Tuesday, September 18, 2012

Stockmarket Update 18 September 2012

From my last update 27 August 2012:
There are number of significant meetings due to occur over the next 3 weeks. It would appear these meetings, combined with the majority of market players returning from their summer holidays, will result in increased volume and price movement one way or the other.


•On August 31 Ben Bernanke speaks in Jackson Hole. Last year Bernanke laid out Operation Twist and two years ago he laid out his QE2 plan. It appears the Jackson Hole meeting is his "place" to announce upcoming policy changes so every word he speaks at this meeting will be monitored closely.

•On September 6 the ECB governing council meets. Mario Draghi was expected to detail his bond purchase program at this meeting but he may wait until Germany’s Constitutional Court (set to rule on Sept. 12) decides on the legality of Europe’s permanent bailout fund before unveiling full details of his plan to buy government bonds.

•On September 7 the August U.S. non-farm payrolls will be reported. The July report was stronger than expected so any further good news on jobs in the U.S. (which Obama obviously wants to see given the November election) will be a market mover.

•On September 12 the German court rules on the constitutionality of the euro zone’s permanent rescue fund as mentioned above. This ruling is critical to Europe as its passage is necessary to allow the Germans to agree to further bailouts of Greece/Spain/Portugal, etc.

•The September 12/13 FED meeting is shaping up as the make-or-break moment for QE3. It is expected if there will be a QE3 it will be announced at this meeting (and telegraphed at the Jackson Hole meeting at the end of August). The market has drifted higher on the expectation there will be a QE3; should this not happen the next meeting is not until late October and that is perceived to be too close to the election date. As such, should there not be a QE3 announcement on Sept 13 the markets will respond accordingly.
It has been an amazing 3 weeks since that update.  Here is the "Readers Digest" version of those events:

1)  Jackson Hole Meeting:

Nothing concrete but a hint from Bernanke that the Fed would be willing to take a much larger role if needed to reduce unemployment in the U.S. (which he singled out in his speech as his single biggest concern currently).


2)  ECB Meeting:

The ECB announced an open ended and unlimited quantify bond purchase plan named Outright Monetary Transactions (OMTs).  Essentially it is a plan to buy short term government bonds from countries in financial trouble and hit with high yields (initially targeted at 3 year paper).  One big factor in the plan is countries must first formally ask for assistance from the euro zone bailout funds and sign a memorandum of understanding (MOU) that commits the country to conditionality, including deficit reduction targets and structural economic reforms.  It is envisioned this conditionality would include monitoring by both the ECB and the IMF.  Should a full bailout not be required, there is a provision for a lesser program without the full austerity requirements in the form of a precautionary program (an Enhanced Conditions Credit Line, or ECCL).

It would appear the 1st to test this new program may be Spain.  they are anticipating results of an independent audit of bank capital requirements over the next month. Additionally, Spain's credit rating is under review and could be downgraded to below-investment grade shortly. While Spain doesn't necessarily require aid at this point (as Prime Minister Rajoy has been repeatedly telling the markets the past 2 weeks primarily due to the decrease in Spanish bond yields associated with the ECB announcement and the pressure currently being taken off Spain somewhat), I would expect very soon market pressure could increase and force Spain to make a decision.


3)  August non-farm payrolls:

August non-farm payrolls rose by 96,000 with unemployment falling to 8.1%.  the expectation was for job gains of 130,000 so it was a disappointing number.

Ironically the markets rose on Friday in response to this bad number due to the anticipation that a possible QE3 would come into place the following week at the Fed meeting.


4)  The German court backed up the constitutionality of German support for the establishment and funding of the European Stability Mechanism (ESM).  The ESM is capped at 500 billion Euros and Germany's portion is capped at 190 billion Euros, however Germany's contribution can be increased upon parliamentary approval.


5)  Federal Open Market Committee meeting:

This was the big one.  Going into the meeting there was varied opinions on whether the FED would get too involved so close to the U.S. elections in November as it usually attempts to be politically neutral.  As such, they either had to do something at this meeting or otherwise wait until at least the December meeting.  It appeared they felt no other choice but to move now; and they did so in a VERY big way.

The decision was to begin a new QE3 program purchasing $40 billion in Mortgage Backed Securities (MBS) monthly along with a continuation of its current "Operation Twist" program of purchasing 45 billion of long term treasuries (primarily 10 year bonds) to at least year end (that is $85 billion in monthly injections to the end of the year).  The Fed placed no definite timeframe on the new MBS purchase plan, and noted that "If the labor market does not improve substantially, the (Federal Open Market) Committee will continue its purchase of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate".

In other words, the FED has gone "all-in" on its bet on the economy.  They have essentially told the world there are now no limits on the amount they will spend and the amount of time they will continue to spend it.  This is a first in the history of the FED.


Overall Picture

My take on the proceedings the past 3 weeks is the investment picture is much more clear.  It appears obvious both Europe and the U.S. (maybe China soon to follow) are getting more and more desperate by what is unfolding (recessions, unemployment, GDP declines) and feel it is necessary to step in with some MAJOR programs.

Given the amount of liquidity the world will soon be flooded with in the next few months by Central Banks worldwide, risk assets will be bid up higher and higher (equities, precious metals, commodities).  Along with this there is a natural presidential cycle whereby the U.S. equity markets generally do well in the Oct-Dec period during a presidential election along with the normal seasonal rise in the same period.

Put it all together and it looks like we go higher from here ........ following consolidation as I will discuss below.

CLICK ON ALL CHARTS TO ENLARGE


ACWI Daily:



The daily chart remains bullish with all technical indicators in alignment.  After my last blog prices declined to the support level around 45.20 before the latest advance.  This advance pushed through the previous April high near 47.00.

Price continues to display RSI(2) readings that exceed 95 on advances and stay above 5 on pullbacks.  Until this pattern reverses it must be assumed everything remains bullish.

One area of concern is price is currently overbought (as indicated by the RSI(14) above 70).  In addition, price pushed above the well established price channel and above the upper Bollinger Band.  This indicates a pullback is required before the next advance can begin.

The daily chart is BULLISH.


ACWI Weekly:


The weekly chart turned bullish mid-July and remains bullish.  Last week price was able to close above resistance (shown by the thin yellow band) and is currently consolidating.

The weekly chart is BULLISH.


ACWI Monthly:


The monthly chart closed the month of August bullish as price had regained both the 8 month and 10 month simple moving averages.  It must be noted this occurred on very low volume; high volume bullish closes are a much better indication that the buying has conviction.  Part of the problem may be due to the end-of-summer doldrums; if so we would expect a much higher volume at the end of September if this rally is for real.

The technical indicators have all become bullish again and it is interesting to note it is possible we may have a monthly MACD positive reading for the 1st time since early 2011.

The monthly chart is BULLISH.


ACWI PnF:


The Point and Figure chart completed an "Ascending Triple Top Breakout" on 14 Sep.  Resistance is now at the previous Apr/May 2011 high near 49.

Based upon the structure of the chart it projects a bullish price objective of 64.

The PnF chart is BULLISH.


Euro Daily:


As discussed previous, the Euro is "ground zero" for the current worries so must be watched closely.

The Euro daily chart switched to bullish August 03 and has staged an exceptional rally since its low in July 2012.  Very strong overhead resistance was taken out at 126.75 followed by 129.84.  These levels should now act as support and, as long as the Euro remains above these levels, it must be assumed the equity markets will remain bullish.

The Euro is currently VERY overbought so it must be assumed there will a pause in its current advance.


Euro Weekly:


The Euro weekly chart turned bullish 2 weeks ago (both technical indicators, break of the downtrend line and break of the resistance area noted on the chart).

Price is now attempting to challenge the downtrend line from April 2011 as well as the next strong area of weekly resistance (133.29-134.54 as shown on the chart).  It must be assumed given its current overbought status on the daily chart the Euro will at least pause before attempting another move higher.  Alternately, should it reverse the strong support area at 126.75-127.08 must hold to keep the weekly chart bullish.


Euro Monthly:


The Euro monthly chart remains bearish primarily due to the speed of the current advance.  The monthly technical indicators are a bit more slow-moving and the pace of the current advance has not allowed them an opportunity to catch up.

Price is now inter-month above the 8 month simple moving average (currently at 128.67).  Should the month of September close out with the Euro above the 8mSMA this would be potential a very bullish long term buy signal on the Euro.


Bottom Line:

-All technical indicators in all 3 time frames (daily/weekly/monthly) have turned bullish. 

-We have entered the strongest period of the 4 year Presidential cycle (Sept-Dec)

-We are about to enter the strongest period of the yearly cycle (Nov-Apr yearly)

-We have Central Banks around the world now apparently in uncoordinated (but simultaneous) money printing/quantitative easing/monetary expansion.

-The majority of major money managers are way behind on returns vs. the S&P 500 given most were cautious going into the past 3 weeks events.  They will all try to play catch up between now and 31 Dec 2012.

Given the above my outlook has changed from neutral to positive.  However, the daily charts are overbought so I will increase my equity exposure on any short term pullbacks.

I expect to move to a 100% equity exposure in 2 tranches.  I will commit an additional 25% (taking me to a 75% equity exposure) on the 1st significant pullback and commit the additional 25% to subsequent pullbacks.

The 1st pullback appears to have begun yesterday.  I expect they will be short and shallow so may not allow for optimal entry but that is the way it is.  I will post additional purchases as they occur.

As of today I remain in a 50% Equity/50% USD Cash position as I indicated in my last post:


-Russell Global 90 Fund: 40%

-Fidelity International Fund: 10%

-Russell USD Liquidity II Fund: 50%


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