Analysis of major stock markets around the world.
The Dow Jones Industrial Average respected support at 20000, signaling another advance. Probably to 21000 but it could carry as far as the upper trend channel at 22000. Twiggs Money Flow troughs above zero indicate strong buying pressure.
* Target: 18000 + ( 18000 – 16000 ) = 20000
The ASX 200 respected its new support level at 5600. Twiggs Money Flow respected the zero line, suggesting buying pressure. Follow-through above 5750 would offer a target of 6000*.
* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000
The FTSE 100 respected its new support level at 7000/7100. Rising Twiggs Money Flow indicates buying pressure. Follow-through above 7350 would signal an advance to 7500* and offer a long-term target of 8000.
* Target: 7100 + ( 7100 – 6700 ) = 7500
Dow Jones Euro Stoxx 50 is a long way below its 2007 peak at 4500 but has formed a solid base at 3000. Rising Twiggs Money Flow signals long-term buying pressure, while long tails on recent weekly candles indicate shorter term enthusiasm. Recovery above 3300 would signal a fresh advance.
From Ross Gittins:
The economist who’s long made a close study of Australia’s commodity booms, past and present, and the problems they’ve caused when they bust, is Dr David Gruen, now deputy secretary, economic, of the Department of Prime Minister and Cabinet.
In a speech he gave last week, Gruen reviewed the progress of our transition phase.He started by reminding us of just how big an “economic shock” to our economy the resources boom has been. The size of the improvement in our terms of trade (export prices relative to import prices) makes it easily the biggest sustained boom in our history.
Since their peak in September 2011, however, they’ve deteriorated by more than 30 per cent.The boom in mining construction saw it increase from less than 2 per cent of GDP to a peak of about 9 per cent in 2012-13.
This resulted in something like a quadrupling in the mining industry’s stock of physical capital, and a tripling in its production capacity, in the space of a decade.”The largest investment was in liquefied natural gas production capacity, with Australia on track to overtake Qatar as the world’s largest sea-based exporter of LNG,” Gruen said.
The economic activity and employment that accompanied the investment boom caused a significant re-allocation of labour across industries, but this has now been largely unwound as mining projects reach completion.
The improvement in the terms of trade caused sustained growth in real income per person (much of it coming in the form of lower prices for imports and overseas travel).
Since their peak in 2011, the terms of trade have subtracted from income growth by so much that, even with reasonable improvement in the productivity of labour, real gross national income per person has been falling.
“This is reflected in gradually falling real average earnings per hour over the past four years – for the first time in living memory,” Gruen said.
With an end to the trend deterioration in the terms of [trade] now in prospect – they’ve been improving for the past three quarters – it shouldn’t be long before real incomes start growing again, with the size of that real growth strongly influenced by the rate of improvement in labour productivity.
What surprised me about the successful adjustment — to the the dramatic fall-off in mining investment — was that the Australian Dollar has not fallen further, holding above 70 cents.
Considering that commodity prices, depicted here by the DJ UBS Commodity Index, fell further than in both 2001 and 2008.
Source: Now the economy’s transition phase is ending, wages can start rising
From Tim Wallace at The Age:
Nine years on from the start of the financial crisis, the US recovery may be overheating, Legal & General Investment Management economist James Carrick has warned.
He has predicted a series of interest rate hikes will tip the US into a 2018 recession.”Every recession in the US has been caused by a tightening of credit conditions,” he said, noting inflation is on the rise and the US Federal Reserve is discussing plans for higher interest rates.
Officials at the Fed have only raised interest rates cautiously, because inflation has not taken off, so they do not believe the Fed needs to take the heat out of the economy.
But economists fear the strong dollar and low global commodity prices have restricted inflation and disguised domestic price rises. Underneath this, they fear the economy is already overheating.
As a result, they expect inflation to pick up sharply this year, forcing more rapid interest rate hikes.
That could cause a recession next year, they say. In their models, the signals are that this could take place in mid-2018.
I agree that most recessions are caused by tighter monetary policy from the Fed but the mid-2018 timing will depend on hourly earnings rates.
Hourly earnings are a good indicator of underlying inflationary pressure and a sharp rise is likely to attract a response from the Fed. The chart below shows how the Fed slams on the brakes whenever average hourly earning rates grow above 3.0 percent. Each surge in hourly earnings is matched by a dip in the currency growth rate as the Fed tightens the supply of money to slow the economy and reduce inflationary pressure.
Two anomalies on the above chart warrant explanation. First, is the sharp upward spike in currency growth in 1999/2000 when the Fed reacted to the LTCM crisis with monetary stimulus despite high inflationary pressures. Second, is the sharp dip in 2010 when the Fed took its foot off the gas pedal too soon after the financial crisis of 2008/2009, mistaking it for a regular recession.
Hourly earnings growth has risen to 2.5 percent but the Fed is only likely to react with tighter monetary policy when earnings growth reaches 3.0 percent. Recent rate rises are more about normalizing interest rates and are no cause for alarm.
I am more concerned about the impact that rising employment costs will have on corporate earnings.
The chart below is one of my favorites and shows the relationship between employee compensation and corporate profits (after tax) as a percentage of net value added. Profit margins rise when employment costs fall, and fall when employment costs rise.
Employee compensation is clearly rising and corporate profits falling as a percentage of net value added. If this trend continues in 2017 (last available data is Q3 2016) then corporate earnings are likely to come under pressure and stock prices fall.
Source: Warning of bump for Donald Trump next year with slide into recession
The forward Price-Earnings (PE) Ratio for the S&P 500, depicted by the blue line on the chart below, recently dipped below 20. In 2014 to 2105, PEs above 20 warned that stocks were overpriced.
We can see from the green and orange bars on the chart that the primary reason for the dip in forward PE is more optimistic earnings forecasts for 2017.
We can also see, from an examination of the past history, that each time forward PE dipped below 20 it was an opportune time to buy.
History also shows that each time the forward PE crossed to above 20 it was an opportune time to stop buying. Not necessarily a sell signal but a warning to investors to tighten their stops.
Quarterly sales figures are only available to June 2016 but there are two stand-out sectors that achieved quarterly year-on-year sales growth in excess of 10 percent: Consumer Discretionary and Health Care.
Interestingly, apart from Energy where there has been a sharp drop in earnings, sectors with the highest forward PE (based on estimated operating earnings) are the defensive sectors: Consumer Staples and Utilities. While Consumer Discretionary and Health Care are more middle-of-the-pack at 16.7 and 15.4 respectively.
Both the DAX and FTSE 100 display Twiggs Money Flow troughs above zero, indicating long-term buying pressure.
Germany’s DAX is approaching its 2015 high of 12400. Twiggs Money Flow signals long-term buying pressure but expect resistance between 12000 and 12400.
The FTSE 100 is retracing to test its new support level at 7000/7100. Rising Twiggs Money Flow indicates buying pressure. Respect of support is likely and would signal an advance to 7500*.
* Target: 7100 + ( 7100 – 6700 ) = 7500
India’s Sensex found support at 26000 and is headed for a test of medium-term resistance at 29000. Twiggs Money Flow recovery above zero indicates medium-term buying pressure. Breakout above 29000 would find long-term resistance at 30000 which may prove to be stubborn.
The ASX 200 continues to test its new support level at 5600. Twiggs Money Flow is now declining, reflecting medium-term selling pressure. Breach of support is likely and would test the lower trend channel around 5500 but the primary up-trend is unchanged.
* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000
The ASX 300 Banks Index has undergone a sell-off in the last few weeks, weighing heavily on the broader index. Declining Twiggs Money Flow indicates medium-term selling pressure. Respect of support at 8000 would indicate that the up-trend is intact.
The Dow Jones Industrial Average broke the important psychological barrier of 20,000 this week. The news was greeted with cheers from the media, many advisers and investors.
Older readers may recall a similar event when the Dow broke 1000 on November 14, 1972. Here is an excerpt from the New York Times that day:
The Dow Jones industrial average closed above the 1,000 mark yesterday for the first time in history.
It finished at 1,003.16 for a gain of 6.09 points in what many Wall Streeters consider the equivalent of the initial breaking of the four-minute mile.
“This thing has an obvious psychological effect,” declared one brokerage-house partner. “It’s a hell of a news item. As for the permanence of it — well, I just don’t know.”
Last Friday, the Dow surpassed 1,000 during the course of a day’s trading, but it fell back below the landmark figure by the end of the session.
But yesterday the market was not to be denied. The Dow finally put it all together, the peace rally, the re-election of President Nixon, the surging economy, booming corporate profits and lessening fears about inflation and taxes and controls and other uncertainties of 1973.
…..International Business Machines, Wall Street’s best known glamour issue, moved up 11 1/4 points to 388, its best price of the day.
…..An office broker, watching the stock tape from his desk downtown, murmured in wonderment: “There’s a sort of renewed confidence in the whole economic outlook.”
The broker who questioned the permanence of the move must have had a crystal ball. Three months later, the Dow reversed below 1000, commencing a bear market that ended at 570.
Four years later, in 1976, the Dow again rallied and broke 1000. Only to retreat in another bear market that carried as low as 750. A third advance carried the Average above 1000 in 1981, before another retreat, this time to 780.
Only in 1982, a full ten years after the first breakout, did the Dow finally break clear of 1000, advancing strongly over the next few years.
The next significant barrier for the Dow was 10,000. Breakout took place in 1999, during the Dotcom boom, with a minimum of fuss. At least one pundit at the time predicted the Dow would reach 100,000 by 2020.
Contrary to initial indications, the 10,000 level also proved a formidable barrier, with breach of support in 2001 heralding the start of a bear market that fell as low as 7200.
Recovery in 2003 appeared robust, with two secondary corrections respecting the new support level at 10,000. But the global financial crisis in 2008 saw the Dow fall to 6500. It took more than ten years after the initial breakout before we could comfortably say that the Dow had broken clear of 10,000.
The next important barrier is the current 20,000. It may be naive to think we have seen the last of it.
If past records are anything to go by, we could be in for an interesting decade.
