Technical Talk: S&P 500 – support in 1,130–1,150 area

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The comments below were provided by Kevin Lane of Fusion IQ.

As seen in the chart below, the S&P 500 Index is still above support in the 1,150 to 1,130 zone (green solid and dotted line). It took quite a few attempts to get above the 1,150 level, so we would surmise that pullbacks should hold somewhere in that area. Only below the lower support level near 1,130 would the picture turn more negative.

Source: Kevin Lane, Fusion IQ, October 12, 2010.

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Technical talk: Bias remains cautious

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The comments below were provided by Kevin Lane of Fusion IQ.

The market had its worst sell-off in a few sessions as the S&P 500 (as well as other key benchmark indices) rallied up into resistance zones and then turned down. The volume on the sell-off was much heavier than the volume on the advance and suggests the bear still has some bite left. Internals on the sell-off were decidedly in the favor of sellers. Thus the bias remains cautious and the path of least resistance remains down until a variety of resistance levels can be overtaken.

Below in our chart watch we look at several key indices from a technical perspective to paint a more detailed picture of the current “Message of the Markets”.

As seen above, the S&P 500 stalled at the convergence of resistance and a downtrend near 1,100 (red and orange line). Volume expanded on the sell-off after a light volume advance. Until we can break above 1,100 the path of least resistance is down.

As seen above, the Dow Jones Transportation Index (TRAN) reversed Friday at a down­trend line. Like the S&P 500, until this index can work out the downtrend the bias will be down.

As seen above, copper futures are in a triangular consolidation (red lines) and nearing the apex of the consolidation. Expect a resolution of the range very soon. A downside break would sug­gest the economy is softening, while an upside breakout would suggest the economy is still tracking up.

Continue reading Technical talk: Bias remains cautious

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Charts: Get ready to dump stocks, says Griffiths

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“Equities are going to lose you money between now and October. You either sell right now or wait for the rest of the rally and sell into that,” Robin Griffiths from Cazenove Capital told CNBC when taking a technical look at the FTSE.

Source: CNBC, July 19, 2010.

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Picture du Jour: A generation of overoptimistic equity analysts

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I have long been of the opinion that equity analysts are generally too optimistic on earnings forecasts. Research by McKinsey & Company now offers rather compelling evidence in a paper entitled Equity analysts: Still too bullish (registration required to access the full report).

The report shows that “analysts have been overoptimistic for the past quarter century: on average, their earnings-growth estimates – ranging from 10–12% annually, compared with actual growth of 6% – were almost 100% too high. Only in years of strong growth, such as 2003 to 2006, when actual earnings caught up with earlier predictions, do these forecasts hit the mark.”

Source: McKinsey & Company

Source: McKinsey & Company

The nagging question, of course, is whether earnings forecasts, especially those used for one- and two-year prospective P/Es, are again too optimistic. Many bullish stock market arguments are based on these.

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Global equities – what is in store?

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Global equity markets have been hemorrhaging from the debt crisis in the European Union that began in Greece and subsequently spread to Portugal and Spain’s equity markets, losing more than 15% in terms of US dollars since the recent high in mid-April.

Source: I-Net Bridge.

With long-term trend-lines broken …

Source: I-Net Bridge.

… what are the equity markets telling us?

Stock markets are in a big way driven by underlying economic fundamental factors. Perhaps the single most important indicator of underlying global economic growth is the Global GDP-weighted Manufacturing Purchasing Managers Index (PMI). The GDP-weighted PMI for each major economic region (Japan, U.S., U.K., Eurozone and China) is weighted according to the sizes of their economies. A reading in excess of 50 indicates expansion of the global economy while a reading below 50 indicates contraction. The GDP-weighted PMI leads global (OECD) economic growth by approximately one quarter.

Sources: I-Net Bridge, Plexus Asset Management.

Approximately 80% of the 12-month momentum of the MSCI World Index since 2003 can be explained by the Global GDP-weighted Manufacturing PMI. From the graph below it is evident that the global equity market ran significantly ahead of the underlying global economy.

Sources: I-Net Bridge, Plexus Asset Management.

Are stock markets expecting an implosion of the Global GDP-weighted PMI similar to that of 2008?

The situation in 2008 was a global liquidity problem where the trust between banks worldwide went for a loop, resulting in interbank lending rates sky-rocketing. The TED spread – three-month dollar Libor less three-month Treasury Bills – climbed to nearly 500 basis points as lenders perceived an increasing risk of default on interbank loans. Global trade effectively came to a standstill that saw Purchasing Managers indices plummeting.

Although the TED spread has widened somewhat in the past few weeks it remains within the range that persisted from 2002 to end 2006. It is therefore evident that the current debt crisis is not a global liquidity crisis.

Sources: I-Net Bridge, Plexus Asset Management.

While it can be expected that the Global Manufacturing PMI will be negatively impacted by the debt crisis and fiscal austerity in the European Union, it should be seen in context. The situation in the European Union is a debt problem in the so-called PIIGS countries (Portugal, Italy, Ireland, Greece and Spain) that collectively amounts to approximately 35% of the EU’s GDP or 7.6% of Global GDP. Two thirds of total EU trade is intra-EU, while the EU accounts for approximately 40% of global imports.

Despite the crisis the preliminary Eurozone Services PMI in May improved to 56.0 against 55.6 in April, while the manufacturing PMI fell from 57.6 to 55.9 but was still expanding. While domestic demand in the Eurozone may be faltering, the manufacturing PMIs for export orders have risen as the euro weakness has started to boost exports of major countries in the Eurozone such as Germany. With the Eurozone GDP-weighted PMI (manufacturing and services) leading the economy by approximately three months indications are that the region’s economy in the second quarter may be growing at a pace in excess of 2% compared to a year ago.

Sources: I-Net Bridge, Plexus Asset Management.

However, given the leads and lags of the austerity measures introduced in the affected countries the jury is still out on what the Eurozone PMIs will be in the coming months.

Continue reading Global equities – what is in store?

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Technical Talk: Is S&P 500’s price reversal significant?

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The comments below were provided by Kevin Lane of Fusion IQ.

Yesterday’s intraday sell-the-Fed-news price reversal on the S&P 500 stalled at the area (S&P – 1,079 to 1,106 area) where the index really accelerated its 2008 sell-off (red dotted lines). This area is likely to be more difficult to overcome and may take several attempts, and thus may cap the rally a bit while the index marks time and pulls back slightly or enters a higher level trading range.

While we believe liquidity and buying power remain strong and thus pullbacks should be relatively shallow in nature, that doesn’t mean we can’t get a corrective wave of some magnitude before this sideline liquidity is redeployed. Additionally, quarter-end window dressing may keep stocks elevated or from slipping too much. However, we do believe that putting new money to work in front of this more significant resistance level poses risks. Initial support below the current S&P levels comes into play near 1,040 level (green line).

Secondary supports if 1,040 were to give way would come into play near 980/975 then 950.

25-sep-09-1c

Kevin Lane, Fusion IQ, September 24, 2009.

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