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A Stock Market on Steroids


 -- Published: Thursday, 19 June 2014 | Print  | Disqus 

TECHNICAL SCOOP

CHART OF THE WEEK

Charts and commentary by David Chapman

26 Wellington Street East, Suite 900, Toronto, Ontario, M5E 1S2

Phone (416) 604-0533 or (toll free) 1-866-269-7773 , fax (416) 604-0557

david@davidchapman.com

dchapman@mgisecurities.com

www.davidchapman.com

 

Charts created using Omega TradeStation 2000i.  Chart data supplied by Dial Data

 

The chart of the S&P 500 is one everyone who is long the market should be worried about. In terms of bull markets, while the current one may not be the most powerful one following a 50% or more collapse in the market it is one of the longest. This current bull is now over 1,300 trading days old. The other two markets that saw the market fall 50% or more was the bear market of 1929-1932 and 1937-1942.

 

Not only is the bull long in the tooth in terms of time as I have pointed out before numerous market indicators are flashing danger. Advisor surveys are over 80% bulls a level rarely seen, the put/call ratio is heavily in favour of calls, advance decline lines are diverging sharply with previous highs and the VIX volatility indicator is at levels seen in 2007 as there is almost no fear in the market. The bull market of 2009-2014 is a market that is on steroids.

 

The market these days does not seem to be concerned about the ongoing crisis in Ukraine. The crisis in Iraq is causing barely a ripple. The S&P 500 hit a record high (once again) following the FOMC meeting where Fed Chairman Janet Yellen slashed the growth forecast for 2014 but said that 2015 and 2016 forecasts were unchanged. While the FOMC hinted at a slightly faster pace of interest rate increases starting in 2015, they suggested that rates should be lower than previously expected. Inflation is running below the Fed’s targets. As expected, the Fed “tapered” another $10 billion.

 

This past week a story came out through the Financial Times of London (FT) that suggested that the world’s central banks have shifted investments into equities as the low interest rates have hit even their investments. The report to be published is from the Official Monetary and Financial Institutions Forum (OMFIF), a central bank and advisory group. The report identifies some $29.1 trillion of central bank assets are held in market investments. No not all of that is in equities. The bulk of it is in bonds mostly government bonds. Some is held in gold.

 

An examination of the Federal Reserve’s assets shows that of the $4.3 trillion on the Fed’s balance sheet as of June 11, 2014, $2.4 trillion or 55% is held in US Treasuries. The next largest category is mortgage-backed securities where there are $1.6 trillion or 37%. If the Fed holds equities, it is not being reported.

Not all central banks hold equities in their portfolio. Central banks that were specifically mentioned in the FT article that do hold equities are PBOC, as well as the Swiss and Danish central banks. Outside of PBOC, the equity portfolios were not large. However, OMFIF did note that upwards of $1 trillion of central bank assets were in equities.                                                     

 

What the central banks have done is maintain artificially low interest rates since the financial crisis of 2008 as well as providing trillions in stimulus through quantitative easing (QE). The central banks at the centre of low interest rates and QE are the Fed, the ECB, the BOE and the BOJ. PBOC has provided QE but Chinese interest rates are not what one would call particularly low. Rather than money being funnelled into productive investment, funds instead are speculating chasing the stock market to ever-higher levels. These markets invariably end badly.

 

Since 2009, the S&P 500 has been forming what appears an ascending wedge triangle. This bearish pattern narrows as the market climbs higher and higher. Since November 2012, the climb has narrowed even further. The S&P 500 appears to be forming a classic ABC type pattern as it rises in the ascending triangle. The S&P 500 appeared to make an ABC rise to a peak in April 2011. That completed the larger A wave. The B wave was the 2011 correction.

 

Since then it is tricky trying to determine how the market is unfolding. Usually the C wave unfolds in 5 waves. Waves 1 and 2 are clear but it is uncertain at this time whether this current long wave has completed waves 3 and 4. That could still be to come. The ascending triangle breaks down under 1,800. Ultimately, the ascending triangle suggests that the market should go back from where it came from. That is the 2009 low near 666.

 

Ideally what one wants to see to complete a potential topping pattern is an initial breakdown followed by a rebound that takes the market back to the high or even new highs. This would ideally complete waves 4 and 5. This pattern is similar to what was seen in 2000 and 2007. This type of pattern was also seen at tops in 1946, 1966 and 1972. It doesn’t always happen but it happens sufficiently enough that it would be a strong sign that the final high was approaching.

 

The stock market is long in the tooth. It has been, for lack of a better description, a market on steroids. Danger signs are flashing. Yet many remain complacent that nothing can go wrong and that the Fed will save the day. Eventually they could be in for a shock.

 

Copyright 2014 All rights reserved David Chapman

General Disclosures

The information and opinions contained in this report were prepared by Industrial Alliance Securities Inc. (‘IA Securities’). IA Securities is subsidiary of Industrial Alliance Insurance and Financial Services Inc. (‘Industrial Alliance’). Industrial Alliance is a TSX Exchange listed company and as such, IA Securities is an affiliate of Industrial Alliance. The opinions, estimates and projections contained in this report are those of IA Securities as of the date of this report and are subject to change without notice. IA Securities endeavours to ensure that the contents have been compiled or derived from sources that we believe to be reliable and contain information and opinions that are accurate and complete. However, IA Securities makes no representations or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to IA Securities that is not reflected in this report. This report is not to be construed as an offer or solicitation to buy or sell any security. The reader should not rely solely on this report in evaluating whether or not to buy or sell securities of the subject company.

 

Definitions

“Technical Strategist” means any partner, director, officer, employee or agent of IA Securities who is held out to the public as a strategist or whose responsibilities to IA Securities include the preparation of any written technical market report for distribution to clients or prospective clients of IA Securities which does not include a recommendation with respect to a security.

 

 “Technical Market Report” means any written or electronic communication that IA Securities has distributed or will distribute to its clients or the general public, which contains an strategist’s comments concerning current market technical indicators.

 

Conflicts of Interest

The technical strategist and or associates who prepared this report are compensated based upon (among other factors) the overall profitability of IA Securities, which may include the profitability of investment banking and related services. In the normal course of its business, IA Securities may provide financial advisory services for issuers. IA Securities will include any further issuer related disclosures as needed.

 

Technical Strategists Certification

Each IA Securities technical strategist whose name appears on the front page of this technical market report hereby certifies that (i) the opinions expressed in the technical market report accurately reflect the technical strategist’s personal views about the marketplace and are the subject of this report and all strategies mentioned in this report that are covered by such technical strategist and (ii) no part of the technical strategist’s compensation was, is, or will be directly or indirectly, related to the specific views expressed by such technical strategies in this report.

 

Technical Strategists Trading

IA Securities permits technical strategists to own and trade in the securities and or the derivatives of the sectors discussed herein.

 

Dissemination of Reports

IA Securities uses its best efforts to disseminate its technical market reports to all clients who are entitled to receive the firm’s technical market reports, contemporaneously on a timely and effective basis in electronic form, via fax or mail. Selected technical market reports may also be posted on the IA Securities website and davidchapman.com.

 

For Canadian Residents: This report has been approved by IA Securities, which accepts responsibility for this report and its dissemination in Canada. Canadian clients wishing to effect transactions should do so through a qualified salesperson of IA Securities in their particular jurisdiction where their IA is licensed.

 

For US Residents: This report is not intended for distribution in the United States. 

 

Intellectual Property Notice

The materials contained herein are protected by copyright, trademark and other forms of proprietary rights and are owned or controlled by IA Securities or the party credited as the provider of the information.

 

Regulatory

IA Securities is a member of the Canadian Investor Protection Fund (‘CIPF’) and the Investment Industry Regulatory Organization of Canada (‘IIROC’).

 

Copyright

All rights reserved. All material presented in this document may not be reproduced in whole or in part, or further published or distributed or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express written consent of IA Securities Inc.


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 -- Published: Thursday, 19 June 2014 | E-Mail  | Print  | Source: GoldSeek.com

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