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