Technically Speaking: The Markets Are Looking Very Toppy

by: Hale Stewart
Summary

On the fundamental side, GDP predictions from the NY and Atlanta Fed support continued increases.

The daily charts are looking very stretched; they're borderline parabolic, which is concerning.  On the 15-minute chart, the QQQs and SPYs could be forming a rising wedge pattern.

The number of stocks trading above their 50-day moving averages is very high.

Much like I believe that at the heart of every libertarian is someone who hates taxes, I also think that the original people behind cryptocurrencies are people who bought into the “Central Banks only issue fiat currency” nonsense. This is my way of saying that I don’t see how a Bitcoin makes sense. First and foremost, currencies are a medium of exchange and store of value (there’s your econ 101 textbook answer). But the dollar, euro, and yen are all backed by strong central banks and governments. Why choose Bitcoin over that framework? But bitcoin also misses another key benefit of currencies: allowing markets to allocate resources between two economies based on the fundamental economic condition of each. For example, when economy A experiences a recession while economy B is expanding, economy A’s currency should naturally devalue. This makes economy A’s goods more attractive for export, allowing that country to at least partially export itself out of its economic weakness. Bitcoin does nothing like that. Finally, how can you trust a currency whose value spikes and contracts 10% or more on a daily basis? Even during the Great Recession, known currency pairs fluctuated within far narrower norms. All of this is my way of saying I don’t get Bitcoin specifically and cryptocurrencies in general.

Could someone please, please, get the Federal Reserve a thesaurus so they can find another word for “moderate?” For the last 5 years, that has been their favorite adjective to describe this economy in general and various economic statistics. Growth is “moderate;” retail sales are “moderate;” demand growth is “moderate.” I realize that “Fed speak” requires the central bank to only use non-offensive words and language, but they’re also in desperate need of an additional adjective. The online Merriam-Webster dictionary offers several such as measured, restrained and run-of-the-mill. I’m Just offering something to break-up the moderate amount of monotony they’re subjecting us to.

With the first estimate of 4Q GDP out at the end of next week, it seems appropriate to visit the New York and Atlanta Fed’s GDP prediction. The former is at 3.9%, where it’s been for the last few months:

The Atlanta Fed’s is 3.4%; it has been trending around 3% since early December:

Regardless of which model you use, it should be pretty obvious that the economy is currently hitting on all cylinders. This is confirmed by the coincident indicators:

The chart above converts the five primary coincident indicators to a base 100 using the end of the last recession as the starting point. All indicators are rising.

Turning to the markets, we once again ended the week on a high note:

The QQQs were up 1.17% and the DIAs increased 1%. The treasury market sold off, with the long-end falling 1.18%. And earnings season is beginning on a solid note. From Zacks [emphasis added]:

Including all of this morning’s results, we now have Q4 results from 44 S&P 500 members that combined account for 13.7% of the index’s total market capitalization. Total earnings for these companies are up +11.4% from the same period last year on +7.5% higher revenues, with 77.3% beating EPS and revenue estimates.

Considering how expensive the market is, this is welcome news. While it won’t take the overall market PE below 20, it will help to mitigate some of the recent lofty valuations – at least for awhile.

From a technical perspective, the markets are looking a little toppy. Let’s start with the daily QQQ and SPY charts:

The overall slope of each’s rally is increasing, which means each’s rally is getting more and more parabolic. Each MACD is very stretched. Looking at the shorter time frame, a top may be forming on the daily, 5-minute charts:

Both the QQQ (top chart) and SPY (bottom chart) are in an uptrend that connects each’s lows from January 10 and 16. And each has hit topside resistance – the QQQs in the mid-160s and the SPYs in 280s. Finally, each index has a very high percentage of stocks trading above their respective 50-day EMAs:

However, we live in a period when it seems like the market will never go down. That means that you should probably be careful going forward.

Until then, have a happy and safe weekend.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.