This is a market of relationships. For a long time we had an inverse working with equities and the US Dollar. In May 2011 the SPX hit a high while the Greenback hit its low. Since then both are closer to the top of the ranges. If I showed you a weekly chart you’d see a lot of flat weeks for the Dollar where the stock market didn’t decline. For instance, from February to May 2012 the Dollar was mostly flat while the stock market was straight up and had one of that aborted correction.
So it is the Greenback and Aussie Dollar both are in recent tailspins. This can’t last since the Aussie Dollar represents the risk on trade. Then we have the ultimate inverse relationship where we used to have the Greenback moving in opposite directions against the Gold market. But recently the Dollar fell hard but Gold has been unable to rally. This is a concern for Gold bugs mostly because the Gold market and later the XAU have exhibited some of the best Gann symmetry we’ve seen in recent memory. But in the economy, if the Dollar gets hit doesn’t that mean inflation? If we are too have a serious bout of inflation, why isn’t Gold going through the roof? What do we make of this relationship?
But the most important relationship we’ve had recently is the level of fear in the overall market compared to the 50 day moving average in the SPX.
We have the end of February, April 18 and now on both the SPX and VIX. What you see are 3 peaks in the VIX which is the same approximate fear or should I say complacency level as the equity index hits the 50dma. It’s just a market that’s getting used to the same old, same old. The VIX can’t break thru and the SPX refuses to break down. This is a classic buy the dip mentality and it’s becoming ingrained.
Last week I mentioned the buy the dip mentality and wondered out loud how many times they can go to the well without getting burned. It’s all becoming too predictable, easy. For a time this is the way markets are supposed to work. You are supposed to have a little butterfly in the tummy as you buy the 50. But now it’s like we’ve reached the point of the Wal-Mart red light special. So I’m satisfied that I’m getting my answer. The takeaway here is even if this market goes to new highs; we’ve already had a retest of the 50 only days after the original. This is a freight train market that won’t reverse on a dime. Fine, it doesn’t have to. But we are starting to see the cracks in the armor. I don’t have to look at an ADX to see the trend weakening. All I have to do is see that we are not getting a clean break away from the 50 like in the past.
There are a couple of reasons for this. First of all, the housing sector has shown some serious cracks as well. This rally is not going to survive without a good HGX. It doesn’t have to lead to the upside but it certainly can’t lead to the downside. So there’s your big relationship. If we can’t have a neutral housing market we are not going to have a rally.
Next page: The situation in Europe
Then we have the situation in Europe which has been leading to the upside since December. When our markets were wondering what would happen with the fiscal cliff, Europe didn’t seem to care. But the FTSE had a serious hiccup last week. Look at the chart, where’s the bounce? We didn’t have one. It’s amazing the US markets did as well as they did while European markets were dead in the water. Now it appears we could have what amounts to a 3rd wave low so I suspect this could be a neutral to decent week all the way around but here’s the next problem. If we bounce to start the week it opens the door for an inversion high as we hit the seasonal change point by Thursday. I’m almost rather see a wipeout the early part of the week because it would increase the probability we can have a real low as June 21 hits. But when I look at the situation in the SPX and VIX, it’s just not very likely to happen.
Let’s project is a little forward on the FTSE. What we have here is a test of the 200dma already looming in the not too distant future. They haven’t respected the 50 very much, have they? We have that 50/200 cross already working and you can see the 50 line rolling over. That’s trouble in anyone’s book. What does that do for our bigger time windows in the fall? It’s too soon to tell but if we manage to stay flat in Europe the time window later in the year could be a major inflection point one way or the other.
So as they wrestle to determine whether the SPX 50 day crumbles now or on the next spin cycle fear levels are going to have to rise above resistance here as well to get to an acceptable point where we can have a true bottom and a new sustainable move. I just don’t see it right now.
Finally, the EUR-USD had interesting calculations as it hit our target trend line. It has backed off the high but is only going sideways in what could be a triangle. We still can’t rule out one more high. We have a Fed meeting on tap to go along with the seasonal change point. I believe we have the capability of still being all over the map. We could still end up with a new high but when all is said and done, the real takeaway to this entire market is Europe not confirming whatever decent action in the US last week and the SPX not coming off the 50 in a clean manner. It might take some serious patience but I think we are going to see implications from this action sooner as opposed to later and quite possibly right after the seasonal change point. Simply put, I think it’s time for a bigger correction.