Canada’s TSX 60 index is headed for another test of primary support at 640. Failure of support would signal a primary decline to 560*. 63-Day Twiggs Momentum is rising but respect of the zero line would warn of a strong down-trend.
* Target calculation: 640 – ( 720 – 640 ) = 560
The S&P 500 continues to test resistance at 1370 but declining 63-day Twiggs Momentum warns of a primary down-trend. Breach of the rising trendline would indicate a primary down-swing; confirmed if support at 1270 is broken. Reversal of 63-day Twiggs Momentum below zero would strengthen the bear signal. Breakout above 1420 is unlikely, but would signal an advance to 1570*.
* Target calculation: 1420 + ( 1420 – 1270 ) = 1570
The Dow Industrial Average is in a similar position, with bearish divergence on 13-week Twiggs Money Flow warning of selling pressure. Reversal of TMF below zero would indicate a primary down-trend .
Alan Kohler: Debt was built up through 30 years of current account imbalances after currencies were finally unshackled from the gold standard in 1971, and the depression of the 70s came to an end in 1982.
Central banks, principally the Federal Reserve, complied in the process of debt build-up by holding down interest rates and allowing asset prices to rise, keeping balance sheets in the black.
The credit crisis of 2007-08 brought asset prices down rapidly and rendered banks suddenly insolvent, so they had to be recapitalised by governments. Now the governments of Europe, the US and Japan are insolvent, and the only question is when the central banks will monetise their debt – that is, print more money and buy their debts…..
10-Year Treasury yields are testing support at 1.45 percent. Breach would offer a target of 1.20 percent*. Declining yields suggest that money is flowing out of stocks and into bonds. Recovery above 1.70 percent is unlikely but would suggest another stock market rally.
* Target calculation: 1.45 – ( 1.70 – 1.45 ) = 1.20
Latest stats from the Fed show holdings of Treasury notes and bonds increased by $3.9 billion over the last week, which may have contributed to the decline. Holdings of (short-term) Treasury bills fell to $14.6 billion, leaving little room for further “Twist” operations — where the Fed swaps short-term holdings for long-term Treasuries.
The Euro broke medium-term support at $1.23, signaling a test of the 2010 low at $1.19/$1.20. Declining 63-day Twiggs Momentum warns of a strong down-trend. Breach of the 2010 low becomes likely if the ECB had to indicate an intention to directly or indirectly purchase government bonds — and would suggest a long-term decline.
Pound Sterling broke through €1.26 against the Euro and is now retracing to test the new support level. Rising 63-day Twiggs Momentum indicates an accelerating up-trend. Respect of support is likely and would offer a target of €1.29.
* Target calculation: 1.26 + ( 1.26 – 1.23 ) = 1.29
Canada’s Loonie is weakening against the Aussie Dollar but long-term bullish divergence on 63-day Twiggs Momentum (and breach of the descending trendline) warns of reversal to an up-trend. Breakout above parity would confirm.
The Aussie Dollar broke support at $1.02 USD and its recent broadening wedge on the 2-hour chart. Expect a decline to $1.01; confirmed if short-term support at $1.015 is broken.
* Target calculation: 1.02 – ( 1.025 – 1.015 ) = 1.01
A long-term chart shows the US dollar forming a bottom against the Yen after long-term bullish divergence on 63-day Twiggs Momentum and breach of the descending trendline. Breakout above the current descending trendline and resistance at ¥80 would indicate another test of ¥84/¥85, while breach of that level would confirm a primary up-trend.
* Target calculation: 84 + ( 84 – 78 ) = 90
The S&P 500 is advancing on the weekly chart toward another test of 1420, but falling momentum warns of a primary down-trend. Reversal of 63-day Twiggs Momentum below zero would indicate a primary decline. Failure of primary support at 1270 would confirm, offering a target of 1170*. In the shorter term, recovery above 1370 would indicate a test of 1420. Breakout above 1420 is unlikely at this stage — especially with money flowing into bonds.
* Target calculation: 1270 – ( 1370 – 1270 ) = 1170
Beginning scene of the new HBO series The Newsroom answers the question: “Why is America the greatest country in the world?”
An honest three and a half minutes of television…. [strong language]
Hat tip Barry Ritholz/Doug Kass
Art Laffer of Laffer Associates warns that attempts to increase taxes on the top 2% of earners will drive the economy back into recession: “They employ everyone else, invest capital and provide the economic recovery” he said.
Jonathan Cheng: Companies begin reporting second-quarter earnings this week, starting with Alcoa Inc. (AA -2.19%) on Monday. Already, 42 companies—including Ford Motor Co. (F -0.73%) and Texas Instruments Inc. (TXN -2.43%) —have warned investors that profits will be lower than initially expected…….
Companies now are being hit on several fronts. Economies in China, Europe and the U.S. are slowing. That is hurting companies dependent on demand from those countries. As well, the U.S. dollar has jumped against the euro and other currencies, reducing profits made from international sales for U.S. companies.
Historically the S&P 500 was considered overbought — and ripe for a bear market — when the dividend yield dropped below 3 percent. A surge in share buybacks in the past two decades, however, disrupted this relationship, with the dividend yield falling close to 1.0 percent in the Dotcom era.
In 2011, S&P 500 share buybacks increased to $409.0 billion. With dividends of $298 billion*, that gives a total cash distribution (dividends and buybacks) of $707 billion for a yield of 5.44 percent. Right in the middle of the 5.0 to 6.0 percent range previously considered typical of an oversold market.
* S&P 500 market capitalization of $12,993 billion at June 29, 2012 multiplied by 2.29 percent
Unfortunately share buybacks fluctuate wildly with the state of the market:
If we omit the highest and lowest readings, and take the average share buyback over the remaining 3 years, it amounts to $349 billion. That would give adjusted total cash distributions of $614 billion and an adjusted yield of 4.98 percent — still close to the oversold range.
The current reported earnings yield of 6.8 percent, however, is way below the highs (10 to 14 percent) of the 1970s and 80s. Current distributions (dividends plus buybacks) amount to 80 percent of current earnings. Payout ratios above 60 percent are considered unsustainable.
My conclusion is that earnings yield offers a more accurate measure of value. And reflects a market that is fairly valued — rather than overbought or oversold — especially when we consider the likelihood of earnings disappointments.
