S&P 500 Weekly: Everybody Selling But Market Still Goes Up

| About: SPDR S&P (SPY)

Summary

We have to see how the great jobs number plays out.

We remain bearish and would short breaking Friday's lows which would mean something matters more than the jobs number.

We still don't know what the Fed wants to do with this number.

We think QE peaking near-term is more important.

Yen, oil and bonds are all gearing up to be negative catalysts.

The jobs number showed strong results and picked up from last quarter. There is momentum in the market. The only way to short is on a break. We don't want to get long based on the mounds of risks piling up.

Here's the market (NYSEARCA:SPY) chart post jobs.

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The market showed a nice breakout of a consolidation. This is a bullish technical formation. That's why we don't want to just short it. There are too many fundamental factors that are not allowing us to buy into the move. For that reason we're waiting until the market closes below Friday's low to want to short. If it goes up in a straight line to infinity from here, we missed it. Given the risks, we're ok with that.

For those bullish, we don't see a problem saying as long as the market holds above Friday's high stay bullish. But we are not bullish so we are using a low as a confirmation of down stocks.

Key Risks We're Watching:

The Bond Market

Bonds have been a key reason the market has held up. As yields move up bonds move down. That could take a key support from this market.

Here are bond yields.

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So far this move up in yields is similar to the past historical wiggles for this downtrend.

Now, with the Fed potentially on hold despite the jobs pickup there could be fear that inflation has official permission to move higher.

Here are the Fed Funds futures telling you what the Street expects from the Fed.

Click to enlarge

The last little red dot on the right side of the chart shows the Fed Funds futures pit's reaction to the blowout jobs number. If you take a magnifying glass you can maybe see a yawn.

The Chief Economic Advisor from Allianz went out on a limb and even gave the Fed a 40% chance to raise rates in September.

Just so you know we give everything in the universe about a 50-50 chance of happening. If you want to hear our specific expectations on just about anything, we'll give you our answer. About 50-50, give or take.

If the hawkiest comments call for a 40% chance of a rate hike, that means it's likely not so likely. We give that our famous "Everything In The World Is A 50-50 Rating."

The Fed Chair will be speaking August 26th. Unless we get a Fed leak in a Wall Street Journal article the Street will think the Fed is on hold. That is likely a negative for bonds as inflation fears creep in pushing bond prices lower.

Bonds have held up the market. Bonds turning down because of a handcuffed Fed is potentially a market risk.

Central Bank Ease Peak And Tighten

The US CB (Central bank)

We reported recently that we saw the Fed pull liquidity from the market. It was the biggest drop in liquidity in several years.

The same capital which was associated with quantitative easing ("QE") which helped markets rise now hit a down trend.

Here's the chart.

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The above chart shows Federal Reserve balances. They have hit lows not seen in over a year but the drop was the biggest in several years. We have concern that just as QE supported markets, pulling that QE can pull needed support for the markets.

As the market breaks out we think the Fed is more likely to pull this support.

Japan CB

We pointed out last week that Japan's new fiscal policy will require more spending. They will need to issue bonds. Those bonds will be selling to the market. That will sap liquidity from the market which is the opposite impact from their three year bond buying spree. (Selling is the opposite of buying.)

We think Japan is also signaling that they are trying to "lock in" low yields by issuing 40 year bonds. That is a strong signal that rates may have bottomed if one of the biggest bond buyers is now selling bonds at these low rates and doing so for the long term.

We'd guess traders catch on that they are on the other side of that trade and may not want to play. That lack of demand can push down bonds and push up yields which we think is a market risk.

EU CB

We've reported the EU is maxed and unless they change the law they can't find bonds to meet their bond buying mandate. That, for us, acts as a bond market peak.

Bank Of England

While a lot can be said for their plans to ease, their downgrade of GDP forecasts by 150bp for next year hints to us the impacts of Brexit.

We also think their 10B pound plans of easing is not that big. The US Federal Reserve pulled money from the market by $16B two weeks ago. That more than outweighs the BoE extra easing to the market.

Overall Inflation

If the Fed remains on hold there is no holding back inflation worries. Whether it materializes or not, the slowing growth and tons of ease, we think will lead to inflation at some point. (Inflation Formula)

Yen Risk

If the dollar continues to fall against the yen we have a global issue brewing.

Here's the dollar (NYSEARCA:UUP) yen (NYSEARCA:FXY) chart.

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In the middle you see a horizontal 5 year line. The current price is at a critical point in recent history. This price defined breakouts and breakdowns.

If we go below this dollar/yen price we think multiple problems happen in the world.

1) Japanese investors start selling their US dollar denominated investments.

2015 2016
Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
Japan 1197 1200 1197 1177 1149 1144 1122 1123 1133 1137 1142 1133
Mo to Mo -1.4% 0.3% -0.3% -1.7% -2.4% -0.4% -1.9% 0.1% 0.9% 0.4% 0.4% -0.8%
Cumul. -1.4% -1.1% 0.0% -1.9% -4.0% -2.8% -2.4% -1.8% 1.0% 1.2% 0.8% -0.3%
Click to enlarge
Click to enlarge

We saw a downtick in May of Japanese investment in US Treasuries (grid above). We expect more of a downtick in Japanese holding of US Treasuries and other investments. Japan is the second largest purchaser of US treasuries behind China. There is no close third. Their selling would mark a material market event.

We think their selling can raise yields which is negative for stocks.

2) We think below 100 dollar/yen itches the BOJ to sell yen. That would peg them as a currency manipulator and hurt their economy.

3) If Japan intervenes and sells yen other countries will also competitively devalue. Currency volatility is associated with down markets.

Oil Risk

Oil has been dropping. We think that oil dropping strains credit markets. 10-20% of energy companies have already seen some type of default. We think that can spike rates at some point. As oil prices drop more producers are strained to meet their debt obligations. This is the biggest current risk in the bond market as we see it.

Fund Selling

We've seen more investors exiting funds and ETFs. The combination of central bank, bond and investor selling, we think creates market risk.

Here's data from Lipper.

Billions $ Equity Bond ETF Tax-Free
08/03/16 -3.6 -0.1 -4.4 2.1
07/27/16 -4.1 2.8 -7.1 2.5
07/20/16 -2.8 3.0 -7.1 2.4
07/13/16 7.8 8.7 -7.5 2.6
07/06/16 -1.4 4.1 -6.1 -1.0
06/29/16 -6.8 -2.6 -2.8 -4.1
06/22/16 -6.1 2.5 -1.8 1.7
06/15/16 -3.4 -3.1 -4.4 -1.8
06/08/16 -0.9 1.9 -4.0 0.4
Click to enlarge
Click to enlarge

Above you can see money coming out of the market. While the market is going up we think it must be coming from fewer and fewer players.

Conclusion

We want to use Friday's action to determine price points to get short. If you're bullish we think Friday's low is a good stop loss. We're bearish so we want to use Friday's low as a confirmation of a peak.

Central bank, bond market, and mutual fund selling in combination makes us think that there is less support for this market.

A Fed rate hike or a simple market bond yield spike we think is a risk for markets near term.

This article focuses on the medium term. Check out Your Trading Team to get Elazar Advisors, LLC's short term calls along with help handling the moves, risk and mind games of the market in the short, medium, and long term.

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Disclosure: I am/we are long YEN, BUT THAT CAN CHANGE AT ANY TIME.

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