Summer stagnation

The S&P has rallied almost 9% in seven session off the lows seen on the first day of this month. Volume has lagged, however, and as we come to test the 50DMA & 200DMA, downside risks are back into play. The head & shoulders “breakdown” through S&P 1040 was a bear trap, confirmed by the ridiculous 54% AAII bearish readings that week. A jump from mid-30s to mid-50s is unsustainable and showed that everyone had gone risk-off on a technical pattern. The true head & shoulders, however, is at the 1015 level, the Oct 2009 & July 2010 lows (as well as July 2009 highs). Flow data has confirmed short-covering and fast money has rallied the market, with no conviction as per volume data.


Meanwhile, the 10yr Tsy yield, as mentioned in the previous post, retraced back to its 310-315bps breakdown level (and subsequently sold off), suggesting the risk rally is over, at least implied by the bond market. This confluences with the moving average resistance in the equity indices, suggesting risk may find selling here. The recent divergence between Tsy yields & equity suggest equity is overpriced, if the bond market is taken to be the leading indicator that it has been since April when it failed its 400bps breakout and reversed course downward. The 10yr yield corrected back up to June lows but never got above those levels.


After the YoY 10.3% Q2/11.1% H1 GDP growth data from China, the AUD/USD went vertical, shooting up 50 pips in a matter of minutes. But since then it has retraced all of those gains and against the backdrop of overbought risk markets facing all kinds of resistance, its .8780-.8860 range seems at risk for breakdown and consequent resumption of downtrend.


Iron ore, copper, and coal prices are down significantly from their highs, while China is cooling itself down in an environment of global austerity (aka decreasing import demand). Global trade has all but halted, as judged by the Baltic Dry Index, which is on its 37840th consecutive day of decline.

These factors do not bode well for the Aussie Dollar, and all it takes is a little risk aversion to send it underperforming and exposing the RBA’s rate hikes as malconceived. The high rates will eventually pop the Aussie property bubble (one of only two remaining bubbles Jeremy Grantham observes), furthering the downside risk, and probably leading to a reversal in rate policy from the RBA, which would be an embarrassing turn of events that would be disastrous to Australia’s currency & equities. The RBA effectively leveraged the entire Australian economy and growth story (via rate hikes) into the China export story. But that is one-time demand, from stimulus engaged at the depths of the financial crisis, and the global push for tightening and austerity will most likely send Australia into its first dose of true recession and skyrocket its employment (currently consisting of millions of miners supplying China’s now-peaked demand for building commodities). The Shanghai Composite (in bear market territory) isn’t making things look any better, either.


Bank earnings are coming up for American stocks and the technical backdrop shows a low-volume rally that has brought financials back up to significant resistance & the 200DMA in the context of a major head & shoulders topping pattern. There’s always a chance blowout earnings result in bank stocks breaking out, but at these levels even good results will probably result in selling the news. With recent market vol, trading volumes and leverage used by hedge funds has declined dramatically (even getting WSJ exposure), while hedgies have faced big redemptions in the face of poor May & June numbers (Paulson may single-handedly be catalyzing the selloff in gold with his big redemptions after an abysmal May & June).


JPM is on deck tomorrow for earnings. Let’s take a look at how the market has fared in the past few quarters following JPM earnings. Market loves to pump on low volume ahead of JPM results, only to dump on high volume subsequently. The technicals imply this pattern may continue this quarter, as well.


On smaller timeframes like 30min/hourly charts, we still have higher highs & higher lows, suggesting risk is still bid. But with heavy resistance above, low volume behind the rally off July 1 lows, a poor macro backdrop, and slowing momentum, we could see some distribution resulting in a reversal of trend. My take is that this may be near the top of this move, judging strictly by technicals. JPM (and subsequent bank) earnings may provide catalyst for movement.

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2 Responses to Summer stagnation

  1. steve says:

    I’m in agreement with your analysis of Oz. I’m also bearish on the AUD and wildly bullish on Aussie 90 day bank bill futures.

    However, I’d prefer to short the AUD against the JPY rather than the USD. Up until the election, the Feds will be engaging in Mexico-like money printing tactics. Beware the dollar for a few months.

    Enjoy your blog.

  2. Anon says:

    I don’t think the BDI has declined for 37840 consecutive days, as you say. That would suck

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