For those of you who may have taken a few weeks off in June, good for you. We are basically at the same level we were on June 5, around S&P 500 1610 (SPY). Of course, the 10-Year Note is a different story: we went from around 2% to 2.5%, with a peak at 2.6%. Who says when Rates rise, Stocks must fall?
Now, for most of us who did not take a break, or were simply hiding under our desks, here is what happened in the past few weeks, and days. We made an all-time high on the S&P 500 at 1686 intraday on May 22, and a low at 1560 on June 24, also intraday. In the process, we established numerous pivot points. Personally, the ones I look at are 1628, 1608, 1600, 1580 and 1560. The last three I highlighted in a comment posted on my last article:
(1) 1608 is the bottom of the Regression Channel from the November 2012 low (the Regression Channel is defined by two bands parallel to the Regression Line, at a distance of one standard deviation; it sounds complex but it is fairly conventional);
(2) 1600 is the 25% Fibonacci retracement from the November 2012 low to the May 2013 high;
(3) 1580 is the Regression Line from the October 2011 low;
(4) 1560 is pretty close to the 1555, which is the 38.2%, Fibonacci Retracement from the November 2012 low.
The reason I am focusing on Technicals here is because the Market itself is. As I commented before, over the past few days, Fundamentals were the subject of collective schizophrenia, or afraid of something else - like Bernanke leaving his pilot post. So, before I get to this, one last Technical view. As you all know, these charts can be as complex as math, which is why I like to KISS. Just draw the conventional Regression Channels from the March 2009 low, October 2011 low, and November 2012 low (all intraday), and you will see, magic below, that all three upper bands converge at 1666 on May 28. I am not making this up. 1666 is 1000 points higher than the 03/06/09 low of 666. I don't know if the Devil is in the details, but this is pretty uncanny! On our way to 2000, we will have to decisively break this level first.
On Fundamentals, here is the riddle I wrote last week to summarize the schizophrenia:
The only sector that is moving the needle of the U.S. Economy and Employment is Housing.
Housing Stocks were decimated today (6/20 and 6/24) as if the recovery is over because of the end of QE. But, if the needle is moving back, how could QE end?
QED. You cannot sell both the end of QE and the end of Housing.
Actually, if construction employment goes back to the 2007 level, there will be 1.9 million more jobs, which would mean an unemployment rate of 6.8% vs. the current 7.7%. I'll take that anytime. The question is, how do we get there with no disruptive pick-up in inflation?
Note: This is now. During the first QE phases, from the end of 2008 to September 2011, Housing stocks continued to plummet while the market was rallying: Pulte (PHM) went from $12 to $4, Toll Brothers (TOL) went from $20 to $14, St. Joe (JOE) went for $40 to $12. Many reasons for that, to include the death of "little m":
(click to enlarge)
In plain English, more restrictive lending standards. However, longer term, Supply and Demand works: Housing had to pick up at some point, given that the normalized rate of new home construction is 1.2 million units per year. For more on that, refer to my infamous article of July 6, 2011. I will throw in this chart for extra:
The moral of the story: if I was sitting in the White House, or taking an expensive vacation, or playing golf, I would reassess the Bernanke Balloon. In retrospect, it was a lead balloon, which got shot at first sight. I would thus say to myself "I don't particularly care for Ben Bernanke, actually I am getting tired of him reminding me of my spending habits, but I need the money to keep my people happy, and to buy their votes. If he goes, and Housing goes, so do I. Might as well bite the bullet. Larry and Timothy can wait - come to think of it, I don't care about them either. Get Prissert on the phone."
This brings me to the "Round Bottoms vs. V Bottoms" debate. Personally, I prefer Round ones, but it is tough to know which one will show up for Happy Hour. If I have to venture, when the Market is simply emotional, it usually self-medicates pretty quickly, in which case you get a V. When the problem is more pervasive, then they come in all different shapes - U for Round, W, L. I have not seen an XL yet but why not?
The point is, back to the Technicals above, it seems to me that the bottom for this Air Pocket is now in place, and that we will get to 1660 before we go back to 1580, if at all. Then we will look at Q2 Earnings, and the Devil in the eyes.
For the record, this was written on 6/27, at 3:30 pm. The S&P 500 is at 1615, the Dow Jones Industrials is at 15042, and the NASD Composite 100 is at 3404. The 10-Year Note is at 2.47%.
QE and Housing are inversely correlated. If QE goes, it's because Housing stays. And if Housing goes, then QE stays.
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