My prayers go to families and friends of the victims in Colorado. Those of you who know me know I’m a huge hockey fan. One of the victims was an up-and-coming hockey blogger who went by the name of Jessica Redfield. She miraculously survived a shootout in a mall in Toronto just last month. What are the chances of being at both horrific events on opposite ends of the continent? I suppose it’s the same odds as having two events of this nature in the same community twice in one generation as the Aurora movie theatre is about 14 miles from Columbine. The good folks of Colorado have to heal once again.
A very strange week, indeed. Housing starts hit their best level in over 3 years while new unemployment claims surged to end the week. There’s good and bad out there. The bottom line is the stock market hit overhead resistance from June and July and looked for an excuse to sell. These highs represented the last guard at the gate preventing a move all the way back to the 2012 top. The dollar had a very volatile week, on Tuesday morning it put up a huge skyscraper only to be totally retraced by the end of the day and regained by Friday. This is the kind of Mercury retrograde behavior we’ve grown to detest. If you follow the Greenback closely you saw that Thursday was the end of the weakness so Friday didn’t surprise.
The most important sentiment story of the week concerned the weather simply because of the grains story. On Friday they reported drought conditions and the heat would last with no relief in sight. Does this sound familiar? Sure it does. Once sentiment gets to the point where everyone thinks the only way is up, it’s very late in the game. It doesn’t necessarily mean we have the top although we do have a time window working on the Wheat chart which is 360 days off the secondary high, but this kind of sentiment is the beginning of the end in the very least. We should see higher prices for various grains in the coming weeks.
We hear lots of talk of the R word and while it’s true, from what I’ve noticed in my life even BEFORE I was involved in financial markets is the media, politicians and others fail to mention the R word until its late in the game. SO if the country is in an official recession or not this could be late in the game for it. As you know my concern is what happens at the big time window come October. At 3 months there’s still too much time but I’d much prefer a low to a high. That being said, markets turned back lower to end the week. Most of these charts resemble bearish engulfing bars.
So why is the action so strange? Last week at this time we were talking about a mediocre market where housing was leading to the upside and banks were holding up rather well. As you know our mantra is nothing bad happens to the market as long as banks stay neutral. But tech can’t continue higher if banks start turning lower. Bank of America got hit which caused banks to move in sympathy and housing got hit particular hard. This could undo some of the good action we saw last week in semiconductors. How could banks outperform in one sequence and do an about face in the next? It is what it is.
Here’s what we are looking at. The Greenback has suddenly found life again and is challenging the July high. It may or may not push through right now but I believe the irresistible magnet is ultimately the 86 level I’ve shared with you on a long term chart. The EUR-USD is now sitting in the 1.2100 handle and the inevitable push should be the 1.2000 major support low. Lots of folks in Europe think it will ultimately get to the 1.1800 level. That might be right but let’s look no further than a test of support. Alternatively, the Dollar can stay in a trading range for the recent highs and lows in July. At the end of the day the battle for the Dollar and Euro represents the risk on trade with commodities and oil hanging in the balance.
We are also watching the Transport average which has been in a complex range or triangle and violated a trend line on Friday. With Transports lower it can create a Dow Theory divergence which would ultimately spook traders and likely put a ceiling on upward movement. Finally, we’ll pay close attention to China which looked like it was putting in a low the prior week but never got any traction. Of course, it goes without saying we’ll look to Europe which had a rough day to end the week. China is sensitive to Europe and the folks in Australia need to be aware of that. The Australian market has been strange because Financials were higher (along with Telecomm and Health Care) but the risk on trade led by Materials and Energy were lower. For those of you not familiar with the importance of the Aussie market, it’s a commodity based economy and a good barometer for the risk on condition. At the end of the day, it’s a big circle with Europe influencing China and Australia which ends up coming home to roost. Right now we have to be concerned with seeing follow through to Friday’s reversal day.
In the bigger picture, the VIX continued to drop which creates a very strange psychological picture given all the talk of recession. I don’t remember a time where recession was discussed so openly with a VIX on the cusp of euphoria. While it’s never good for the economy to have the market turn down, in this case with the potential of the largest time window of this decade coming in less than 3 months we would be best served by not having a major top at that time. The October anniversary of the 2 most important pivots of the 00’s decade may end up being the most important stock market story of the year nobody is talking about. If we are fortunate markets will find a low and turn up but that is far from a guarantee.
This was a very tough week for many people. In addition to the events in Colorado we lost bestselling author Stephen Covey, hedge fund king Barton Biggs and rock legend Jon Lord. Each was an icon in their field and they will be missed.
I’ve written this column for five years and with the exception of vacation or convention even when I’ve endured serious bouts of the flu. Thankfully I haven’t had any serious health challenges. But my wife Jeanne and I were awakened by 80 pound bundle of joy (black lab) named Sydney at 2am Sunday morning. She was violently ill and we spent 4 hours in the emergency room in the middle of the night. The doctors feared kidney failure but found out she only has a kidney infection which is potentially life threatening. She is only 4 years old and we are praying the antibiotics do their job. But she is not out of the woods yet. As you pray for the folks in Colorado please add one for Sydney.
Life gets in the way of our best laid plans. Hopefully this will be a week of healing no matter what the market does.