What has become obvious in the last few years is that debt-driven growth is a flawed business model when financial markets no longer have an appetite for it.
S&P 500 approaches tipping point
The S&P 500 index broke downwards from its recent pennant, counter to normal bullish expectations, and is testing medium-term support at 1200. Failure of support would test primary support at 1100. Respect of support is less likely, but would suggest a rally to 1300. A 21-day Twiggs Money Flow cross below the zero line would indicate rising selling pressure.
The weekly chart better illustrates the breakout above 1200 followed by several tests of the new support level. Respect of the zero line by 63-day Twiggs Momentum would be a strong bear signal, warning of continuation of the primary down-trend — as would failure of support at 1200.
* Target calculation: 1100 – ( 1300 – 1100 ) = 900
Comparing to the 2008 weekly chart, there was a similar break below 1400 in January followed by several months of indecision before a false recovery above 1400 in May. Reversal below 1400 precipitated a major sell-off, with the index falling 50% over the next 9 months. If we look (above) at the current chart, there was a similar fall below 1250, several months of indecision before “recovery” above 1200/1250. Reversal below 1200 would provide a similar bear warning to 2008 — as would a 63-day Twiggs Momentum peak below zero.
There is no guarantee that stocks will follow the same path as in 2008, but reversal below 1200 would greatly increase the probability of another primary decline — with a target of 900*.
The Anatomy of Global Economic Uncertainty – Mohamed A. El-Erian – Project Syndicate
Mohamed A. El-Erian, CEO of PIMCO, describes four key dynamics that will shape the future of the global economy:
- Many economies have built up excessive debt that is now causing market instability. They have three options for de-leveraging: default, like Greece; austerity, like the UK; or “financial repression” like the US — where “interest rates are forced down so that creditors, including those on modest fixed incomes, subsidize debtors”.
- Economic growth would reduce the ratio of debt to incomes: “Many countries, including Italy and Spain, must overcome structural barriers to competitiveness, growth, and job creation through multi-year reforms of labor markets, pensions, housing, and economic governance. Some, like the US, can combine structural reforms with short-term demand stimulus. A few, led by Germany, are reaping the benefits of years of steadfast (and underappreciated) reforms.”
- It is also important that the benefits of economic growth be shared across the entire community, reducing income inequality and related social instability.
- Political systems in Western democracies, designed to support the status quo, are ill-equipped to deal with these “structural and secular changes”. Failure to adjust is the greatest risk.
“Those on the receiving end of these four dynamics – the vast majority of us – need not be paralyzed by uncertainty and anxiety. Instead, we can use this simple framework to monitor developments, learn from them, and adapt. Yes, there will still be volatility, unusual strains, and historically odd outcomes. But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.”
via The Anatomy of Global Economic Uncertainty – Mohamed A. El-Erian – Project Syndicate.
Aussie and Loonie test support
The Aussie is testing support at parity against the greenback. The “iceberg” on 63-day Twiggs Momentum indicates a primary down-trend. Failure of parity would test primary support at $0.94 and, in the long-term, breach of primary support would signal a decline to $0.80*.
* Target calculation: 0.94 – ( 1.08 – 0.94 ) = 0.80
63-Day Twiggs Momentum indicates a stronger down-trend on Canada’s Loonie. Failure of support at $0.975 would test primary support at $0.94 and, in the long-term, breach of the $0.94 level would signal decline to $0.80*.
* Target calculation: 0.94 – ( 1.01 – 0.94 ) = 0.87
The Aussie and Loonie normally move in sympathy with the CRB Commodities Index and a CRB break of its primary down-trend would warn of a reversal on the above two currencies.
Auditor Says F.H.A. Could Need Bailout – NYTimes.com
WASHINGTON — The Federal Housing Administration has a “close to 50” percent chance of requiring a bailout if the housing market deteriorates next year, the agency’s independent auditor said in a report released Tuesday.
The F.H.A., which offers private lenders guarantees against homeowner default, has just $2.6 billion in cash reserves, the report found, down from $4.7 billion last year.
The agency’s woes stem from the national foreclosure crisis. In the last three years, the F.H.A. has paid $37 billion in insurance claims against defaulting homeowners, shrinking its cash cushion.
Canada TSX 60
Canada’s TSX 60 index is consolidating between 680 and 720. Upward breakout would penetrate the descending trendline, indicating that the primary down-trend is weakening. A 13-week Twiggs Money Flow trough that respects the zero line would signal a primary up-trend. Reversal below 680, however, would warn of another test of primary support at 620.
* Target calculation: 720 + ( 720 – 680 ) = 760
Nasdaq fails to dispel fears of a bear market
The Nasdaq 100 is consolidating in a narrow band below resistance at 2400 on the weekly chart, suggesting an upward breakout. Follow-through above 2450 would confirm the target of 2800*. 13-Week Twiggs Money Flow continues to signal buying pressure after an earlier bullish divergence.
* Target calculation: 2400 + ( 2400 – 2000 ) = 2800
The Dow Industrial Average is consolidating below 12300. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure. Breakout above 12300 would offer a target of 12800*. Failure of support at 11600 is less likely, but would mean another test of primary support at 10600.
* Target calculation: 12200 + ( 12200 – 11600 ) = 12800
The S&P 500 is similarly consolidating between 1220 and 1300. Expect strong resistance at 1350.
Comparing to early 2008, the S&P500 displays a similar pattern, with the index testing resistance at 1400. We are close to a watershed: reversal below medium-term support (1220) would be a strong bear signal, while follow-through above recent highs would dispel fears of another bear market.
EconoMonitor : EconoMonitor » Europe Begins Its Endgame. Watch and Learn, for Europe’s Problems Are the World’s.
The current structure of Europe cracks under the slowly rising stress of vendor financing: export-based prosperity for some, debt-financed consumption by others. Unless reformed, this can only end badly. The global economy has similar imbalances. In 2010 the trade surpluses of China, Russia, and East Asia (China being half the total) were almost equal to the US trade deficit of $560 billion. OPEC, Germany, and Japan accumulated another $518 billion surplus. These numbers continue year by year, accumulating stress that will eventually break the current global financial order.
We should watch and learn from Europe’s experience in the months to come. We, and the rest of the world, may follow them sooner than we expect.
Global Liquidity ‘on the Cusp’ of Drying Up – WSJ.com
“Global liquidity has fluctuated wildly over the past five years and we are on the cusp of another retrenchment,” [Bank of Canada Governor Mark Carney] said in the text of a speech, which was focused on global liquidity, to the Canada-U.K. Chamber of Commerce in London.
Mr. Carney, who was appointed chairman of the Financial Stability Board at last week’s G20 Summit, said market volatility is increasing and activity declining as global liquidity shrinks. “The effect on the real economy will soon be felt,” he said. The Bank of Canada expects the euro-area to experience a brief recession.
Canada TSX 60
The TSX 60 is testing the band of resistance from 720 to 730 and the descending trendline. Upward breakout would indicate that the primary down-trend is weakening, while respect would warn of another test of primary support. The sharp rise on 13-week Twiggs Money Flow indicates buying pressure, but there is no sign yet of a reversal.
* Target calculation: 650 – ( 720 – 650 ) = 580