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Dow 13,000!: Where To From Here?

  • Written by Syndicated Publisher 224 Comments224 Comments Comments
    February 29, 2012

    Dow 13,000 achieved. Mission accomplished!  That purely psychological and meaningless level will be paraded across CNBC and similar channels as a sign that all is well. A whopping 98 net issues advanced today though in celebration of that “milestone.”

    Sarcasm aside (that was sarcasm by the way) I do find it interesting that the market was rather weak today especially small and mid cap stocks well underperforming the SPX and closing 1% off intraday highs when the LTRO was formally announced by the ECB today. The results of which will be announced at 5:15AM EST.

    If liquidity by the central banks is the “reason” for market euphoria well someone needs to tell oil which was weak a second consecutive day and back below a three year uptrend. But rest assured the Dow is now comfortably above 13,000 by 5 points (sarcasm again).

    LTRO 2 Now “On Sale”

    The ECB officially launched the second LTRO auction on Tuesday and will announce the results at 5:15AM EST on Wednesday. ECB President Mario Draghi seems to be sending mixed signals though. Last week he discussed concern that banks were becoming too dependent on this emergency lending facility while today he said there was no stigma associated with such borrowing.

    The results will be very interesting indeed. You can be assured the results will be spun however the ECB needs. For example if banks are concerned about the stigma or fear of driving out private credit due to subordination concerns the amount of capital issued may be low. In which case Mario Draghi will claim that the financial sector is strong and the system is improving. If the issuance is high, once again the ECB will be “credited” with “saving Europe.”

    Divergences Within Equity

    I’ve discussed the equity divergences with copper, treasury, transports, spread between HYG and LQD, etc. Well there is another blatant warning sign and that is within equity. Two charts below show how only large caps such as the SPX  or Dow continue to move higher while the RUT (Russell small caps) and MID (Mid cap 400) have not only diverged but have begun moving lower.

    Today was another example of such divergence where relative to the SPX the RUT was 70 bp (100 bp equals 1 %) weaker while the MID was 55 bp weaker.

    RUT VS SPX

    MID VS SPX


    Apple (AAPL)

    The stock that just won’t quit. Amazing how an iPad 3 launch can be more important than a three year low in Durable Goods and a multi year low in the Case Shiller index. Back to AAPL though. This parabolic move is clearly losing momentum as indicated on the chart below (volume, MACD and RSI divergences).

    When AAPL rolls over and trust me it will, a lot of people will be running for the same narrow exit. In other words many will be trying to lock in profits ahead of everyone else which is mathematically impossible.

    Bottom Line

    The waiting game continues for those viewing this market as suspect. Chasing the market here could pay off but is rather risky as the equity bus looks like the wheels are slowly falling off. The vix continues to hold in at elevated levels as do other signs of fear such as the Skew and Credit Suisse Fear Barometer.

    On Thursday ISDA which declares whether or not a credit event in Greece will have occurred is beginning to “assess the situation” possibly since S and P just downgraded Greek debt to selective default.

    All eyes though will be on the ECB in the morning regarding the results of the second LTRO and any reference to future programs and or rate policy. And of course don’t forget the second revision to Q4 GDP and Chairman Bernanke testifying before Congress. Should be a rather volatile morning.

    Images: Flickr (licence attribution)

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