1. The Stock Market
2. Bond Market
3. Currency Market - US Dollar
4. Housing Market
Stock Market
We have just witnessed a nice bear market rally after a major market implosion that occured in the Fall of 2008. The NYSE Bullish Percent is the main indicator I use to measure risk in the equity market and it is currently in high risk territory sitting at 72%. Any reveral down of the short term and intermediate indicators and then the NYSE BP could result in an eventual testing of the recent S&P 500 low of 666.
Both of these charts go way back to the 1930's and the first of them shows the extraordinary collapse in earnings of the S&P500 companies. The second of them shows that the resulting overall P/E ratio has risen into the stratosphere.
Maybe if the Fed finally get audited we will all realize where all the money went. It may have gone right back into the stock market through firms such as Goldman Sachs and JP Morgan. I mostly work off technical analysis when evaluating the stock market but these two S&P500 charts are UNBELIEVABLE from a fundamental standpoint. The current run up of the market truly makes ZERO sense.
Bond Market
The next important market that is much larger than the stock market we want to monitor is the bond market. I like to watch the TNX because this will have an impact on interest rates. It is clear that the US Government has been artificially keeping the mortgage rates down in order to prop up the ailing housing industry. The bond market is also getting skittish due to the Obama Administrations running very high deficits by increasing spending and the slow economy presents a problem to local, state and the federal gov't to collect the necessary tax revenues each municipality is used to receiving for current budgets. The combination of a severe recession and high deficits has resulted in the questioning of US AAA credit rating. If you are an institutional trader and are worried about the US Credit rating you do not want to hold US Dollars or US Treasuries. We are currently witnessing a spike in the TNX. The TNX hit a low of 21 in late 2008 and has recently closed above 34. This is a 38% increase in just a few months after the TNX bottomed out after the Fall 2008 Market Meltdown. Not only have we had an increase in the TNX but it has also broken a trend line at 32 which could result in higher yields for the immediate future.
US Dollar
The last time the US Dollar had a Relative Strength Sell Signal was June 2002. The US Dollar did not reverse from this RS Signal until March 2009 when institutional money flew into the USD for safety after the Fall 2008 market meltdown. Now that the credit markets have thawed out due to Trillions in stimulus it is clear to the world that all is not well in the good old US of A. The temporary rush into the USD has quickly been forgotten due to our internal banking, housing and deficit problems. The worrisome factor from technical analysis standpoint is that the USD is only 1 box away from hitting a RS Sell signal since it last happened in 2002!
Housing Market
Clearly the US Housing Market is not out of the woods yet. There are still mortgages resetting and recasting as prices decline in cities across the US. Inventory levels are still at high levels and now homeowners atttempting to sell are having to compete against discounted short sales and foreclosures in many cases. Most cities are still experiencing weak sales because buyers want deals but sellers can not give them a deal because so many are already upside down in their mortgage versus what the home would sell for on the market today. Add in an increasing unemployment rate without an industry to support new growth or jobs and we have some problems to deal with.
What is important to understand regarding these 4 market perspectives is that this does NOT mean the S&P 500 will roll over and crash tomorrow. This is a process. I am only connecting the dots to some major trend movements that are about to change or are not anywhere close to changing such as housing.
The point of this article is to paint a picture of risk in the market and economy right now and nothing more. Sure the S&P 500 could rally a bit higher but it is certainly beginning to defy gravity from a fundamental standpoint. Just keep in mind that structural bear markets typically last 20 years and we are only 9 years into this one. Also remember that this a severe recession unlike anything we have ever seen because the market and economy are so much different than the 1930s. We are in unchartered territory with quantitative easing from the Fed, corporate takeovers by the government, derivative time bombs still ticking away, unseen levels of debt, out of control spending, consumer debt, foreclosures and short sales, new emerging markets such as China who have more economic power than we do and an extremely high amount of deleveraging occuring at the retail and institutional levels.
Be careful and good luck!
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
