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By HaleStewart March 15, 2015 9:05 am
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US Equity Market Review For the Week of March 9-13; Hey, It Looks Like More Consolidation, Edition

     For the first 4-5 years of this latest bull market, there was little to no talk of the Fed raising rates, except in a purely hypothetical manner, such as, “at some point, the Fed will have to raise rates, and they will have to be exceedingly careful in how they do so.”  Talk of rate hikes increased in 2013 and the first half of 2014, but, as with previous references, it was largely hypothetical.  But now with unemployment at 5.5% (despite a fair amount of evidence of continuing weakness in the broader employment statistics) there is far more discussion about interest rates going up.  And it is this discussion – in conjunction with a massive dollar rally -- that has provided a very solid ceiling on meaningful US equity market advances since the first of the year.  But conversely, the US economy is still expanding (albeit at a slower pace than the torrid 5% of 3Q14), providing ample ammunition for the bulls.  In short, there are solid arguments on both bear and bull sides right now, making price action a true tug of war between rival camps.   As a result, I believe we’re seeing the beginning of another consolidation period in the market.   

     Let’s take a look at the daily SPY chart to get a better idea of recent market movements.

The chart above contains two dashed lines: a red one that connects the April 2014 and December 2014 lows and a black one that connects the October 2014 and January 2015 lows.  Both of these trend lines indicate the bull market is still in play.  However, starting at the beginning of March and after hitting the lower 212 price level, the SPYs started to sell off.  I think what is happening is we’re seeing the beginning of another consolidation period.   I’ve drawn a preliminary line (dark blue) connecting the lows of late December and mid-March and highlighted the recent market top (in light green highlight) to show the areas where, on this chart, potential technical points exist for this consolidation.  However, these are preliminary and could change depending on price developments.

     Several longer term charts are painting some headwinds, strongly implying that upward advances will be a very tough slog.  In support of this argument, consider these weekly charts of the SPYs and the three largest market sectors.

The weekly SPY chart has been printing a declining MACD number since the beginning of 2014 and a slowly declining RSI for the same length of time. 

     And the massive rally in the dollar (whose weekly chart is above) is going to seriously impact earnings in the coming quarters, as large US companies derive at least 40% of their earnings from international sales.

     Now let’s turn to the three largest sectors, starting with technology which accounts for nearly 20% of the SPYs.  While the chart is still in a bull market, the MACD has been declining since mid-2014.  And the RSI has been dropping for the same length of time.

     The weekly chart of the financials (which represent 16% of the S&P 500) are printing a price arc, which is clearly slowing its ascent as the latest high in below the December 2014 price peak.  But most importantly, the MACD has been dropping for the better part of a year and a half. 

     The health care sector (14.8% of the SPYs) has the strongest chart of the bunch.  But, here too, the MACD has been dropping since December.  While an aging population provides strong fundamental support for this sector, there is a huge potential problem coming down the pike with the King v. Burwell decision.    

     The talk of rate hikes, a strong dollar and declining momentum at the weekly level (all documented) provides the bears with ample ammunition.  And that’s before we add in the already expensive nature of US markets.  However, the underlying US economy is still expanding.  Unemployment is at 5.5%, broader employment metrics are improving, and consumers are still spending.  There are no meaningful signs of a recession in any of the economic metrics.  And despite talk of rate increases, it’s incredibly difficult to see a dovish Fed chair raising rates more than 50 basis points (and, frankly, that’s a stretch).  So, just as the with the bear argument, the bulls have ample ammunition as well.  This means that both bull and bears will be able to move in the market with ample justification at what they consider to be price extremes, leading to (I believe) consolidation over the next few months.

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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