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By HaleStewart February 14, 2015 8:51 am
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US Equity Market Review For the Week of February 9-13; Upside Breakout Edition

           From mid-December to the end of January, the markets have been consolidating.  This has been occurring in all the major averages to some degree over that time period, confirming the overall trend.  As I noted last week, the markets broke out.  But these developments need follow-through to be meaningful.  Last week, the breadth of the move higher increased, confirming the overall trend so far. 

            But before we get too excited about this, let’s take a look at the treasury market, because this is what continues to hold the market back.

On the 30 minute chart, we see the overall move lower from ~110 to ~107, which is about a 3% move.  There are four gaps lower, indicating a strong supply/demand imbalance at the opening of the market.  Prices continually broke support, adding further downside momentum.  And on Friday, prices closed at a low, adding to the bearish tone.

            But on the daily chart, prices are still above two major trend lines.  This is key, as treasury prices could move lower by 3% and still be in a longer-term uptrend.  While we are seeing a bullish move in equities, there is still a bullish tone to the treasury trade, which will compete with equities for investor dollars, at least for the time being.  Keep this in mind when looking at the equity charts.

            Let’s start with the SPYs:

The SPYs have broken out of their triangle consolidation pattern and made a solid move higher, closing at new highs last week.  This move is supported by the technicals: a rising MACD, RSI and CMF. 

            And now we have multi-average confirmation:

Above are three charts: the IJHs (mid-caps), the IWMs (Russell 2000) and the QQQs (NASDAQ).  All confirm the SPYs move higher, and, all have similar technical readings: a rising MACD, RSI and CMF.  And pay particular attention to the MACDs, as all are at fairly low readings, which tells us the averages have room to run.

          But will they?  As noted above, the treasury market is competing for equity dollars.  And that tells us there is still a safety trade, driven by concerns about the geopolitical situation (Ukraine and the Middle East) and the international economic environment, especially deflationary pressures and weak growth in the EU, Australia, Japan and to a lesser extent, China.  And while the US economy is still growing, US companies are being hit by this weak international environment and strong dollar, which will put a dent in earnings. 

     But, the US economy is growing.  Even though 4Q14 GDP growth was disappointing, it was still positive.  And with this growth coming from consumer spending, the US can pull goods in from the rest of the world – a process which is aided by the strong dollar.  And with some better news coming from US employment and wages, that trend could continue for some time.  But, with the strong headwinds, it could be a grind higher rather than a compelling rally.      

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer  




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