The S&P 500 rally is testing resistance at 1875/1880. Volumes are light, but an attempted breakout above 1880 should reveal any patient sellers lying in wait. Successful breakout would signal an advance to 1950*, but bearish divergence on 21-day Twiggs Money Flow continues to warn of medium-term selling pressure.
* Target calculation: 1850 + ( 1850 – 1750 ) = 1950
The ASX 200 continues to rally, but today’s weak close indicates resistance. 21-Day Twiggs Money Flow holding above zero, however, indicates longer term buying pressure. Breakout above 5450/5460 would signal an advance to 5800*. Weakness from China or the US, however, could drive the ASX lower. Failure of support at 5290/5300 would signal a stronger correction and possible test of primary support at 5050.
* Target calculation: 5400 + ( 5400 – 5000 ) = 5800
ASX 200 VIX near 12, however, indicates low risk typical of a bull market.
China’s Shanghai Composite Index encountered resistance at 2100 last week. Reversal below long-term support at 1950 would signal a decline to the 2009 low of 1650*. 13-week Twiggs Money Flow below zero indicates selling pressure. Recovery above 2180 is unlikely, but would complete a double-bottom reversal.
* Target calculation: 1950 – ( 2250 – 1950 ) = 1650
India’s Sensex closed strongly above 22000 last week, signaling an advance to 23000*. Reversal below 21500 is unlikely, but would warn of another correction. A 13-week Twiggs Money Flow trough above zero indicates long-term buying pressure.
* Target calculation: 21500 + ( 21500 – 20000 ) = 23000
The DAX rallied strongly off primary support at 9000. Recovery of 13-week Twiggs Money Flow above the descending trendline would suggest that medium-term selling pressure is easing. Breakout above 9800 would signal an advance to 10600. Breach of primary support is unlikely at present.
DAX Volatility retreated below 20, indicating low risk typical of a bull market.
The S&P 500 rallied off support at 1840/1850 but a weak close warns of further resistance. Bearish divergence on 21-day Twiggs Money Flow (not shown) indicates medium-term selling pressure. I have highlighted daily Volume that is more than 1 standard deviation outside the 50-day moving average on the graph below. The latest red bar showed strong resistance at triple-witching hour, but the last two rallies on low volume also suggest a lack of commitment from buyers. Reversal below 1840 would signal a correction. Breakout above 1880 is less likely, but would signal an advance to 1950*.
* Target calculation: 1850 + ( 1850 – 1750 ) = 1950
CBOE Volatility Index (VIX) below 15, however, continues to indicate low risk typical of a bull market.
The Nasdaq 100 below 3600 indicates a correction. Penetration of the (secondary) rising trendline would strengthen the signal. Sharply falling 21-day Twiggs Money Flow, following bearish divergence, warns of strong selling pressure and a test of primary support at 3400/3420. Recovery above 3650 is unlikely, but would indicate another advance.
* Target calculation: 3600 + ( 3600 – 3400 ) = 3800
Bellwether Transport stock Fedex is headed for another test of primary support at $128/$130. Reversal of 13-week Twiggs Money Flow below zero warns of strong selling pressure and a primary down-trend. Failure of primary support would confirm, suggesting a broad economic slow-down.
Scott Radnitz suggests that Vladimir Putin is not crazy — just deliberately acting that way.
….consider strategic theorist Thomas Schelling’s concept of the “rationality of irrationality.” This can be illustrated through the game of chicken, in which two drivers are heading for each other at full speed, and the first to swerve is the chicken. A driver who appears crazy enough to prefer dying over chickening out will always have the advantage. It is therefore rational for a player to convince his opponent that he is actually irrational.
Read more at Vladimir Putin’s irrational behavior: Why the Russian president wins if we think he is crazy..
From a speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, at the New York Stock Exchange, New York, 26 March 2014:
How do we get to the end of the tunnel?
At the European level, the most important project is the banking union. The banking union is most certainly the biggest step since the introduction of the euro. And it is the most logical step to take. A single currency requires integrated financial markets and this includes the supervision of banks.
Consequently, one of the pillars the banking union rests upon is a Single Supervisory Mechanism – that is European bank supervision for the largest banks. Centralising supervisory powers in such a way can foster a comprehensive and unbiased view upon banks. It also enables policy action that is not held hostage by national interests. Thus, it will contribute to more effective supervision and better cross-border cooperation and coordination.
Read more at Andreas Dombret: What is going on in Europe? The view from within.
The daily press appears convinced the S&P 500 is overvalued and due for a crash. Yet the macro-economic and volatility filters that we use at Porter Capital and Research & Investment — to identify market risk so that we can move to cash when risks are elevated — show no signs of stress. So I have been delving into some of the aggregate index data, kindly provided by Standard and Poors, to see whether some of their arguments hold water.
The Price-Earnings ratio for the S&P 500 itself is not excessive when compared to the last decade.
The bears argue, however, that earnings are unsustainable. One reason advanced for this is that earnings growth has outstripped sales, with corporations focusing on the bottom line rather than business growth.
Faced with weak domestic demand, large US corporates have actively sought to manage their expenses so as to meet and exceed the market’s expectations. Combined with the unwinding of provisions taken in the GFC, cost management has allowed US corporates to achieve a 124% increase in 12-month trailing earnings off the back of a 25% increase in 12-month trailing sales since October 2009.
~ Elliott Clarke, Westpac
That may be so, but any profit increase would look massive if compared to earnings in 2009. When we plot earnings against sales (per share), it tells a different story. Earnings as a percentage of sales is in the same band (7% – 9%) as 2003 to 2006. A rise above 9% would suggest that earnings may not be sustainable, but not if they continue in their current range.
The second reason advanced is that business investment is falling. Westpac put up a chart that shows US equipment investment growth is close to zero. But we also need to consider that accelerated tax write-offs led to a surge in investment in 2009/2010. The accelerated write-offs expired, but the level of investment merely stopped growing and has not fallen as I had expected.
Private (non-residential) fixed investment as a whole is rising as a percentage of GDP, not falling.
Lastly, when we compare the S&P 500 to underlying net asset value per share, it shows how frothy the market was before the Dotcom crash, with the index trading at 5 times book value. That kind of premium is clearly unsustainable without double-digit GDP growth, which was never going to happen. But the current ratio of below 2.50 is modest compared to the past decade and quite sustainable.
I am not saying that everything is rosy — it never is — but if sales and earnings continue to grow apace, and with private fixed investment rising, the current price-earnings ratio does not look excessive.
