June and the equity market has continued to move higher. This makes is less similar to 2007 because under than comparison, we should have seen a stock market high in and around September but that did not happen. Could the pattern still be similar to 2000? The charts below make some comparisons.
Within the uptrend that took the S&P 500 to the 2000 high, there was a significant correction down of 22% in 1998 which was reversed by a bullish monthly reversal.
From that 1998 low at 923, the S&P 500 rallied 68.1% to 1,552.
Within the recent uptrend that started in 2009, we got a serious correction down in 2011 of 22% which ended with a bullish monthly reversal.
If we were to replicate the 1998-2000 rally in magnitude from the 2011 low, we would have peaked at 1,806 (and the high has been 1,808 so far as we have rallied 68.3%).
The parallel line on the log scale chart above comes in at 1,821.
In 2000, the high on the S&P 500 was 13.4% above the 12 month moving average. The same now would put the S&P 500 at 1,833.
Overall, when making a comparison with the 1998 - 2000 price action and how the market trades relative to the 12 month moving average, we would expect the S&P 500 to test and potentially peak between 1,806-1,833.
There are other measures that put further important on this price range...
In 2000, the S&P 500 high was 13.8% above the 55 week moving average
If replicated here we would trade at 1,824 (i.e. within the price targets set out in the previous chart when using the 12 month moving average)
A closer look at this chart reveals another level which converges here...
The channel top comes in at 1,822 while the channel base converges with the 55 week moving average at 1,594-1,603
From a medium term perspective, a break of the 55 week moving average would open the way for the 200 week which is at 1,364 (though it could be quite a while before we need to pay more attention to that)
This chart however is a warning sign that the uptrend may still have further to run.
In 2000, the S&P 500 peaked at 47% above the 200 week moving average.
If replicated again here, we could be talking about the S&P 500 trading around 1,990 before peaking. That is still 10% above current levels
In summary -
We believe the uptrend in the S&P 500 is stretched relative to the underlying economy and consumer confidence
The consumer confidence indicator is a leading one, especially given the similarities with previous cycles
As a consequence we remain sceptical in the medium-long term about the sustainability of the uptrend in the S&P 500 though have to respect that at least for now the trend is still up.
As we make higher highs, important levels that converge between 1,806 and 1,833 are now being tested.
A clear break of that region may open the way for a stretch to 1,990 though for now there is need for some caution at and around current levels.
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I'm guessing the underlings read Z/H and relayed to their handlers that ( 1+1=3 ) is in fact a Fallacy<>
All these charts only mean one thing - Buy Buy Buy
"We believe the uptrend in the S&P 500 is stretched relative to the underlying economy..."
We are not sure, but we think it's possible. That the stock market is "stretched". Possibly.
"We are firmly noncommittal on this."
We are skeptical but:
Important levels/targets on the S&P 500 converge between 1,806 and 1,833. A convincing rally through this range (weekly close above) may open the way for a test of the 1,990 area...
So freakin which is it skeptical or it will rally to 1990?... Bunch of useless sh|ts
we've got a citiload of reservations about this uptrend BUT WE ARE GOING TO PARTY LIKE ITS SPX 1,999
oh, whut is the 'mattering' with shitibank, is also 'like' shitiwok?
The mattering thing with Shitibank, the crustiest bits, is that they continue wasting resources on non mattering speech expressions.
Somehow this is very something.
Yellen isn't going to allow the market to go down. She's going to attempt to boost it up again. All bets are off in a Fed manipulated market. One way to kill shorts. The Fed is the market.
the market can do what yellen wants, but i'm loving this consumer confidence trendline - oif we draw a line through the bottoms it implies this cycles crash of confidence to print below zero
next years headline 'S&P sustains all time high while consumer confidence at -20 out of 100'
Can any of these so-called analysts do basic math? At the current rate of job destruction by the Obama administration and Obamacare, we won't have enough PCE by the end of 2014 to give us a positive GDP. For the last year according to the BLS, 77% of all new jobs created have been part time. The BLS definition of part time is any job under 30 hours ( it could even be someone working at home on their own business for just one hour a week). Now going from a 40 hour job to a 30 hour per week job is at a minimum a 25% pay cut. Take that 25% loss out of the 70% portion of the GDP that comes from PCE , and you have just caused a negative 17.5% impact on the GDP. There is no money from the workers to be spent on goods produced by America's businesses!
http://www.reuters.com/article/2013/11/29/us-economy-global-stagnation-insight-idUSBRE9AS03O20131129
'SELF-INFLICTED DISASTER'
With Beijing repressing domestic consumption and holding down the yuan's exchange rate to give it a competitive edge in world markets, foreign direct investment poured into China to take advantage of cheap labour, land and other inputs.
Exports duly exploded. China's resulting current account surplus, though now declining, contributed to a glut of global savings that depressed U.S. interest rates and helped fuel the fateful boom in sub-prime mortgages.
China's foreign exchange reserves today stand at an unfathomable $3.66 trillion.
Tens of millions of people have been lifted out of poverty by the rise of China and other poor countries plugged into global supply chains.
But outsourcing of production has hollowed out skilled jobs in advanced economies in what British financial analyst Tim Morgan, in his book ‘Life After Growth' calls "a self-inflicted disaster with few parallels in economic history".
Jen added: "If you are a labourer in the West, you have been hurt. It's very clear. If you are a capitalist in the West, you have benefited immensely."
Dominic Rossi, global chief investment officer for equities at Fidelity Worldwide Investment, noted that labour's share of U.S. non-financial output held steady at between 61 percent and 65 percent for half a century.
"Then, something happened. From 2000, it plummeted and currently rests at an all-time low of 57 percent," Rossi wrote in the Financial Times. Over the same period, median U.S. household incomes have fallen in real terms.
"Overall, labour is not participating in economic growth as it has done in the past," he said.
The flip side is that U.S. corporate profit margins stand at 12 percent of gross domestic product, a record high, yet net corporate investment is only 4 percent of GDP, Rossi noted.
The picture of corporations awash with cash but reluctant to invest is mirrored in Europe.
THE ZERO BOUND
So what is to be done?
Against a background of high debt and depressed incomes and investment, former U.S. Treasury secretary Larry Summers posited at a recent IMF conference that real interest rates consistent with full employment could now be minus 2-3 percent.
"We may well need in the years ahead to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back below their potential," Summers said.
He is not alone in worrying about the limits of monetary policy even as the risks of outright deflation grow.
Alan Blinder, a former Federal Reserve vice-chairman, expects inflation to be lower on average over the next half a century than in the past 50 years. As a result, central banks would keep hitting the zero lower bound (ZLB) on nominal interest rates.
"We have just experienced first-hand how difficult the ZLB can make it for a central bank to stimulate its economy out of a recession and, therefore, how large the potential social costs are," Blinder wrote in a recent essay.
Bill White, a former chief economist of the Bank for International Settlements, blamed central banks for wrongly analysing the strong disinflationary impulse imparted by the reintegration of previously isolated economies such as China into the world trading system.
"Globalisation constituted a significant, long-lasting and positive productivity shock that should have been met with tighter rather than easier monetary policy," White said in a speech to Omfif, a London think tank.
By leaning against what they saw as excessive disinflation, central banks have helped to create the imbalances now dogging the global economy and have postponed the adjustments needed to achieve sustainable, balanced growth, White argued.
"In short, ‘still more of the same' monetary policies since 2007 have left us, in my view, with old problems unresolved and some new ones added as well," he said.
Glaring problem with the last chart - From the article:
'In 2000, the S&P 500 peaked at 47% above the 200 week moving average.
If replicated again here, we could be talking about the S&P 500 trading around 1,990 before peaking. That is still 10% above current levels'
The problem is that(unless my numbers are wrong) the S&P traded more than 50% above it's 200wma at various times in 1997, 1998, and 1999.
And of course there was no 'peak' during those years(acknowledging the steep but brief correction in 1998).
Also from when the S&P first surpassed 47% above it's 200wma in 1997, it increased another 70% before peaking in 2000.
It could just as easily be said that if the S&P were to surpass the 47% above it's 200wma mark this time(at roughly 1990 points), then that could mean we'd have 70% higher to go from there. Or to roughly 3,400 before 'peaking'.
The main 2 differences between now and the 1997-1999 period are: 1. Bears still existed back then, 2. The Fed is in full retard mode now.