According to my recent posts, markets look vulnerable for a correction as we are very, very overbought. GDP disappointed, yet most throw it out as fluke data. The June employment report was the market's "fatal conceit." Sure, NET 288,000 jobs were created. BUT over 500,000 FULL-TIME jobs were lost! Here's a nifty chart from Zero Hedge:
If this recovery is so real and so sustainable as the talking heads would have you believe, then why is there so much more hiring for part time as opposed to full time? Better yet, why are full time positions
contracting?
But let's get down to nitty-gritty technicals as opposed to fundamentals, because obviously those don't matter anymore! Quantitative Easing shall never die! Long live
central bank manipulation!
Let's look at a chart of the S&P 500 Index (SPX)
The three gray ovals indicate the largest areas of divergence between SPX and its 50sma.
June 9- SPX @ 1955.55, 50sma @ 1883.65. Divergence = 71.9 pts (3.68%).
June 20- SPX @ 1963.91, 50sma @ 1897.42. Divergence = 66.49 pts (3.39%).
July 3- SPX @ 1985.59, 50sma @ 1917.62. Divergence = 67.97 pts (3.42%).
As you can see, though, SPX hardly declined after being so rampantly overbought. The last time the RSI was above 70 was on June 9 and SPX only declined ~1.5% Hardly a correction. But, as we all know, market participants will try to scoop up shares
anytime the market slightly declines because they perceive more risk in being out of the market than being in. That's a dangerous illusion - obviously stocks are riskier than cash!
As well as a large divergence in the SPX from its 50sma, the new highs are not being confirmed with McClellan's Oscillator:
The oscillator looks at components (this case the Dow Jones DJIA) in an index and its current price oscillators to check if each one is above or below zero. A declining number of stocks in the index are participating in the uptrend creating a divergence as well as a movement below the oscillator's 15 period moving average. Usually, markets don't power past this, but they "certainly could try."
Many participants also look to the VIX for signs of trouble. With the VIX
hitting a fresh multi-year low, there doesn't seem to be any present danger in the market. Once again a foolish assumption. Here's a chart of the VIX:
Previously with the aforementioned June 20 divergence, the VIX jumped off the sub 11 lows to 12 and change as SPX traded down slightly. We're now at the same lows. Bottom line (no pun intended),
SPX will fade this week off the fresh all time high, but a full on correction at this point seems impossible... the Fed has consistently reassured the markets that a rate hike will not be coming anytime soon. DESPITE THE FACT THAT BOTH THRESHOLDS FOR A RATE HIKE HAVE BEEN MET. The original thresholds were an unemployment rate of 6.5% and inflation of 2%.
Both of those have been met / exceeded.
With the fundamentals for stock appreciation and an economic "recovery" so lousy, the markets are, in my opinion, a ticking-time bomb. At these strained levels, anything could trigger a sell-off, not unlike what we saw in late January and into February with the Ukraine developments. I think the catalysts for such an event could be Q2 GDP or rising inflationary pressures.
Q2 GDP is likely to be bad, or at least below consensus, much like Q1. JP Morgan has already
cut its full year 2014 GDP forecast in half! They think that 2014 will be the lousiest growth in a year sine
2009. Yes, the depths of the Great Recession. Why is the market writing this off?! A snowstorm?!
Give me a break!
Even with inflationary pressures, the Fed will
never raise rates.
The US Government, nor the big banks, nor consumers, can afford a higher interest rates. The result is
stagflation, not unlike what we saw in the 1970s.
Will the stock market call the Fed's bluff? Will the bond market cease to believe the Fed's lies? Only time will tell. This ain't your father's market anymore.
