The dollar has rallied through the month of February as a result of a number of bullish catalysts. Technical support, Italian elections, FOMC minutes, and ECB meeting expectation were all reasons to be bullish on the dollar. I believe these items are behind the dollar and it’s time for a correction. It could also be inferred that a rally is due in commodities. The only thing holding back a dollar correction is a strong employment number tomorrow. That question will be resolved soon.
Technically speaking, the biggest concern right now is the recent decline in breadth. Near the end of January better than 85% of stocks in the S&P 500 were above their respective 50 day moving averages. Now just over 65% of S&P members are above their 50-day moving average.
Too often investors play the ball and not the whistle. They have an idea of what SHOULD happen but fail to see what IS happening and do not listen to the ultimate referee for investing—the market. If you believe we are heading into a bear market and/or recession and yet the market continues to hit new 52-week highs and the ISM Manufacturing Index remains north of 50 in expansionary territory, how long will you wait before the whistle blows?
I wanted to discuss some technical relationships I’m starting to see in the market that might shed some light on recent events. The goal is to help us identify corrections and rotations in the market between various assets classes and stock sectors.
The cyclical sectors of the market have been weakening over the last few weeks which was warning of the possibility for a pullback. However, the cyclical sectors are leading the way today after bullish commentary from the world’s two biggest central banks.
You’ve probably heard the talk making the rounds these days that margin debt is today as high as anything we have seen since 2007. In nominal terms, that’s exactly correct. So, is it really a reflection of “animal spirits” that are too highly elevated? After all, isn’t this exactly what Bernanke and friends wanted to have happen as the endgame for all the QE iterations?
It has been apparent for years that the state of the Chinese economy has a major impact on global markets. If the headline number on Chinese growth is stronger than expected that is generally viewed as good for us here in the States. If growth is slowing in China then that is going to have a negative ripple effect on the global economy.