This market is gaining a reputation as the ‘Teflon’ Dow. We know where that came from and last time I checked it didn’t work out too well for the last person to have this nickname. But even though the difference in the name is only by one letter, at least the market is not a bad guy. I’ll take it one step further and tell you of the ‘Teflon Dow’ and ‘Don’ only one was really liked by the public and it isn’t the Dow. What does that tell you?
But there’s lots of cross currents going on and as we start the 2nd quarter it isn’t one thing in particular that will impact stock prices. Not necessarily in this order, the 2nd quarter should be affected by China, Japan, the SPX 3rd rail, the symmetry in the NDX and the bond market. You probably know how tough it is to get a committee to agree on anything so before I go any further it may occur to you that with all of these cross currents the 2nd quarter may end up all over the map.
Let’s start with China, they took it on the chin last week in what has become a fairly sticky pattern. We don’t want to see China get bogged down in a bear phase because it can spread. This one tried to go down, couldn’t and now has the look of a B wave in a larger ABC up. There’s nothing to complain about right here.
Japan has two moving parts and since the Nikkei bottomed, everything around the globe has been better. First of all we have their equity market which has turned back up and is holding its own. But that is only the first part. The other part is the big G7 intervention which I told you would work out into the intermediate level. On Friday it may have hit a peak after a move of 10.8% and on the square of 9 261 degrees. Both of these readings are excellent Gann geometric points. The move may not be over, but this is the first time we should expect some turbulence for the Yen and the desire of world banks to see a lower Yen. After 10.8% that does qualify as an intermediate term move. I know it’s only 2 weeks, but it is what it is. We are also going to find out in this sequence just how sensitive the Nikkei is to the movement in the currency.
One thing we’ve been following very closely is the SPX long term bear 3rd rail. We closed the week above it which potentially is long term bullish. This is potentially the most bullish news of all given where we are in relation to the median channel. Last week the SPX actually closed above the bear market line. My take is very simple. If the SPX sets up shop north of that line, I’m considering the stock market as a long term secular bull. The best technical analogy I can give you is on a chart of Nat Gas. We cover it every week in our Futures update and it has come to the two-year trend line for the second time in a couple of months and failed to break through. If it breaks through, that bear market is likely over as well.
But given the state of the state in NAT GAS, I’m not going to jump the gun. Not yet anyway. But I’ll say this, the stock market is in better shape to kiss good bye the secular bear market than Nat Gas is. If there was ever a leg that could’ve killed off the bull for now or even this entire year, you just saw it. It was short and intense. We never did have the long term calculations back in February for a long term equity top but with our methodology it could’ve lasted a lot longer. But think of the median channel as a flowing river, the path of least resistance if you will. At the moment, the SPX resides in the path of least resistance up. That brings us to the NDX.
What is interesting to me is the NDX sequence of a bear range at 1220 and a low at approximately 121 weeks back in the middle of March. The last time we had a comparable calculation it was the Dow back in September that was 77 weeks off a bottom that materialized in 7728 points. So to see the NDX move off a bottom in similar fashion is very interesting to say the least.
Start adding all of these things together and a theme starts to emerge that can’t be ignored. To be sure, there are a couple of things I don’t like. Last week I felt some euphoria for the first but it didn’t last. More importantly, the inverse relationship to the bond market is still in force and that is trying hard to find a low. You’ll note that when bonds hit their stride late Friday the equity market started to fade. Perhaps it should because last week may have been one big buy the rumor sell the news sequence again. Did you ever notice how much easier it is for economists to nail the jobs number in a better market? To me it was the classic buy the rumor sell the news sequence but it didn’t kick in until Friday afternoon.
We are due for some kind of turbulence but I start to add things up, they are starting to look bullish in the longer term if not the near term. Let’s finish with a theme I started last week. We had some bad news given new housing starts reached a new low. That is not a manifestation of the chart. It’s a condition created by the fact housing peaked last April and did not confirm new highs in the rest of the stock market. On Friday the HGX achieved its highest print since February 23. So sentiment is not universally euphoric, just in patches. It’s more than likely the most bullish news I can report to you over the past week. To understand this you need to separate the economic news from our technical work. Of course we want to see housing do better because it means jobs and prosperity on Main Street. Technically, what we want to see is the media report a bunch of bad news when the chart is neutral which means it has a chance to climb a wall of worry. It also means that if they don’t sell the bad news or to whatever degree they did is that whoever wanted to sell HAS SOLD.
Look at all of these factors. China is not dropping; Japan is holding its own although that is now due for a change of direction. The bond market may also be due for better days to at least maintain a trading range. But with the behavior and time of year for the turn in the SPX, NDX given the Gann Master Timing Window as well as the Spring Equinox most of what we look at is painting a bullish picture. This can change to a degree going forward because our old friend Mercury retrograde is back. This is the kind of condition that leads to wild swings. With the committee of institutions driving the action, we may not have everyone on the same page for a while.
But our chart of the week shows you exactly the long term condition of the market. Once again, like in February it is making a bid to say good bye to the bear. Nothing is confirmed but you do have to admire how well it has recovered.
Click chart to enlarge