Wednesday, July 16, 2014

SPX and RUT Updates, Plus Yellen (Interpreted)

On Tuesday, Janet Yellen gave testimony before Congress.  She does this twice a year, just after the conclusion of her semiannual "Run for the Presses" Charity Marathon.  In her speech, Fed Chairmanwomanperson Yellen stated that, despite the recent strong job reports, she won't conclude the economy has recovered until the following metrics are met:

1.  Wages must rise.
2.  Discouraged workers must return to the workforce.  Or, at the very least, they have to cheer up a bit.  The last thing this economy needs is a bunch of jobless workers milling about looking discouraged!
3.  More than 47% of late-night infomercials must be selling courses on how to get rich quick by flipping houses.
4.  Donald Trump must file for bankruptcy again.
5.  Taco Bell must quit messing with our heads by resurrecting, then removing, the Chili Cheese Burrito from its menu.  This type of madness does not occur in healthy economies!

Okay, I admit the last one on the list is mine.  The first two are true, though.  Mostly.  Unfortunately, I didn't have time to listen to Yellen's entire speech because I had to depart her reality in order to rush off to an important appointment back on the planet Earth -- but numbers 3 and 4 on the list sound about right.

Yellen also pledged to remain vigilant about asset bubbles, and to make sure that no market would be left without one.

Regarding the end of QE-Infinity -- or, as Senator Charles Schumer called it (alternately), "QE2" and "QE3" -- Yellen had the following to say (modestly rewritten by me for clarity):  "Here are a bunch of words strung together at random.  It will sound like I'm saying something, but really I'm not.  Did I ever mention that I excelled at essay questions in college?  Because I did.  Anyway, enough about me!  The bottom line about tapering QE, if we can consider this a bottom line, is that 'It's not set in stone.'  Furthermore... Hey look, there goes Elvis!"

So it appears that bulls have the all-clear for continued QE into the 21st century and beyond.  Wait a second (checks calendar), we're already in the 21st century, aren't we?  What a let-down.  In that case, it sounds like QE will continue for at least another few months, or years, or decades -- or possibly centuries.  Perhaps QE will simply become a perpetual part of the investment landscape; an ongoing reminder that money does indeed grow on trees, and that the Constitution of the United States only has value because it's a really old piece of paper that contains the autographs of some famous historical figures.  Well, they used to be famous, anyway, back when we still taught history to school kids.  Tough to say if they're still famous nowadays -- in a recent national survey, the majority of American teenagers identified Alexander Hamilton as "a hot brand of clothing."

Bulls did get a little nervous when they read the full Fed report that accompanied Yellen's testimony, and noticed it said: "Valuation metrics in some sectors do appear substantially stretched — particularly those for smaller firms in the social media and biotechnology industries..."

Of course, we all know what an expert the Fed has proven to be on market valuation.  So it was a relief to hear that they're only worried about a few "smaller firms in the social media and biotechnology industries," such as Yelp (YELP).  Not coincidentally, "Yelp," is the exact same sound CEO's make when they realize their company is about to go bankrupt.

But the message from the Fed seems to be:  The rest of the market is almost certainly fairly-valued.  Trust us.  There's nothing to see here; move along!

This Fed's approach of singling-out specific market sectors is a bit odd, and almost strikes me as a strategy designed to focus attention on some of the more obvious bubbles in order to detract attention from the rest of the bubbles that are forming ("Yes, arguably," he says, with a nod to the optimists).  It's as if the Fed were trying to reassure us by saying: "See, we're not totally oblivious to bubbles!  In fact, we're very alert, and we've identified these specific bubbles right here!  And we're extremely wary of them.  Hey look, there goes Elvis!"

The good news is that there's more riveting testimony still to come today!  I realize I'm probably being overly optimistic, but my sincerest hope is that, for today's testimony, Senator Charles Schumer will be solidly briefed about which QE program we're currently in.

Moving on to the charts, last update suggested a near-term target of 1978-82 for the S&P 500 (SPX), and noted that same zone should be resistance.  Monday hit an intraday high of 1979.85 before stalling, and Tuesday saw the market run to 1982.52 before reversing.  Tuesday's price action left a bearish reversal bar on the daily chart (price opened higher, hit a higher high, then closed red).  And Tuesday's overlap at the price point of 1969 suggests that the rally from 1952 to 1982 was an abc.

Note that the preferred intermediate count still anticipates new all-time highs, the near-term question is how the market gets there.  While the abc structure suggests the rally was corrective and hints at the count shown below in blue and red, the abc does still leave bulls the option of an ending diagonal fifth wave rally, as shown on the chart below in black:

Without publishing 50 more charts, there are a few charts that suggest bulls have a shot at seeing new all-time highs directly, via the ending diagonal.  The Dow Jones Industrial Average (INDU), for example, would probably look better with a couple more thrusts to new highs, as would the Transportation Average (TRAN).  As discussed in the last update, the Russell 2000 (RUT -- below) appears to have entered a down trend -- but with Tuesday's new low, has potentially completed five waves down.  This means that, near-term, it may be due for a more substantial reaction rally.

In conclusion, bears accomplished what they needed to on Tuesday, but bulls aren't out of the running by any means, and we could still see SPX chop its way to new highs over the coming sessions.  RUT, on the other hand, appears to have established a new intermediate downtrend, but in the meantime may be due for a near-term reaction rally.  Today's session should offer a lot of information on both markets.  Trade safe.

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1 comment:

  1. Not so much a charity event; the Fed's chair is mandated by statute (Humphrey-Hawkins) to testify before Congress twice a year. Although the Fed probably submits to this minimal oversight just to maintain the illusion that the Fed is under the control of Congress (rather than the reverse).