Weekend Recap

Even while driving around America’s heartland trying to get a decent cell signal, you could tell that international stocks continued to take in on the chin this week as the Euro sell-off shows no signs of slowing anytime soon. The best performing foreign ETF we regularly track, Vanguard Total World Stock underperformed the S&P 500 by nearly 100 bps for the week and that was only because of the fact 55% of its portfolio is in the U.S. Even though the various Markit PMI reports for Europe continue to show mild expansion, when can we expect the market to reverse its nasty trend?

First, consider the weakness of the Euro by looking at the U.S. dollar index:

UUP

Yes, according to Captain Obvious this chart of UUP (so you can see volume) looks very overbought on a short or even intermediate term basis, and is looking stretched even on a monthly report. And guess what? No one cares, not even a little. According to the Reuters and our friends at the CFTC (here), the net long position in the U.S. dollar has reached over $37 billion and has been above $30 billion for over eight weeks as everyone with a pulse and benchmark decides to plow into the long dollar/long bond trade, levels not seen since June of 2013. Who can blame them? Uncle buck is up 8.12% this year as of Friday while TLT is up over 18%.

Meanwhile the short dollar sister trades in commodities, precious metals, materials and energy names continue to get curb stomped with precious metals feeling the most love. According to my friends over at ETFG, GDX has lost something like 15% of its assets in the list month alone while losing over 19% in the third quarter and falling into the red for the year! XLE has also continued its breakdown as it searches for a bottom.

gdx

So when will this end? The 4th quarter usually isn’t the time for trend changes as everyone tries to ride a winner to take them to December 31st although the year-end reallocation trade has largely moved to the first two weeks of December. At this point, the dollar will keep going until someone big decides to sell and that’ll have to happen soon. Literally the buck can’t have ALL the money invested in it and the trade is pretty much one way at this point. The annual re-balancing should push some capital into European stocks, but it’ll largely just stop some of the bleeding, not cause a trend change. Until Europe manages a more decisive push into QE (and drags the German courts kicking and screaming), and the U.S. economy noticeably weakens, the long dollar trade will be here to stay.

And as for bonds, what else is there to say that a monthly chart of the ten year yield can’t cover?

sc

Domestic Equities:
Which brings me to domestic equities and their lackluster performance over the last two months. The S&P 500 and DJ Industrial Averages managed to pull themselves out of a tailspin last week but only just. The S&P 500 ran smack into its 50 day simple moving average and died there after falling out of its long-term daily trend pattern. To instill some confidence, it needs to break back into the pattern, push back to 2000 and then keep the lower bound of the trend channel all while doing so on convincing volume. Not asking for a whole lot am I?

indu

spc1

The Russell 2000 managed to have the smallest loss for the week, but for technicians out there, the pattern is disheartening. While IWM had the narrowest loss for the week, we can really attribute that performance to three factors:

  1. Good Harbor Reallocated some portion of their small/mid cap names to bonds on October 1st and as well all know, Good Harbor trades are pretty much the perfect turning point signal.
  2. IWM cracked the lower bound of its continuation pattern.
  3. IWM was really, really oversold. For a domestic equity index anyway

iwmd

gh

 Look at the charts for the DJ Industrials, S&P 500 and IWM again and tell me if you notice something? Volume was lighter on Thursday and Friday following the Wednesday sell-off, which is not too surprising but you’ll see that as you slide down the market cap scale, the pattern’s become less convincing. All three bounced off prior support levels, all three managed to break out of their short term “sell-off” patterns but as the market capitalization drops, so does the follow-through. The DJ Industrials had the strongest finish on Friday, remarkably close to their highs while the S&P 500 closed near the midpoint and IWM did noticeably worse.

What this feels like to me is a “hey, let’s get some equities on the cheap but not the “really” cheap stuff.” Like the difference between the Capital Diner, Cracker Barrel and Pittsburgh’s own Kings. Tying this in with their Yinzer Analyst momentum scores that put them close to the bottom of the their 2014 range, this has a bit of the feel of a dead cat bounce. Keep your eye on this one and if you have to play, consider these levels for sell targets:

  • DJ Industrials: We ran right into prior support around 17000. Next resistance will be around 17200 and then it’s back to the top.
  • S&P 500: First we need to clear the 50 day simple moving average at 1974, then it’s 1990 and 2000. Nice big round numbers to remember on the what could be a slow march back to the old highs.
  • Russell 2000 (IWM): We need to clear the falling 50 and 200 day moving averages around $113.50 before making a stab at each of the legs on the downtrend line. Get ready for a slog.

bond dom int sec

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