I begin each year reviewing the long term technical positions of the "Big Four." 10 Year rates, SPX, Commodities, and the US Dollar. This is the second of the series. Granted, macro doesn’t typically impact shorter term (swing, daily and weekly) trading but developing a framework for markets and for recognizing the potential for change is important. Next week I will look at commodities and at the weekly perspective time frames.
1) SPX is in a SECULAR BULL MARKET. There are NO OVERTLY BEARISH BEHAVIORS evident.
2) Note the three trend lines (1x, 2X & 3X). This three trend line pattern is another fractal pattern (appears in all time frames). It is characterized by each trend becoming sequentially steeper. The parabolic acceleration in the third leg often offers warning that the trend is moving into its late stages.
3) But, parabolic moves often last for extended periods and can cover lots of ground (as this one has).
4) This position in the trend is generally characterized by poor valuations and overly developed bullish sentiment.
5) But again there are NO OVERTLY BEARISH behaviors evident in this perspective. Until they develop, the macro UP-TREND must be given every benefit of the doubt.
6) However, given the markets position in its trend, close attention should be paid for ending action (for instance a buying climax) or a show of failure/weakness that develops in the shorter time frame (particularly the weekly).
Bottom Line: The technical trend to higher prices is intact, but, from this trend position, the market is extremely vulnerable. While not yet discontinuing bullish strategies, I would be extremely wary, reducing fresh commitments and deciding on risk management levels. Shorter term time frame weakness can easily morph into something greater.
Fundamental:
There are several key fundamental points around equities to consider. In particular, monetary and fiscal policy, and inflation have my attention. This isn't meant to be an exhaustive fundamental review, but simply a view into what I think is most important at this juncture.
Policy:
1) Both monetary and fiscal policy have been extremely supportive.
a. Quantitative Easing (Fed Policy) translated directly to financial markets and only moderately to the real economy. See M2 velocity.
b. Fiscal policy translated to the real economy via consumers (see excess savings). This is the inflation and positive earnings vector.
2) Now both policy vectors are turning negative and are unlikely to provide support. This may change if rising rates break the weakest financial link and the Fed is forced to reverse course or Congress decides to money drop again.
Inflation: While I believe that the current inflation is cresting, I suspect that over the next 1-2 years that it will remain much higher than the Fed desires.
Many believe that their equity allocation will act as an inflation hedge.
1) Much of this belief is due to the experience in the US inflation in the 1970s. But equity performance in that period was very sector specific. If you didn't own energy and commodities the real or after inflation return of most sectors was significantly negative.
2) Historically, consistent inflation above roughly 3% has been detrimental to equity ownership.
3) Of the 19 bear markets since 1929, 15 have been accompanied by rising inflation. It is by far the most consistent of the contributing factors.
4) If inflation does become embedded it is difficult to excise. Volcker had to produce two vicious recessions in order to beat the great inflation. Recessions are not kind to equity.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
1) SPX is in a SECULAR BULL MARKET. There are NO OVERTLY BEARISH BEHAVIORS evident.
2) Note the three trend lines (1x, 2X & 3X). This three trend line pattern is another fractal pattern (appears in all time frames). It is characterized by each trend becoming sequentially steeper. The parabolic acceleration in the third leg often offers warning that the trend is moving into its late stages.
3) But, parabolic moves often last for extended periods and can cover lots of ground (as this one has).
4) This position in the trend is generally characterized by poor valuations and overly developed bullish sentiment.
5) But again there are NO OVERTLY BEARISH behaviors evident in this perspective. Until they develop, the macro UP-TREND must be given every benefit of the doubt.
6) However, given the markets position in its trend, close attention should be paid for ending action (for instance a buying climax) or a show of failure/weakness that develops in the shorter time frame (particularly the weekly).
Bottom Line: The technical trend to higher prices is intact, but, from this trend position, the market is extremely vulnerable. While not yet discontinuing bullish strategies, I would be extremely wary, reducing fresh commitments and deciding on risk management levels. Shorter term time frame weakness can easily morph into something greater.
Fundamental:
There are several key fundamental points around equities to consider. In particular, monetary and fiscal policy, and inflation have my attention. This isn't meant to be an exhaustive fundamental review, but simply a view into what I think is most important at this juncture.
Policy:
1) Both monetary and fiscal policy have been extremely supportive.
a. Quantitative Easing (Fed Policy) translated directly to financial markets and only moderately to the real economy. See M2 velocity.
b. Fiscal policy translated to the real economy via consumers (see excess savings). This is the inflation and positive earnings vector.
2) Now both policy vectors are turning negative and are unlikely to provide support. This may change if rising rates break the weakest financial link and the Fed is forced to reverse course or Congress decides to money drop again.
Inflation: While I believe that the current inflation is cresting, I suspect that over the next 1-2 years that it will remain much higher than the Fed desires.
Many believe that their equity allocation will act as an inflation hedge.
1) Much of this belief is due to the experience in the US inflation in the 1970s. But equity performance in that period was very sector specific. If you didn't own energy and commodities the real or after inflation return of most sectors was significantly negative.
2) Historically, consistent inflation above roughly 3% has been detrimental to equity ownership.
3) Of the 19 bear markets since 1929, 15 have been accompanied by rising inflation. It is by far the most consistent of the contributing factors.
4) If inflation does become embedded it is difficult to excise. Volcker had to produce two vicious recessions in order to beat the great inflation. Recessions are not kind to equity.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
CMT Association is a global non-profit credentialing body committed to advancing the discipline of Technical Analysis. Improve investment performance and career opportunities: www.cmtassociation.org
