S&P 500 rallies while inflation subdued

Average hourly earnings growth came in at 2.7% (All Employees) for the 12 months ended July 2018. Growth in average hourly earnings is an excellent gauge of underlying inflationary pressures in the economy, which remain subdued.

Average Hourly Wages Growth

Consumer price index (CPI) growth is slightly higher, at 2.8% for June 2018, but lower core CPI (2.2%) suggests that food and energy prices are partly to blame.

Consumer Price Index and Core CPI

The S&P 500 respected support at 2800, signaling an advance to 3000. Declining 21-day Volatility suggests that market risk is declining and the market is returning to business as usual.

S&P 500

The Nasdaq 100 shook off recent Facebook (FB) and Netflix (NFLX) tremors and is testing resistance at 7400. Breakout is likely and would offer a target of 7800.

Nasdaq 100

CPI rises but US stocks rally

June consumer price index (CPI) jumped to 2.8% but forward estimates of inflation, represented by the 5-Year breakeven rate (5-year Treasury yield minus TIPS) remain subdued at 2.06%.

CPI and 5-Year Breakeven

Core CPI (excluding food and energy) is at 2.2% while average hourly earnings (total private: production and non-supervisory employees) annual growth, representing underlying inflationary pressure, is higher at 2.7%.

Core CPI and Average Hourly Earnings: Production and Nonsupervisory

Credit and broad money supply (MZM plus time deposits) growth remain steady, tracking nominal GDP growth at around 5.0%. A spike in credit growth often precedes a similar spike in broad money supply by several quarters.

Credit and Broad Money Supply Growth

And a surge in broad money supply growth, ahead of nominal GDP, flagged rising inflationary pressures ahead of the last two recessions, prompting the Fed to step on the brakes.

Nominal GDP and Broad Money Supply Growth

Overall, the inflation outlook appears subdued, with little urgency to hike interest rates at present.

The market is also getting more comfortable with the idea of trade tariffs. The S&P 500 is testing resistance at 2800. Breakout is likely and would suggest a primary advance to 3000.

S&P 500

The Nasdaq 100 followed through above 7300, confirming the primary advance, with a target of 7700.

Nasdaq 100

This is the final stage of a bull market but there is no sign of it ending. I am wary of the impact of a trade war on individual stocks and have reduced exposure to multinationals that make a sizable percentage of their sales in China.

Financial markets are supposed to swing like a pendulum: They may fluctuate wildly in response to exogenous shocks, but eventually they are supposed to come to rest at an equilibrium point…. Instead, as I told Congress, financial markets behaved more like a wrecking ball, swinging from country to country and knocking over the weaker ones. It is difficult to escape the conclusion that the international financial system itself constituted the main ingredient in the meltdown process.

~ George Soros on the 1997 Asian Financial Crisis and the need for greater regulation of global financial markets

Rising inflation, Dollar weakens

The consumer price index (CPI) ticked up 1.14% (year-on-year) for April 2016, on the back of higher oil prices. Core CPI (excluding energy and food) eased slightly to 2.15%.

CPI and Core CPI

Inflation is muted, but a sharp rise in hourly manufacturing (production and nonsupervisory employees) earnings growth (2.98% for 12 months to April 2016) points to further increases.

Manufacturing Hourly Earnings Growth

Despite this, long-term interest rates remain weak, with 10-year Treasury yields testing support at 1.65 percent. Breach would signal another test of the record low at 1.50% in 2012. The dovish Fed is a contributing factor, but so could safe-haven demand from investors wary of stocks….

10-year Treasury Yields

The Dollar

The US Dollar Index rallied off long-term support at 93 but this looks more a pause in the primary down-trend (signaled by decline of 13-week Momentum below zero) than a reversal.

US Dollar Index

Explanation for the Dollar rally is evident on the chart of China’s foreign reserves: a pause in the sharp decline of the last 2 years. China has embarked on another massive stimulus program in an attempt to shock their economy out of its present slump.

China: Foreign Reserves

But this hair of the dog remedy is unlikely to solve their problems, merely postpone the inevitable reckoning. The Yuan is once again weakening against the Dollar. Decline in China’s reserves — and the US Dollar as a consequence — is likely to continue.

USD: Chinese Yuan

Gold breaks support

Gold fell to $1070/ounce, breaching the band of primary support between $1080 and $1100 per ounce. 13-Week Twiggs Momentum peaks below zero indicate a strong primary down-trend. The next level of support is $1000/ounce*.

Spot Gold

* Target calculation: 1100 – ( 1200 – 1100 ) = 1000

Inflation

Core CPI is close to the Fed target of 2.0 percent but inflation expectations continue to fall, with the 5-year breakeven rate (5-year Treasury minus 5-year TIPS yield) as low as 1.2 percent.

5-Year Breakeven Rate

Interest Rates and the Dollar

Long-term interest rates are rising, anticipating a Fed rate hike. 10-Year Treasury yields retraced to test the new support level after breaking through 2.25 percent. Respect of support is likely and will signal an advance to 2.50 percent. Recovery of 13-week Twiggs Momentum above zero suggests an up-trend. Breakout above 2.50 percent would confirm.

10-Year Treasury Yields

Low inflation and a stronger Dollar are weakening demand for gold. The Dollar Index is testing resistance at 100. Respect of zero by 13-week Twiggs Momentum indicates long-term buying pressure. Breakout above 100 is likely and would signal an advance to 107*.

Dollar Index

* Target calculation: 100 + ( 100 – 93 ) = 107

Low inflation and a stronger dollar indicate weak gold

Growth in hourly manufacturing earnings has climbed above the Fed target of 2.0 percent, while core CPI continues to track near the target. But the 5-year breakeven rate (5-year Treasury minus TIPS yield) is close to 1.0 percent. The market expects inflation to fall over the next few years.

5-Year Breakeven Rate, Core CPI and Growth in Hourly Manufacturing Earnings

The reasoning is straight-forward: the end of the infrastructure boom in China and slowing economic growth means low energy and commodity prices for the foreseeable future. Slow credit growth in the West will also act as a brake on aggregate demand, maintaining downward pressure on CPI.

CPI:US and EU

Long-term interest rates are low, with 10-year Treasury yields testing support at 2.0 percent. Declining 13-week Twiggs Momentum, below zero, suggests further weakness.

10-Year Treasury Yields

The Dollar Index rallied off support at 93. A higher trough indicates buying pressure. Breakout above 98 would suggest another advance.

Dollar Index

Gold

A strong dollar and low inflation would weaken demand for gold. Spot gold is testing medium-term support at $1150/ounce. Breach would warn of a test of the primary level at $1100. 13-Week Twiggs Momentum is rising, but a peak below zero would signal continuation of the primary down-trend.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

Low inflation and a stronger dollar indicate weak gold

Growth in hourly manufacturing earnings has climbed above the Fed target of 2.0 percent, while core CPI continues to track near the target. But the 5-year breakeven rate (5-year Treasury minus TIPS yield) is close to 1.0 percent. The market expects inflation to fall over the next few years.

5-Year Breakeven Rate, Core CPI and Growth in Hourly Manufacturing Earnings

The reasoning is straight-forward: the end of the infrastructure boom in China and slowing economic growth means low energy and commodity prices for the foreseeable future. Slow credit growth in the West will also act as a brake on aggregate demand, maintaining downward pressure on CPI.

CPI:US and EU

Long-term interest rates are low, with 10-year Treasury yields testing support at 2.0 percent. Declining 13-week Twiggs Momentum, below zero, suggests further weakness.

10-Year Treasury Yields

The Dollar Index rallied off support at 93. A higher trough indicates buying pressure. Breakout above 98 would suggest another advance.

Dollar Index

Gold

A strong dollar and low inflation would weaken demand for gold. Spot gold is testing medium-term support at $1150/ounce. Breach would warn of a test of the primary level at $1100. 13-Week Twiggs Momentum is rising, but a peak below zero would signal continuation of the primary down-trend.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

Fanaticism consists in redoubling your efforts when you have forgotten your aim.

~ George Santayana

Bear Rally

North America

Construction activity continues to advance. The graph below shows Total US Construction Spending adjusted for inflation (Core CPI). Spending is substantially below the 2004 to 2007 property bubble but equates to the earlier Dotcom era. The steep rise suggests that rate increases will be necessary to prevent another bubble.

US Construction Spending adjusted by Core CPI

The S&P 500 is testing resistance at 2000. Bullish divergence on 21-day Twiggs Money Flow indicates (medium-term) buying pressure. Recovery above 2000 would signal a relieving rally, with a target (from the double-bottom pattern) of 2130*. The market remains bearish and respect of 2130 would warn of another test of primary support at 1870.

S&P 500 Index

* Target calculation: 2000 + ( 2000 – 1870 ) = 2130

The CBOE Volatility Index (VIX) below 20 indicates market risk is easing. We need to remain vigilant for the next few weeks as VIX can be prone to false breaks.

S&P 500 VIX

NYSE short sales are subdued.

Dow Jones Industrial Average is similarly testing resistance at 17000 on the weekly chart. Breakout would offer a similar target of 18300. Recovery of 13-week Twiggs Money Flow above zero indicates buying pressure. Reversal below 16000 is unlikely, but would confirm a primary down-trend.

Dow Jones Industrial Average

Canada’s TSX 60 recovered above the former primary support level at 800. Follow-through above 820 would signal a relieving rally. Weak 13-week Twiggs Momentum, below zero, warns the market is still bearish.

TSX 60 Index

* Target calculation: 820 + ( 820 – 750 ) = 890

Europe

Germany’s DAX remains weak, with 13-week Twiggs Money Flow below zero. Recovery above 10500 would indicate a bear rally. Only follow-through above 11000 would signal that the down-trend is over.

DAX

The Footsie proved more resilient, respecting support at 6000 with 13-week Twiggs Money Flow holding above zero. Breakout above 6300 indicates a relieving rally, while follow-through above the descending trendline would suggest that the correction is over. Reversal below 6000 is unlikely, but would confirm the primary down-trend.

FTSE 100

Asia

The Shanghai Composite Index continues to test government-enforced support at 3000. Recovery above 3500 is most unlikely.

Dow Jones Shanghai Index

Hong Kong’s Hang Seng Index rallied to test resistance at 22500, while 13-week Twiggs Money Flow recovered above zero. Follow-through above 22500 would indicate another test of 24000. But this remains a bear market and reversal below 22500 would warn of another decline.

Hang Seng Index

Japan’s Nikkei 225 respected primary support at 17000. Gradual decline on 13-week Twiggs Money Flow suggests a secondary correction. Recovery above 19000 would indicate another test of 21000.

Nikkei 225 Index

* Target calculation: 19000 + ( 19000 – 17000 ) = 21000

India’s Sensex followed through above resistance at 26500, indicating a bear rally. Strong buying pressure, signaled by a 13-week Twiggs Money Flow trough above zero, suggests a reversal. Breakout above 28500 would confirm. Reversal below 25000 is unlikely, but would confirm a primary down-trend.

SENSEX

Australia

A monthly chart of the ASX 200 shows the significance of the 5000 support level.

ASX 200 monthly

Rising 21-Day Twiggs Money Flow on the daily chart indicates medium-term buying pressure. Breakout above 5300 would offer a target of 5700. But expect stiff resistance between 5200 and 5300 — already flagged by a tall shadow on today’s candlestick. Breach of 5000 is unlikely at present, but would confirm a primary down-trend.

ASX 200

* Target calculation: 5000 – ( 5400 – 5000 ) = 4600


More….

Crude: Another bear rally

Gold down-trend continues

Sen. John McCain on Russia’s airstrikes in Syria

Paddleboarding with whales

Deleveragings go on for about 15 years. The process of raising debt relative to incomes goes on for 30 or 40 years, typically. There’s a last big surge, which we had in the two years from 2005 to 2007 and from 1927 to 1929, and in Japan from 1988 to 1990, when the pace becomes manic. That’s the classic bubble. And then it takes about 15 years to adjust.

~ Ray Dalio, Bridgewater Associates

Bears out in force

Bears continue to dominate equity markets. Patches of support are visible across North America, Europe and Asia but this is likely to be a secondary rally rather than a trend change.

The Russian bear is also playing up. This time in Syria. Senator John McCain sums up the escalating crisis in the Middle East in this 15-minute video.

North America

The S&P 500 respected support between 1870 and 1900, rallying toward another test of resistance at 2000. The 21-day Twiggs Money Flow peak just above zero continues to indicate (medium-term) selling pressure. Recovery above 2000 is unlikely, but would signal a relieving rally. Breach of support at 1870 would confirm the primary down-trend.

S&P 500 Index

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800

The CBOE Volatility Index (VIX) holding above 20 indicates elevated market risk.

S&P 500 VIX

NYSE short sales remain subdued.

Dow Jones Industrial Average is testing support at 16000. Long tails on the last two weekly candles and recovery of 13-week Twiggs Money Flow above zero indicate strong support. Breach of 16000 would confirm a primary down-trend but we are likely to see a (secondary) bear rally beforehand.

Dow Jones Industrial Average

Bellwether transport stock Fedex continues to warn of a contraction in economic activity.

Fedex

And retail sales growth remains subdued.

Retail Sales and Core CPI

A long tail on Canada’s TSX 60 indicates continued support despite the breach of 790. Declining 13-week Twiggs Momentum below zero indicates a primary down-trend. Recovery above 820 is unlikely, but would suggest a bear trap.

TSX 60 Index

* Target calculation: 800 – ( 900 – 800 ) = 700

Europe

Germany’s DAX signals a primary down-trend, but appears to have found secondary support at 9500. Recovery of 13-week Twiggs Money Flow above zero would suggest a bear rally.

DAX

The Footsie found strong support at 6000, with long tails and 13-week Twiggs Money Flow recovering above zero. Penetration of the descending trendline is unlikely but would warn of a bear trap. Breach of support at 6000 is more likely and would confirm the primary down-trend.

FTSE 100

Asia

The Shanghai Composite Index continues to test government-enforced support at 3000. Recovery above 3500 is most unlikely. Breach of 3000 would warn of another sharp sell-off.

Dow Jones Shanghai Index

Hong Kong’s Hang Seng Index broke support at 21000, confirming the primary down-trend — signaled earlier by 13-week Twiggs Money Flow.

Hang Seng Index

Japan’s Nikkei 225 is testing primary support between 16500 and 17000. Gradual decline on 13-week Twiggs Money Flow suggests a secondary correction, but reversal of 13-week Momentum below zero warns of a primary down-trend. Breach of 16500 would confirm.

Nikkei 225 Index

* Target calculation: 17500 – ( 19000 – 17500 ) = 16000

India’s Sensex found support at 25000 before testing resistance at 26500. 13-Week Twiggs Money Flow trough above zero indicates strong buying pressure. Recovery above 26500 would warn of a bear trap. Reversal below 25000 is less likely, but would confirm the primary down-trend.

SENSEX

* Target calculation: 25000 – ( 26500 – 25000 ) = 23500

Australia

The ASX 200 also shows solid support at 5000, with rising 21-Day Twiggs Money Flow indicating medium-term buying pressure. Recovery above 5200 would indicate a bear rally. Breach of 5000 remains likely, however, and would confirm the primary down-trend.

ASX 200

* Target calculation: 5000 – ( 5400 – 5000 ) = 4600


More….

Gold and Treasury yields decline as inflation weakens

Sen. John McCain on Russia’s airstrikes in Syria

Japan abandons Fed-style inflation targeting and targets GDP growth instead

Deflation supercycle is over as world runs out of workers | Telegraph

Australia: Latest SMSF statistics | FINSIA

I think anybody who is a great investor, a good investor, a successful investor has to be a person who can be both aggressive and defensive….. have enough fear to have the caution. But you can’t let the fear control you.

~ Ray Dalio, Bridgewater Associates

Gold: No flight to safety

US inflation remains subdued with core CPI hovering below 2.0 percent.

Core CPI

Treasury yields remain weak, with the 10-year yield testing support between 1.85 and 2.0 percent.

10-Year Treasury Yields

That gives a real yield, after deducting core CPI, of close to zero on a 10-year investment.

10-Year Treasury Yield minus Core CPI

Abraham Maslow wrote in the 1960s: “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” His description certainly applies to the Fed who have used monetary policy extensively to fix a problem for which it was not intended. Interest rates were driven down to unsustainable levels, with questionable results. My concern is that maintaining rates close to zero for close to seven years could breed a host of unforeseen problems.

What is really needed is a Keynesian solution: government investment in productive infrastructure. But neither party is likely to succeed in winning approval for this.

The Dollar Index is ranging between 93 and 98. Increased interest rates or falling inflation would suggest an upward breakout. Flight to safety would drive yields downward. But the biggest factor that may drive up yields could be a Chinese sell-off of foreign reserves (largely Treasury investments) in order to support the Yuan or spend on infrastructure to revive their economy.

Dollar Index

There is no flight to the safety of gold as yet. The Gold Bugs Index, representing un-hedged gold miners, is testing primary support at 105. Twiggs Momentum (13 week) peaks below zero indicate a strong down-trend.

Gold Bugs Index

Spot gold fared a little better, but is likely to test primary support at $1080 per ounce. Again, declining 13-week Twiggs Momentum, with peaks below zero, signals a strong down-trend. Breach of support at $1080 would offer a target of $1000/ounce*.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

Will the Fed hike rates?

The market eagerly awaits the decision of the Fed Open Market Committee (FOMC) on whether to lift the target interest rate (FFR) from its 0.00 – 0.25 percent range maintained since the dark days of 2008.

Core CPI

Core CPI remains subdued at 1.83 percent for the 12 months to August — close to its 2 percent target — so there is no urgency to increase rates despite a strengthening job market.

The act of revising the target rate is largely symbolic. There is no doubt that the economy can withstand an increase in the Fed Funds Rate to 0.5%. But commencement of a tightening cycle may scare an already jittery market. There is a fairly equal split amongst economists as to whether the Fed should proceed with the rate rise or not. My guess is that the Fed will opt for a bet each way, with a wider target range (say 0.00 to 0.50 percent) or a reduced increment (say 0.10 to 0.30 percent). The effective FFR is currently sitting at 0.14 percent and I am sure the Fed’s plan is to continue with a gradual increase over time and no sudden movements.

Effective Fed Funds Rate

The S&P 500 is testing resistance at 2000 after a higher trough and rising 21-day Twiggs Money Flow indicate buying pressure. Recovery above 2000 would signal a relieving rally, while respect of resistance would suggest another test of support at 1900.

S&P 500 Index

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800

The CBOE Volatility Index (VIX) indicates market risk is declining.

S&P 500 VIX

NYSE short sales are also declining.

NYSE Short Sales

Dow Jones Industrial Average closed above resistance at 16700. Follow-through after the FOMC decision would confirm a relieving rally. Reversal below 16600 would warn of another test of 16000. Failure of support at 16000 is unlikely, but would signal a primary down-trend. Recovery of 21-day Twiggs Money Flow above zero indicates medium-term buying pressure.

Dow Jones Industrial Average

Canada’s TSX 60 recovered above 800, indicating solid support between 790 and 800. Recovery above 820 and the descending channel would signal that the correction has ended. Rising 13-week Twiggs Momentum would strengthen the signal, while recovery above zero would confirm.

TSX 60 Index

* Target calculation: 800 – ( 900 – 800 ) = 700

Europe

Germany’s DAX found support at 10000. Recovery above 10500 would suggest a relieving rally, but only follow-through above the descending trendline and resistance at 11000 would confirm. Respect of the zero line by 13-week Twiggs Money Flow is a bullish sign; completion of a trough above zero would confirm long-term buying pressure.

DAX

The Footsie similarly found support at 6000. Recovery above 6300 would indicate a relieving rally. Penetration of the descending trendline would confirm.

FTSE 100

Asia

The Shanghai Composite Index continues to test (enforced) support at 3000. Recovery above 3500 is unlikely, but would indicate that the crisis has passed.

Dow Jones Shanghai Index

Hong Kong’s Hang Seng Index found support at 21000 and is likely to test the former primary support level at 23000. 13-Week Twiggs Money Flow below zero indicates long-term selling pressure, but recovery above zero would suggest a false signal. Breakout above 23000 and the descending trendline is unlikely, but would signal that the down-trend is over.

Hang Seng Index

Japan’s Nikkei 225 found support at 17500. Recovery above 19000 would signal a rally to test resistance at 21000. The gradual decline on 13-week Twiggs Money Flow suggests medium-term selling pressure rather than a primary (long-term) shift.

Nikkei 225 Index

* Target calculation: 19000 + ( 19000 – 17500 ) = 20500

India’s Sensex is headed for a test of the new resistance level at 26500. The primary trend is downward. Respect of the zero line by 13-week Twiggs Money Flow indicates medium-term buying pressure. Recovery above 26500 is unlikely, but would warn of a bear trap. Respect of resistance remains more likely and would suggest another decline.

SENSEX

* Target calculation: 25000 – ( 26500 – 25000 ) = 23500

Australia

The ASX 200 continues to test primary support at 5000. 21-Day Twiggs Money Flow oscillating around zero indicates uncertainty. Breach of 5000 would confirm a primary down-trend. Recovery above 5300 is less likely, but would indicate a bear rally.

ASX 200

* Target calculation: 5000 – ( 5400 – 5000 ) = 4600

Just a word of caution. Relieving rallies can (and often do) fail. Probability of a continued primary up-trend will only improve once support levels have been tested. Early movers always face greater uncertainty. Which is why our long-term portfolios continue to hold high levels of cash.


More….

Why Europe Failed

Not much wrong with the US economy

NYSE short sales easing

Marcus Miller & Eric Clapton [music]

You really wonder why leaders want these jobs when they really do not want to lead. And what is their risk? That Barack Obama will not get a second term? Or that Angela Merkel’s coalition might finally end up on the rocks? If they actually made the leap they might astound themselves. Because, in the end, everyone in political life gets carried out — the only relevant question is whether the pallbearers will be crying.

~ Paul Keating, 24th Prime Minister of Australia (2011)