New highs for the United States, a non-confirmation in Europe. From December until May, Europe was leading to the upside but when we hit the June time window where markets bottomed, something changed. Europe started leading to the downside but the United States broke the leash and started pushing higher. The question now is whether the U.S. is really leading to the upside or is European non confirmation a warning sign and starting a new problem trend that eventually turns markets down this fall.
The SPX is just about at 1700 with leg relationships in the near term, which could take it to about 1715. It can do it, but if it does then it will violate another time window, this one being 1597 calendar days (Fibonacci) off the 2009 Haines bottom. We are coming to a semi-important anniversary as the next time window. It was two years ago next week we found the low for the debt ceiling debacle. July and August are traditionally the dog days of summer, especially the last 3 weeks of August, but we have seen some important pivots this time of year.
In 2007, the Russell actually topped in the middle of July. It also hit a key low in the middle of August. We know about 2011. But how many of you remember the key low in late July in 2008 which became Custer’s last stand? You remember it, that was when Ben Bernanke went up to the Senate Banking Committee and was finally roasted because the developing subprime mess was proving to not be contained. That was also the time they instituted the ban on naked shorts for financial stocks. Then 10 weeks later Lehman went under. In July 2006, we had the final trading bottom which led to the last leg of the bull market. We also had a very key trading low on about Aug. 13, 2004, in the young bull.
Even as we are coming to some of the slowest trading weeks of the year, it’s no time to get complacent or fall asleep at the wheel. We can end up with some important twists and turns right about now. Last week we were due for a shakeout and it started but the Dow recovered its 150 point drop to end the week. That’s the good news; the bad news is the market never really took off after the great aftermarket session inspired by the AAPL earnings. So what we are really getting is mixed signals. While we can’t seem to push a breakout we are not really experiencing that shake of the trees either.
I think we have a shot at seeing it this week because we are overdue to see a low in the Greenback which has exhibited oversold behavior to finish out last week. While we are sitting near 81.70, moderate targets suggest 81.40-.80 while aggressive bear targets take it down near 81 before the bigger bounce attempt. This is also a Fed week and while the Fed meetings not at seasonal change points seem to lack the firepower, we could finally see that shakeout this week.
Overall, I’m not looking for a major top for at least another month but it’s entirely possible we’ve already seen a high for the year in one or more important sectors. A real candidate would be the housing sector. This one is interesting for the following reason. The move down to the June low was an ABC where C was 61 to the whole. This is the classic bull market correction where A extends and C doesn’t. That would be all fine and nice but we never got the lift. The alternate view is the 61 C wave could be a 1st wave down to a bigger 3rd or C wave in disguise. We’ve had plenty of bull markets where the extension down never materializes but here we are 160 months off the Internet bubble peak in 2000 and conditions are ripe for housing to lead to the downside if it really wants to do it. Housing is a long way from confirming what we’ve seen in the rest of these markets and I have to wonder why it’s behaving so poorly. I have an idea, we’ve seen a reversal in the bond market and the Fed has done enough threatening to taper off the bond buying program that housing stocks have actually caught a cold. They haven’t got the flu yet but they are close.
The rest of the markets are challenging highs, why is the housing sector sitting at the bottom of the range? It really doesn’t matter why, it is what it is.
My other concern is the oil market. Here’s the last 2 years. You see the May 2011 perfect storm high which is getting retested in what amounts to a major resistance zone. We are also peaking at 262 weeks off the all-time high. But it looks like we have a large scale triangle and if we project a little Elliott triangle thrust we also have a chart with the potential to get into the 130’s. If we take out the May 2011 high I’d expect higher prices because it would take a strong underlying function to even take out the big pivot. What would it take to see oil prices in the 130’s? Well, we need not look any further than Egypt which seems to create new violence by the day. Traders are a strange lot. Even as Egypt will never be mistaken for the place Jed Clampett struck it rich, traders will be paranoid the flow of oil could be interrupted at the Suez Canal if a civil war really develops. Oil could spike into the 130’s even for a couple of weeks. If that happens and for whatever reason the long bond were to drop seriously from where we are now, that’s what could precipitate a fall correction.
Next page: Role of Congress
At this point it’s just hypothesizing on my part but while the VIX continues to drop here are the few storm clouds I see on the horizon. This doesn’t even consider what will happen when Congress comes back at the end of August and they start posturing for the new budget. The president had a speech on the economy this week. We know that. What we also know is the House GOP stands in the way of any meaningful legislation that could break the logjam. How many times has the GOP attempted to repeal Obamacare? As of May it was 36 times. But now that we are getting closer to the debt ceiling debate we hear the GOP won’t agree to any increases in the ceiling which may be tied to Obamacare. This time they might have some leverage. The bottom line here is that while the market certainly enjoys Bernanke backing off from his threats to taper the bond buying program, it is deathly afraid of another debt ceiling debacle.
So for now the risk is for a shake of the trees to take some of the weaker hands out of the market. The bigger picture has a few storm clouds on the horizon and the time windows for this activity is getting close.