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"You can't feel the heat until you hold your
hand over the flame.
You have to
cross the line just to remember where it lays."
~ Rise
Against. "Satellite" Lyrics ~
Friday
morning traders and market participants awaited the key January employment
report from the U.S. Bureau of Labor Statistics. The reaction to the
supposedly wonderful report was a surge in the S&P 500 E-Mini futures
contracts as well as several other key equity index futures.
The overall
tenor among the financial punditry was predictable as wildly bullish
predictions permeated the morning session on CNBC and in the financial
blogosphere. However, after the report had been out for several hours notable
independent voices such as Lee Adler of the Wall Street Examiner came out
with information that suggested the numbers were an apparition of manipulated
statistics.
I am not
going to spend a great deal of time discussing the report, but the reaction
to the news was decisively bullish on Friday. The question I want to know is
whether Friday was a blow off top? In the recent past the S&P 500 has
seen several key inflection points and intermediate-term tops form on
non-farm payroll monthly announcements.
I follow a
variety of indicators to help me decipher more accurately when the market is
getting overbought or oversold. For nearly two weeks the market has been
extremely overbought, but now we are reaching truly astonishing levels. The
following charts represent just a few signals that the market is due for a
pullback and a top is likely approaching.
Percentage of
NYSE Stocks Trading Above Their 50 Period Moving Average
The chart
above clearly illustrates that as of Friday's closing bell (02/03) over 89%
of stocks were trading above their 50 period moving averages. Consequently
that reading is one of the highest levels that we have seen in the past 3
years. In addition, over 73% of stocks that trade on the
NYSE are currently priced above their longer-term 200 period moving
averages. Another extremely overbought signal.
S&P 500
Bullish Percent Index Weekly Chart
The S&P
500 Bullish Percent Index is another great tool for measuring the overall
position of the S&P 500. It is without question that the longer term time
frame is reaching the highest level of overbought conditions in the past 3
years.
McClellan
Oscillator Divergence with S&P 500 Price Action
The two
charts shown above present an interesting situation regarding the divergence
in the McClellan Oscillator and the price action in the S&P 500. The most
recent example of this type of divergence occurred in October of 2011 and
prices immediately reversed to the upside after several months of selling
pressure. In fact, this correlation between reversals in the S&P 500 and
divergences in the McClellan Oscillator works relatively well historically.
Clearly there
are bullish voices arguing for the 2011 S&P 500 Index high of 1,370.58 to
be taken out to the upside in the near future. Additionally, several market
technicians in the blogospere have been pointing to
the key resistance range between 1,350 and 1,370 on the S&P 500 as a
likely price target. Obviously if those price levels are met strong
resistance is likely to present itself. However, as a contrarian trader I
have found that the more obvious price levels are the more likely it is that
they either will not be tested or they will not offer significant resistance.
It is obvious
that Chairman Bernanke and the Federal Reserve have embarked on a massive
fiat currency printing campaign which has helped buoy risk assets to the
upside. Through a combination of reducing interest rates on safety haven
investments like Treasury's and CD's, the Federal Reserve has forced
conservative investors and those living on a fixed income into riskier assets
in search of yield.
This process
helps elevate stock prices and creates the desired outcome for the Federal
Reserve which involves the perception by average individuals that they are
wealthier. The Fed calls this the "wealth effect" and they seem
poised to insure that U.S. financial markets continue to ride upon a see of cheap money and liquidity.
Ultimately
the Federal Reserve's most recent announcements have served to help flatten
the short end of the yield curve further while providing a launching pad for
equities and precious metals. However, issues persisting in Europe could have
an adverse impact on the short to intermediate term price action of the U.S.
Dollar.
Right now
everywhere I look I hear market prognosticators commenting on how hated the
U.S. Dollar is and how Chairman Bernanke will not allow the Dollar to
appreciate markedly in order to protect U.S. exports and financial markets. I
think that the Dollar has the potential to rally in the short to intermediate
term. Right now the U.S. Dollar Index appears to be trying to form a bottom.
U.S. Dollar
Index Daily Chart
Obviously
there is good reason to believe that the U.S. Dollar Index could reverse to
the upside here. Whether it would have the strength to take out recent highs
is unclear, but a correction to the upside not only seems unexpected by most
market participants, but it seems plausible based on the weekend news coming
out of Greece.
Monday
morning the Greek government is set to determine if they will agree to the
demands of the Troika in exchange for the next tranche of bailout funds. If
the Greek government and the Troika do not come to an agreement, the Euro
could sell-off violently.
Additionally
there are already concerns about the next LTRO offering from the European
Central Bank. The measure is to help provide European banks with additional
liquidity, but there are growing concerns that the size and scope of the LTRO
could have a dramatic impact on the Euro's valuation against other
currencies. Time will tell, but there are certainly catalysts which could
help drive the U.S. Dollar higher.
Another
potential indicator that the Dollar could see higher prices in coming days
was the largely unnoticed bearish price action on Friday of precious metals.
Both gold and silver have been on a tear higher over the past several weeks.
Both precious metals have surged since the Federal Reserve announced that
interest rates would remain near zero on the short end of the curve through
2014.
However, on
Friday gold and silver were both under extreme selling pressure. The move did
not get much attention by the financial media. The price action in gold and
silver on Friday could be another indication that the U.S. Dollar is set to
rally. The daily chart of gold is shown below.
Gold Futures
Daily Chart
Obviously the
reversal on Friday in gold futures was sharp. The move represented nearly a
2% decline for the session on the price of gold. However, as long term
readers know I am a gold bull. I just do not see how gold and silver do not
rally in the intermediate to longer term based on the insane levels of fiat
currency printing going on at all of the major central banks around the
world. The macro case for gold is very strong, but the short term time frame
could reveal a brief pullback.
At this
point, I suspect a pullback will present a good buying opportunity for those
that are patient. However, I think it is critical to point out that this move
in gold on Friday could be a signal that the U.S. Dollar is going to find
some short to intermediate term strength. If the Dollar does start to push
higher, it will likely put downward pressure on risk assets like equities and
oil
While
Friday's price action may not mark a top, nearly every indicator that I
follow is screaming that stocks are overbought across all time frames. Pair
that with the Greece uncertainty and LTRO considerations and suddenly the
Dollar starts to look a bit more attractive.
Ultimately I am not going to try to pick a top, but the evidence suggests
that it might not be too many days/weeks away.
Chris Vermeulen
Editor, the
Gold and Oil Guy
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