Is the End of the Fed Bull Cycle at Hand?

While the Yinzer Analyst may had done a magnificent job muddling his case for investors to start shifting their focus to overseas markets where a year of bad news had led to depressed prices but higher return potential going forward. Well someone must have been reading our updates because after a back and forth week, there was a clear shift in momentum today towards international equities while the domestic equity outlook became increasingly muddled as more signs of slowing economic activity ran headfirst into an increase in core PPI here at home.

Staying in the U.S, the Yinzer Analyst’s own momentum models showed a serious breakdown that confirms the end of the great 2012-2013 bull market. We’ve discussed our model previously (here) and while scores haven’t reached their 2014 lows registered on October 13th, or even the December 16th lows, they have recently pulled off something not seen since mid-2012. In a bull cycle, readings as low as we registered on January 6th (97th percentile) should have been meet by a multi-week rally, instead we had a 2 day rally and have found ourselves nearly back to the January 6th lows. It’s tempting to say that a rally is now overdue, but truthfully the market will need some sort of outside factor to give it the shot in the arm it needs. The October momentum lows were only the ‘lows” because comments from St. Louis Fed President Bullard supported the idea of an indulgent Fed same for the short lived rally off comments from Chicago Fed President Evans last week.

But moving beyond the momentum and the Fed, let’s inspect the technical outlook for the S&P 500. Starting with a daily chart, you can see the S&P broke through the rising wedge pattern on heavy volume today, confirming the weakness seen in our momentum models and the divergence in the percentage price oscillator that formed in early December. Even with today’s weakness, the CMF score has continued to improve but largely due to the dropping of the first half of December.

spx

Moving to the weekly chart, you can see the market has continued its breakout from the 2012-2013 Fed inspired uptrend and confirming the end of the bull cycle (whether cyclical or secular remains to be seen.) Having broken below the 20 week moving average on Thursday, it’ll take a major reversal for the market to fight its way back into the uptrend for a third time and seems unlikely at this point.

spxW

While a great deal of technical damage has been done, investors with a long term focus and relying on the simple 2/10 simple monthly moving average crossover will not that a sell-signal has been sent yet. If you stay focused on the intermediate term chart with weekly data, we’re already fighting with the first potential point for the pullback to die out, followed by the 20 week moving average and a second stopping out point just below 1900. If we do break through Stopping Point 1, and find ourselves at Stopping Point 2, the risk becomes the S&P will be stuck in a trading range that could persist until the Fed offers reassurances to the market or raise rates sending sentiment even lower.

spxw2

Back to the Old World:

Shifting our eyes to the east, both the iShares MSCI EAFE ETF (EFA) and iShares MSCI EMU Index (EZU) continued their December weakness in early 2015 and made new lows on January 6th but since then have managed to hold onto their gains while U.S. equities have rolled over. We talked extensively on Monday about why we think European equities could outperform in 2015 and the ECJ’s lead investigator certainly delivered on Wednesday with an opinion that the ECB’s OMT program is legal and although a formal verdict isn’t expected for several months it surely added more lift to the market. Next up is a potential ECB QE announcement next week followed by the Greek elections on the 25th.

Starting with the broader EFA, you can see that while it remains stuck below its 2014 downtrend line while the PPO looks to be turning around. Shifting the focus to relative momentum versus the S&P 500, you can see that today was a stunning reversal out of a seven month long downtrend. For the Yinzer Analyst, stunning reversals are sexy as they get but need confirmation. I wouldn’t mind seeing a strong finish to tomorrow (or even a weak one) but with relative momentum retesting the downtrend line at some point soon.

EAFE

EFASPY1

Moving to just EZU, you can see that its managed to get back above the 2014 downtrend line on a daily basis although like EFA it’ll have to retest it on a weekly basis before investors should get too optimistic. For now EZU is fighting hard to close above prior support and that’s fine in my book. It’s going to be a struggle but we should know within a week or so whether the ETF has what it takes to move forward.

ezu

EZU2

On a relative momentum basis, EZU is still within the downtrend formed in mid-2014 although this week looks to reverse the lackluster performance of the last two. If the trend continues, EZU could potentially breakout next week and signal a major shift in market dynamics is upon us.

ezuspy

Finally, the Yinzer Analyst momentum models show changes underway for both ETF’s although we’re still waiting for confirmation. Like the S&P 500, EZU and EFA made historic momentum lows on October 10th but that only sparked a 2.4% gain for EZU and 4% for EFA over the next 30 days. In the eight days since coming close (but not retesting the actual lows) to the October momentum lows, EZU and EFA have managed a 2.08% and a 2.62% gain compared to a .5% loss for the S&P 500. Still within the realm of horse shoes and hand grenades but worth noting for asset allocation purposes going forward.

One final chart for investors to consider is the performance of the iShares Currency Hedged MSCI EMU Index ETF (HEZU) since that momentum low on October 10th. While HEZU might be a relatively new product, you can see that it has already found favor with investors as it outperformed both EZU and the S&P 500 since 10/10. Clearly investors want exposure to European equities, just not to their currency. But could a QE announcement change investor sentiment on the Euro in 2015?

HEZU

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