Category: US & Canada

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S&P 500 at key resistance while Treasury yields fall

10-Year Treasury yields broke through support at 1.70%. Prior to 2012, the 1945 low of 1.70% was the lowest level in the 200 year history of the US Treasury. Expect a test of primary support at 1.40%.
10-Year Treasury Yields

Falling Treasury yields generally indicate a flight from stocks to the safety of bonds. The S&P 500, however, is consolidating below resistance at 1600. Breakout would suggest an advance to 1650, while reversal below 1540 would indicate a correction to the rising trendline at 1475. Recent weakness on 13-week Twiggs Money Flow favors a correction, but oscillation above zero indicates a healthy primary up-trend. A June quarter-end below 1500 would present a strong long-term bear signal.

S&P 500 Index

* Target calculation: 1475 + ( 1475 – 1350 ) = 1600

The Nasdaq 100 index is testing resistance at 2900. Breakout would offer a target of 3400*, but bearish divergence on 13-week Twiggs Money Flow favors a break of 2800 and test of the rising trendline at 2700.
Nasdaq 100

* Target calculation: 2900 + ( 2900 – 2500 ) = 3400

Gold rallied to test resistance at $1500/ounce. Breakout would suggest a bear trap and a rally to $1600, but respect of resistance is likely and would signal another test of support at $1330/1350. A gold bear market indicates falling inflation expectations, but that could also translate into lower growth in earnings and higher Price Earnings ratios.
Gold

Structural flaws in the US economy have not been addressed and uncertainty remains high, despite low values reflected on the VIX.

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Capital Regulation after the Crisis: Business as Usual? | Martin Hellwig

This abstract from a 2010 paper by Martin Hellwig sums up the debate about overhauling the financial system:

Whereas the Basel Committee on Banking Supervision seems to go for marginal changes here and there, the paper calls for a thorough overhaul, moving away from risk calibration and raising capital requirements very substantially. The argument is based on the observation that the current system of risk-calibrated capital requirements, in particular under the model-based approach, played a key role in allowing banks to be undercapitalized prior to the crisis, with strong systemic effects for deleveraging multipliers and for the functioning of interbank markets. The argument is also based on the observation that the current system has no theoretical foundation, its objectives are ill-specified, and its effects have not been thought through, either for the individual bank or for the system as a whole. Objections to substantial increases in capital requirements rest on arguments that run counter to economic logic or are themselves evidence of moral hazard and a need for regulation.

The bipartisan bill, Terminating Bailouts for Taxpayer Fairness Act, sponsored by senators Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican, is a courageous attempt to address the undercapitalization that led to the global financial crisis. Abruptly raising bank capital requirements would lead to a credit contraction if introduced in isolation, but the Fed is quite capable of adjusting monetary policy to offset this and a suitable phase-in period would give banks time to adjust. What is important is that we get to the point where banks are properly capitalized to deal with any future instability.

Read the full paper at Capital Regulation after the Crisis: Business as Usual? | Martin Hellwig, July 2010.

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Two Senators Try to Slam the Door on Bank Bailouts – NYTimes.com

This is a show-down between Wall Street and the voting public. Gretchen Morgenson at NY Times writes:

THERE’S a lot to like, if you’re a taxpayer, in the new bipartisan bill from two concerned senators hoping to end the peril of big bank bailouts. But if you’re a large and powerful financial institution that’s too big to fail, you won’t like this bill one bit.

The legislation, called the Terminating Bailouts for Taxpayer Fairness Act, emerged last Wednesday; its co-sponsors are Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican. It is a smart, simple and tough piece of work that would protect taxpayers from costly rescues in the future.

This means that the bill will come under fierce attack from the big banks that almost wrecked our economy and stand to lose the most if it becomes law.

For starters, the bill would create an entirely new, transparent and ungameable set of capital rules for the nation’s banks — in other words, a meaningful rainy-day fund. Enormous institutions, like JPMorgan Chase and Citibank, would have to hold common stockholder equity of at least 15 percent of their consolidated assets to protect against large losses. That’s almost double the 8 percent of risk-weighted assets required under the capital rules established by Basel III, the latest version of the byzantine international system created by regulators and central bankers.

This change, by itself, would eliminate a raft of problems posed by the risk-weighted Basel approach……

The outcome is far from clear. The financial muscle of Wall Street can buy a lot of influence on the Hill. But my guess is that they are too smart to incense voters by meeting the bill head-on. Instead they will attempt to delay with amendments and eventually turn it into an unwieldy 1000-page unenforcable monstrosity that no one understands. Much as they did with Dodd-Frank.

If they win, the country as a whole will suffer. Maybe not today, but in the inevitable next financial crisis if this bill does not pass.

Read more at Two Senators Try to Slam the Door on Bank Bailouts – NYTimes.com.

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Forex: Aussie consolidates while Sterling surprises

The euro is consolidating between $1.30 and $1.32. Upward breakout is more likely and would test the high of $1.37. Reversal below $1.30 would warn of another decline, to around $1.24*. In the long-term, breakout above $1.37 would signal a primary advance to $1.50. A 13-week Twiggs Momentum trough at the zero line would reinforce this.

Euro/USD

* Target calculation: 1.28 – ( 1.32 – 1.28 ) = 1.24

Pound sterling surprised with a reversal above resistance at $1.53. Follow-through above $1.54 would suggest an advance to around $1.58, while retreat below $1.52 would signal a down-swing to $1.43*. Declining 13-week Twiggs Momentum, below its 2011 lows, strengthens the bear signal.

Sterling/USD

* Target calculation: 1.53 – ( 1.63 – 1.53 ) = 1.43

The Aussie Dollar rallied off primary support at $1.015. Narrow fluctuation of 63-day Twiggs Momentum around zero suggests a ranging market. Respect of support suggests another test of $1.06.

Aussie Dollar/USD

Canada’s Loonie found support above $0.97 against the greenback, suggesting another test of $0.99. Breach of the rising trendline, however, would indicate another down-swing.

Canadian Dollar/USD

The greenback is testing resistance at ¥100 against the Japanese Yen. The 30-year down-trend of the dollar is over. Breakout above ¥100 is likely, and would suggest an advance to the 2007 high at ¥125*.

USD/JPY

* Target calculation: 100 – ( 100 – 75 ) = 125

The Fed, ECB and BOJ are all printing money and debasing their currencies. The US dollar, although taking on water, is viewed as the safest — because it is sinking slower than the others. There are signs the Fed is likely to slow quantitative easing in the next 6 to 12 months.

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Dr. Ed’s Blog: Dividends, Buybacks, & the Bull Market (excerpt)

Ed Yardeni highlights that a surge in dividends and share buybacks is driving the current bull market:

Most importantly, during the current earnings season, US corporations continue to announce dividend increases and more share buybacks. Previously, I’ve shown that this corporate cash flow into the stock market–which totaled $2.1 trillion for the S&P 500 since stock prices bottomed during Q1-2009 through Q4-2012–has been driving the bull market since it began.

I have one concern: is this surge sustainable or was it precipitated by an increase in marginal tax rates for top income-earners and likely to slow along with earnings?

View chart at Dr. Ed's Blog: Dividends, Buybacks, & the Bull Market (excerpt).

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PIMCO’s Gross: Investing may be more difficult in years ahead

Charles Stein and Alexis Leondis at Bloomberg quote Bill Gross, co-chief investment officer at PIMCO (Pacific Investment Management Co) about the outlook for the next decade:

Recently, Gross has become more reflective in his monthly online commentaries. In the April outlook, called “A Man in the Mirror,” he suggested that the careers of the great investors of the past three or four decades were fueled by an expansion of credit that may be coming to an end, and that investing may become more difficult in years ahead.

“All of us, even the old guys like Buffett, Soros, Fuss, yeah — me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience,” he wrote. “Perhaps it was the epoch that made the man.”

Central banks have at last awoken to the dangers of rapid credit expansion and are unlikely to allow a repeat of the credit-fueled growth of the last thirty years. Bull markets of the future are therefore likely to be a lot more sedate.
Read more at Pimco’s Rising Stars Pull in Money for Future After Gross – Bloomberg.

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Nikkei and ASX 200 rally, while China & Europe weaken

Respect of support at 1540 and the bottom trend channel indicates a S&P 500 rally to test 1600 and the upper channel line. Failure to break resistance at 1600 would warn of a correction as signaled by mild bearish divergence on 21-day Twiggs Money Flow.

S&P 500 Index

* Target calculation: 1350 + ( 1350 – 1100 ) = 1600

The FTSE 100 also respected support, at 6220, but a tall shadow on Monday warns of selling pressure. Reversal of 21-day Twiggs Money Flow below zero would strengthen the signal and breach of support (6220) would signal a test of the primary trendline at 6000.
FTSE 100 Index

* Target calculation: 6220 – ( 6420 – 6220 ) = 6020

Germany’s DAX broke medium-term support at 7500. A 21-day Twiggs Money Flow peak at zero warns of selling pressure. Follow-through below 7400 would signal a test of primary support at 7000. Recovery above 7600 is unlikely, but would test the descending trendline at 7700.
DAX Index

* Target calculation: 7500 – ( 8000 – 7500 ) = 7000

India’s Sensex broke resistance at 19000. Respect of support at 18000 and the rising trendline indicates the primary trend is intact. Mild bullish divergence on 21-day Twiggs Money Flow signals buying pressure. Expect consolidation or short retracement, but follow-through above the descending trendline at 19200 would indicate an advance to 20000.
BSE Sensex Index

* Target calculation: 19000 + ( 19000 – 18000 ) = 20000

China’s Shanghai Composite is testing medium-term resistance at 2250. Breakout would penetrate the descending trendline, indicating the correction is over.
Shanghai Composite Index
Unfortunately the Dow Jones Shanghai Index respected the descending trendline Tuesday, indicating another down-swing to the lower trend channel.
DJ Shanghai Index

Japan’s Nikkei 225 is the star performer, when measured in Yen. Sharp rallies, with frequent gaps, followed by short retracements indicates a strong up-trend. As does 21-day Twiggs Money Flow oscillating clear above the zero line.
Nikkei 225 Index

The ASX 200 met some resistance at 5020, but rising 21-day Twiggs Money Flow indicates buying pressure and breakout would signal a test of 5150.
ASX 200 Index

* Target calculation: 5025 + ( 5025 – 4900 ) = 5150

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Forex: Euro finds support while Sterling, Aussie and Loonie fall

The euro respected primary support at $1.26 on the monthly chart. Follow-through above $1.32 would indicate another test of $1.37, while breakout above $1.37 would signal a primary advance to $1.50. A trough above zero on 13-week Twiggs Momentum would reinforce this. Reversal below $1.26, however, would signal a down-swing to $1.20.

Euro/USD

* Target calculation: 1.35 + ( 1.35 – 1.20 ) = 1.50

Pound sterling respected resistance at $1.53 against the dollar, confirming a down-swing to $1.43*. Declining 13-week Twiggs Momentum, below its 2011 lows, strengthens the signal.

Sterling/USD

* Target calculation: 1.53 – ( 1.63 – 1.53 ) = 1.43

The Aussie Dollar fell sharply, headed or a test of primary support at $1.015. Narrow fluctuation of 63-day Twiggs Momentum around zero suggests a ranging market. Respect of support would suggest another rally to test $1.06.

Aussie Dollar/USD

Canada’s Loonie respected resistance at $0.99 against the greenback. The primary trend is down and breakout below $0.97  would indicate another decline, while breach of $0.96 would strengthen the signal. Respect of $0.96, however, would suggest an advance back to the 2012 high of $1.03; strengthened if resistance at $0.99 is broken.

Canadian Dollar/USD

The greenback is testing resistance at ¥100 against the Japanese Yen. The 30-year down-trend of the dollar is over. Breakout above ¥100 is likely, after brief consolidation/retracement, and would suggest an advance to the 2007 high at ¥125*.

USD/JPY

* Target calculation: 100 – ( 100 – 75 ) = 125

The Fed, ECB and BOJ are all printing money and debasing their currencies. It is a case of which boat is sinking the fastest, and the US dollar, although taking on water, being viewed as relatively safe. The fall of gold reveals the market view that the Fed is likely to tail off quantitative easing in the next 6 to 12 months.

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