HedgeFundLIVE.com — The equities markets have been showing subtle amounts of weakness lately. Here’s a few things to look at:
- Equities have been opening high and selling off all day. Sellers are very present.
- JP Morgan Chase posted good earnings today, beating expectations, but the stock went lower after opening very high. As analysts went through the report throughout the day problematic details were found, particularly with lending, and are looming as future problems. Trading revenues have also fallen off.
- Overall trading volume is down, in a big way. I read a few articles today about HFT firms wanting to switch to Russian and other markets outside of the US and Europe due to restrictions. If you look at intra-day volume it dies off steadily (more than usual) as the day continues. HFT firms account for more than half of typical trading volume. Without them watch for volatility in the markets to increase. Some analysts think they actually account for more than 70% of volume, so you can imagine the negative impact of a portion of them leaving.
- The momentum in the recent uptrend is not as strong as the last uptrend in the equities indexes. I use the RSI (14 period) to guage this. On a daily chart for the S+P500 (NYSEARCA:SPY) and NASDAQ (NASDAQ:QQQ) you will see the RSI is significantly lower than it was for the high points from around February 18th. This is also present is stocks like AAPL, which lead the market and have a massive influence on market direction.
- The VIX is currently on a solid support zone between 16.2 and 17 (the 16.50 level was very interesting over the last two weeks).It will take a hugely positive move in the market to push the fear gauge lower, especially down to 15. Though the price of options insurance doesn’t effect the stock market, it is still a useful gauge for judging the ease with which stocks can move higher. There is currently an elevated overall price in options due to unexpected worldwide events i.e. Japan’s earthquake and nuclear problems, tension in the Middle East, and the European debt situation. None of these will go away easily or over night.
- Crude oil is priced very high right now, and has had an eyeball-correlation with equities. The price of oil has affected the Loonie and Aussie currencies by helping them to appreciate against the USD.
At some point they will need to sell off, causing the USD to move higher, which can effect stocks negatively. I am not saying oil’s run up is over, I believe it will go much higher, but all markets eventually pullback to create entry and exit opportunities. Look for the AUD/USD to fall back to support at $1.02 and the USD/CAD to move up to resistance near $0.99/parity. The move should coincide with a sell-off in crude to the $100 per barrell level. Check the RSI on the charts provided to see their and oversold conditions. The red line in the AUD/USD chart is parity, the white line is 1.02. The green line in the USD/CAD chart is parity.
All in all, these global markets are interconnected. Currencies, commodities and equities all play into each other’s performance. Please feel free to comment with any ideas or criticisms. Obviously, the above observations aren’t set in stone and can react is a number of different ways to specific situations. As a conclusion, my view is equities are weakening and due for a correction; the Aussie and Loonie should depreciate against the USD which will coincide with a pullback in the price of oil; the VIX is at a good support zone and likely to move higher.