Let’s check in on today’s unreality. That is, the US stock market. And because it’s the world’s largest capital market, it matters.
The S&P 500 just bettered its April high overnight – and only just; we’re talking by 2 points. The Dow Jones Industrial Index is very close to bettering its April/May highs too. We’re now at a decisive point. The Dow either breaks sustainably above the 13,250 level or turns back down, forming a double-top.
If you look closely at the chart, it’s a tad concerning that the rally over the past few months occurred on declining volume. That suggests there’s not a huge amount of conviction in the recent price rise. We’ve seen plenty of low-volume rallies run out of puff before.
Dow Jones Industrials – At a Decisive Point
‘Dow Theory’ is a method of analysis that takes into account not just the Industrials index, but the Transportation index as well. A bullish development would see the Transportation index make new highs at the same time as the Industrials. As you can see from the chart below, that doesn’t look like happening. In fact the ‘transports’ peaked back in February this year.
The ‘Transports’ Peaked Back in February
That gels with the weak tone of economic data coming out of the US and global economy this year. Yet the poor data just emboldens investors. They equate a weak economy with more central bank largesse. The other theme to arise from this northern summer rally is that the global economy is just going through a weak patch and that stronger growth will emerge by the end of the year.
As the saying goes, markets’ make opinions and a rising market provides all sorts of hopeful theories. But hope is not a particularly robust strategy. Reading John Hussmans’ latest commentary last night reminded us of that:
‘Investors remain so addicted to the temporary high of monetary intervention that they continue to ignore very real downturn in global economic indicators, to an extent that we have not seen since the 2007-2009 recession. This is particularly evident in the deterioration of new orders and order backlogs, which are short-leading indicators of production, which in turn is a short-leading indicator of employment.’
‘Trading volume has been unusually low, while a 14-handle on the CBOE volatility index also suggests unusual complacency. It’s understandable that people are reluctant to place trades in a weakening economy, yet one where quantitative easing is widely expected. Wall Street is scared to death of being out of the market when the perceived salvation of QE3 is announced, and at the same time is increasingly encouraged by negative economic data in the belief that this will accelerate delivery. In short, investors are practically begging to be shot, mauled by dogs, and diced by a Veg-O-Matic so they can get their next fix of pain-killers.’
for Markets and Money
for Markets and Money
From the Archives…
When the Trickle Becomes a Flood
10-08-2012 – Greg Canavan
What Central Planners Can Never Know
09-08-2012 – Bill Bonner
The Central Bank Big Bazooka in Theory and Practice
08-08-2012 – Bill Bonner
In Thrall to the Iron Fist
07-08-2012 – Dan Denning
Cracks in the Foundation
06-08-2012 – Dan Denning