Category: US & Canada

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S&P 500 retraces

The S&P 500 is retracing to test its new support level after breaking resistance at 1420. Respect would signal an advance to 1570*, while failure of support at 1400 would indicate a bull trap. Bearish divergence on 21-day Twiggs Money Flow continues to flag medium-term selling pressure. Breach of the lower trend channel — and support at 1400 — would warn of another test of primary support at 1300.

S&P 500 Index

* Target calculation: 1420 + ( 1420 – 1270 ) = 1570

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S&P 500 breakout

The S&P 500 and NASDAQ 100 broke through resistance to signal a primary advance. Dow Industrial Average has yet to confirm. Timing of the breakout is significant, with November elections looming and the Fed doing its best to prime the pump. September/October is a tentative time of the year, with risk of a “Spring sell-off” following the quarter end, as in 2007. Traders may ride the “election rally” but investors need be more cautious. The market is being driven by macro-economic signals (quantitative easing) rather than earnings.

All is not well: Europe is in recession, China headed for a sharp contraction, and some tough choices will have to be made in the US after the election euphoria is over. Balance sheet expansion (QE) by the Fed, ECB and PBOC is likely but inflation will be muted by private sector deleveraging. And QE will be scaled back as soon as credit contraction eases.

The S&P 500 broke through resistance at 1420 to signal an advance to 1570*. A 63-day Twiggs Momentum trough above zero reflects the primary up-trend. Retracement that respects support at 1400 would confirm the signal.

S&P 500 Index

* Target calculation: 1420 + ( 1420 – 1270 ) = 1570

Dow Jones Industrial Average is testing resistance at 13300. Breakout would strengthen the S&P 500 signal. Rising 13-week Twiggs Money Flow indicates buying pressure.

Dow Jones Industrial Average

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Forex: Euro, Pound Sterling, Canadian Loonie, Australian Dollar and Japanese Yen

The Euro is headed for $1.275, unaffected so far by the announcement that the ECB will purchase government bonds in the secondary market. Expect strong resistance at $1.275, reversal below the lower trend channel would warn of a correction.

Euro/USD

Pound Sterling is weakening against the euro, with a descending triangle testing support at €1.255. Failure of support would indicate a test of €1.230. 63-Day Twiggs Momentum is falling, but continues to indicate a primary up-trend.

Pound Sterling/Euro

* Target calculation: 1.255 – ( 1.285 – 1.255 ) = 1.225

Canada’s Loonie is testing resistance against the greenback at $1.02.  Breakout would indicate an advance to the 2011 highs at $1.06. Reversal below parity is unlikely, but would test primary support at $0.95/$0.96. Rising 63-day Twiggs Momentum suggests a primary up-trend.

Canadian Loonie/Aussie Dollar

The Aussie Dollar found support at $1.02 against the greenback. Expect a test of $1.04. Breakout would indicate $1.06, while respect would warn of a down-swing to parity. Recovery of 63-day Twiggs Momentum above zero suggests an up-trend.

Aussie Dollar/USD

The Australian Dollar found support against the yen at ¥79.50/¥80.00. Recovery above ¥83.50 would indicate a test of ¥88.00. Rising 63-day Twiggs Momentum suggests a primary up-trend. Reversal below ¥79.50 is unlikely, but would indicate another test of primary support at ¥74.

US Dollar/Japanese Yen

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Pro-Growth and Pro-Wall Street is an Oxymoron | Beat the Press

Dean Baker responds to a NYT opinion that “Mr. Clinton is the president who made the sustained case to Democrats that they had to be pro-growth and pro-Wall Street, not just to get elected, but also to build a more modern economy.”

President Clinton’s policies set the country on a course of bubble driven growth. The prosperity of the last four years of his administration was driven by an unsustainable stock bubble. The collapse of the bubble was responsible for the recession of 2001 and the deficits that get the Washington establishment types so excited. It was difficult for the economy to recover from this downturn which led to, at the time, the longest period without job growth since the Great Depression. When the economy finally did recover from this downturn and start to create jobs it was on the back of the housing bubble.

via Pro-Growth and Pro-Wall Street is an Oxymoron | Beat the Press.

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Simon Johnson: Why Are the Big Banks Suddenly Afraid? – NYTimes.com

The threat of too-big-to-fail banks has not diminished. The combined assets of the 6 largest US banks is bigger now than in 2008. Simon Johnson, Professor of Entrepreneurship at M.I.T. Sloan School of Management, writes:

A growing number of serious-minded politicians are starting to support the point made by Jon Huntsman, the former governor of Utah and a Republican presidential candidate in the recent primaries: global megabanks have become government-sponsored enterprises; their scale does not result from any kind of market process, but is rather the result of a vast state subsidy scheme.

…..Serious people on the right and on the left are reassessing if we really need our largest banks to be so large and so highly leveraged (i.e., with so much debt relative to their equity). The arguments in favor of keeping the global megabanks and allowing them to grow are very weak or nonexistent.

The big banks will vigorously defend any attempt to break them up and they have deep pockets. It would be far more effective and politically achievable to raise reserve requirements, lifting capital ratios and reducing leverage to the point that large and small institutions alike are no longer a threat to the economy. Even if we adopt a two-tier approach, with higher ratios for institutions above a certain size.

We need to remember that a fractional-reserve banking system is not an essential requirement of the capitalist system. All that is needed is an efficient intermediary between investors and borrowers. Equity-funded banks proved effective in funding Germany’s industrialization prior to WW1. Islamic banks today follow similar principles. Over-dependence on deposits is the primary cause of our current instability.

via Simon Johnson: Why Are the Big Banks Suddenly Afraid? – NYTimes.com.

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Don't Expect Consumer Spending To Be the Engine of Economic Growth It Once Was

By William R. Emmons:

The recession itself could be described as a period in which consumer spending contracted sharply, while other sources of private demand were unable to offset the shortfall. The subsequent recovery, such as it is, largely has been the result of massive government interventions in the form of financial rescues, unprecedented monetary stimulus and record-breaking government budget deficits. We’re left with extremely low short-term and long-term interest rates, as well as historically large budget deficits—all of which must reverse at some point.
…..To assure strong, sustainable growth in the long term, the U.S. economy needs to include a larger role for business investment and exports than has been the case in recent decades.

via Don’t Expect Consumer Spending To Be the Engine of Economic Growth It Once Was.

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Canada: TSX60 resistance

The TSX 60 respected resistance at 700 on the weekly chart. Penetration of the descending trendline suggests that a bottom is forming, but failure to break 700 would mean a re-test of primary support at 640. Money Flow remains strong but formation of a peak below zero on 63-day Twiggs Momentum would warn of continuation of the primary down-trend.

TSX 60 Index

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Lackluster S&P 500 and Dow Industrials

The S&P 500 Index is currently consolidating between 1400 and 1420. Lackluster momentum suggests another correction; confirmed if Twiggs Momentum (63-day) reverses below zero. Breakout above 1420, however, would signal an advance to the 2007 high of 1560*.

S&P 500 Index

* Target calculation: 1420 + ( 1420 – 1280 ) = 1560

The Dow Jones Industrial Average is similarly testing support at 13000 on the weekly chart. Downward breakout would penetrate the rising trendline, suggesting another correction. Weak volume signals a lack of interest from buyers rather than resistance from sellers. Upward breakout above 13300 is unlikely, but would indicate an advance to the 2007 high of 14200.

Dow Jones Industrial Average

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The Fed and the impact of QE

Unless the Fed announces a new round of quantitative easing before the November election, I do not see the S&P 500 this year advancing past its 2007 high of 1560.

The market generally overreacts to balance sheet expansion by the Fed, anticipating higher inflation. What it seems to overlook is the deflationary effect of private sector deleveraging which should enable the Fed to maneuver a soft landing.

The real impact of Fed policy is to subsidize debtors and starve creditors — private investors and pension funds — of yield. The net result is that investors are driven to higher yields — accompanied by higher risk — which is likely to cause more pain at the next down-turn.

The only way to compensate creditors would be to lower taxes on interest, but I question how high this would rank in either party’s priorities.

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Bernanke Speech Makes Detailed Case for Fed Action – NYTimes.com

The Fed Chairman hinted at further measures to stimulate employment but is still playing his cards close to his chest as to when and how much:

“It is important to achieve further progress, particularly in the labor market,” Mr. Bernanke said. “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

via Bernanke Speech Makes Detailed Case for Fed Action – NYTimes.com.

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