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Thursday Morning Technical Market Briefing

  • Written by Syndicated Publisher 1 Comment1 Comment Comments
    February 16, 2012

    Good Morning. Based on movement in the currencies and futures as of writing this post Thursday could be an interesting day. Apparently the downgrades by Moody’s is having more of an affect this time around.

    Implications for the two big European insurers Generali and Allianz include increased collateral calls similar to what happened to US financials in September 2008 when the underlying mortgage backed securities (MBS) fell in value.

    Some commentary I have been reading assumes that the LTRO program by the ECB and the ability to buy time has basically created a firewall around Greece and any default will in fact be orderly and contained. What’s that expression about don’t assume because “you make an A?? out of you and me.” Secondly as Kyle Bass so eloquently says “I have never seen an orderly default.”

    The implications of Moody’s actions on Wednesday evening highlight the very risks facing the capital markets if and when Greece defaults. Perhaps the credit event trade can finally be brought back into focus. We will know more in the coming days.

    Equity Markets

    Aside from the countless divergences and growing signs of risk aversion the equity charts still appear relatively bullish. That can change fast and the signs are there that something is not quite right. Below is a daily chart of EMD the mid cap futures. EMD reversed off a key trend line on Wednesday and did not take out prior lows. If EMD begins pulling back first real support comes in at 938 area.

    Vix VS SPX

    The following chart is odd to say the least. The vix and SPX over the past few weeks are trending higher. Together! That is not supposed to happen. I have shown various signs of growing risk aversion and the vix is yet another. If markets are breaking out to multi year highs why is the vix showing growing risk aversion? This is a huge warning sign right now that something is not right.

    Vix – Six Month Daily Looking Bullish

     

     

    Currency Markets

    AUD/USD the “risk on” currency and EUR/AUD the “risk off” currency are two key pairs to watch. The AUD/USD does look like it is reversing but the same cannot be said about the EUR/AUD. Although if you study the reversal of this pair preceding the July equity selloff it gave very little warning.

    More important this evening though is the reaction of the EUR to the downgrades by Moody’s. The EUR is very close to a quick swoon to the 1.26 area.

    AUD/USD

    EUR/USD


     

    Commodities

    I continue to watch gold right now. It did show some strength on Wednesday and is technically trading in a bullish flag pattern. Gold just seems weak right here and is a good proxy for USD demand and thus equity strength (in the face of a weak USD and vice versa).

     

    Credit

    Treasury futures look good here but did not show the strength you would have expected on Wednesday in the face of equity weakness. Below is a daily chart of 10 year futures. At a minimum it appears another test of all time highs is in the cards.

    Whether that proves to be a double top or breakout we will have to wait and see. Based on price action in MUB (municipal bond fund), HYG (high yield debt) and LQD (investment grade debt) I would put a higher probability that we will see a breakout.

    Trade School – Net Advancing Declining Issues

    Watching the net advancing declining issues or market breadth intraday can help you understand if a move is gaining or losing momentum. It is purely an intraday indicator but can be extremely valuable.

    Below is a one minute intraday chart of NYSE breadth for Tuesday February 15. A few things to note. Equity markets opened up at the bell and breadth was net 1,200 meaning of all the NYSE stocks trading there were 1,200 more advancing than declining. This is a pretty healthy level. Above 2,000 is a very healthy level. Opposite is true for market selloffs.

    Then something happened. Equity started to show some weakness. Notice the breadth how quickly it began to move lower. This meant less stocks were supporting the positive market momentum and in fact momentum was shifting negative. In short order the breadth moved from 1,200 to 200. This move was an early warning sign of a reversal in equity prices.

    Then the market started to stabilize as the chart shows and breadth began to inch higher. Again another early warning sign the selloff was reversing.

    By studying this indicator I was able to hold off on hedging an underwater position as the deteriorating breadth was a sign that the opening equity strength was fading and there was a high probability markets would sell off.

    Then I saw breadth start to reverse and slowly  move higher. At that point I was concerned that market weakness may have stalled and momentum may be shifting back to higher prices at which point I hedged this position. I didn’t solely use market breadth but it was a very valuable indicator.

     

    Market and Economic News

    Nigel Farage “Globalist Troika Driving Greece Towards Violent Revolution”

    Nigel Farage, leader of the UK Independence Party once again gave another wonderful speech to members of the EU calling out their actions and motives. I wish we had more people like him in a position of power. The money quote is his reference to Greek PM Papademos as “Puppet Papademos.” This video is well worth the two minutes it takes to watch.

    Mortgage Activity Contracts

    The highly volatile weekly MBA mortgage composite index declined (0.1%) last week after rising 7.5% the prior week. Within the report the purchase index contracted (8.4%) from 0.1% growth the previous week. The refinance index rose 0.8% after rising 9.4% the prior week.

    Refinance is a positive for the economy as it increases consumer discretionary spending but the purchase index is troubling. With an oversupply of inventory right now the only way to improve the supply demand imbalance is through increased buying something this report shows did not happen last week. Year over year purchase activity is also showing contraction.

    Industrial Production Flat In January

    Industrial production for January was unchanged at 0.0% from a 1% rise in December originally reported at 0.4%. Capacity utilization was 78.5% up from 78.1% in December both showing a sharp increase. Nothing else major to discuss within this report which shows relative volatility month to month.

     

    Economic Data Being Released

    January Housing starts at 8:30AM. Consensus for 675,000 from 657,000.

    Weekly jobless claims at 8:30AM. Consensus for 365,000 from 358,000 the prior week.

    January Producer price index at 8:30AM. Consensus for 0.4% from (0.1%).

    Ben Bernanke speaks at the FDIC at 9AM.

    Bloomberg consumer comfort index at 9:45AM.

    February Philly Fed survey at 10AM. Consensus for 9.5 from 7.3 in January.

    30 year TIPS auction at 1PM.

    Fed balance sheet and money supply at 4:30PM.

    Intraday Discussion

    All are welcome to join the intraday discussion on this post. Feel free to discuss anything from intraday trading to macro economics and more. All I ask is for civility and to treat people with respect. In a few weeks I will be adding an enhanced comment system to improve the ability to communicate with others. For now we are staying “old school.”

    Enjoy your day!

    Images: Flickr (licence attribution)

    About the Author

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