Saturday, June 20, 2015

The FOMC Decision – Studying the Flight of Birds and Gold

by Pater Tenebrarum

Federal Open Yawn Committee puts Kremlinologists all over the World to Sleep …

The Fed’s monetary policy statement delivered on Wednesday was the non-surprise/yawn-inducer of the year. Readers can take a look at the trusty WSJ statement tracker, which reveals that apart from a few minor and unimportant changes, the statement was basically a carbon copy of the last one.

Not a single dissent mars this bland exercise in bureaucratese, so there isn’t even anything to report on that front. If you have trouble sleeping, reading this statement might be a very good alternative to Valium.

So did anything noteworthy happen? Well, yes. Apparently market participants believe they have to react to the forecasts of a bunch of bureaucrats who are quite likely among the worst economic forecasters in the world – and that’s really saying something.

augursAugurs in ancient Rome, observing the behavior of hens.

The High Priests of Augury

It is widely assumed that it is the job of economists to “make predictions”. This is actually not the case. The job of making predictions is that of augurs and soothsayers. In fact, modern-day economists strike us as today’s equivalent of the caste of augurs in ancient Rome.

As Wikipedia informs us:

“The augur was a priest and official in the classical world, especially ancient Rome and Etruria. His main role was the practice of augury, interpreting the will of the gods by studying the flight of birds: whether they are flying in groups or alone, what noises they make as they fly, direction of flight and what kind of birds they are. This was known as “taking the auspices.” The ceremony and function of the augur was central to any major undertaking in Roman society—public or private—including matters of war, commerce, and religion.”

(emphasis added)

Instead of studying the entrails of freshly slaughtered animals or the flight patterns of birds, today’s augurs are poring over statistics in order to “take the auspices” – but the success rate of their predictions is depressingly similar to that of the ancient birdwatchers. If the members of the FOMC board, the high priests of this caste in modern times, were to retire tomorrow and never again utter a forecast, the global economic soothsaying hit rate would likely improve considerably.

It is all the more astonishing that in light of the evidence to date – the chance that an economic forecast by the Fed actually pans out is approximately 0.0% (give or take a zero behind the decimal point) – market participants are actually paying attention to nonsense like the infamous “dot plot”.

dot plot june 2015The bizarre “dot plot” which indicates the estimates of FOMC members regarding the “future path of monetary policy”. Might as well throw darts, click to enlarge.

The Fed is actually not really “planning” anything – it is just reacting, mainly to data that have become meaningless by the time it reacts, as they simply describe the past. It is an organization that is driving forward with its eyes firmly fixed on the rear-view mirror. Meanwhile, any estimates of future economic trends provided by its members have historically proved to be an exercise in futility. Charts like the one above aren’t revealing any earth-shattering insights.

This brings us to the market reaction to the FOMC statement. So far we have seen both immediate and delayed reactions, which seemed largely based on the dots on the above “dot plot” dropping a bit compared to last time. These reactions have included a sharp pullback in the US dollar, a noteworthy jump in the gold price, and quelle surprise, a sizable rally in the stock market. Evidently the idea is that the most extensively pre-announced rate hike in all of history might be postponed even further.

This is quite funny, because it should make little to no difference to the economy whether or not the Federal Funds target rate corridor is set a handful of basis points higher. It might make a difference to a few carry trades, but any dollar carry trades that existed (using the dollar as a funding currency) have likely been blown out of the water long ago.

Does it Make Sense to Buy Gold Based on Dot Plot Fluctuations?

August gold, COMEX- 20 minutesA 20 minute candlestick chart of the August gold contract over the past three trading days click to enlarge.

As you can see above, traders have apparently also bought gold based on the premise that a Fed rate hike might happen somewhat later. It should be noted that gold was actually quite oversold going into the FOMC meeting, so it may well have bounced no matter what. Assuming though that the “dot plot” was the trigger, the question is: Does this make any sense?

Apart from the fact that the “dot plot” has actually no predictive value, there are other grounds for believing that this reasoning may be flawed. Don’t get us wrong – we have nothing against gold going higher. We believe its current price doesn’t adequately reflect extant systemic risk, although we must also concede that the current fundamental backdrop isn’t unequivocally bullish (as to why, see our list of fundamental drivers of the gold price). However, it appears that there is enough “insurance buying” of gold combined with fairly strong reservation demand from current gold holders to lend strong support to the price near current levels.

Normally rising interest rates are bearish for gold, ceteris paribus (if nominal rates were to rise, while inflation expectations rise even faster, the ceteris would of course no longer be paribus). The low interest rate backdrop and the still brisk growth rate of the US money supply (and the even brisker growth rate of the euro area money supply), which would normally be bullish for gold, are currently mainly supportive of the bubble in assorted risk assets. As long as the bubble in risk continues to expand, market participants won’t have much interest in gold.

As a result of this, gold bulls should probably root for a rate hike. In the very short term, the gold market would likely react negatively to a rate hike. But the gold market traditionally has a tendency to be extremely forward looking. This is probably why gold didn’t rally when “QE3” was launched (apart from losing its euro area crisis premium). Gold market participants intuited correctly that QE3 would be followed by a tightening of monetary policy, which has indeed happened via “tapering” and the cessation of QE3. Any move by the Fed that endangers the bubble in risk should therefore be bullish for gold. The gold market would soon look beyond the tightening of monetary policy and begin to discount its inevitable loosening in the future.

A rate hike delay might turn out to be unequivocally bullish for gold if it eventually becomes apparent that there will never be a rate hike, i.e., if the QE spigot is reopened without an intervening rate hike. This possibility cannot be dismissed out of hand, in spite of Mrs. Yellen’s seeming determination to get at least one rate hike in before the year ends. We cannot dismiss it, because we don’t know what exactly will prick the bubble. Eventually there will be a reversal of the credit expansion-induced distortions in relative prices in the economy and a bust will begin. While this normally requires rising rates and a sharp slowdown in money supply growth, the current situation is highly unusual and things may not play out in line with the traditional script.


Government intervention in the economy is actually the main reason why economists are bothering to make predictions about a multitude of statistics nowadays. Most of their usually quite inaccurate macro-economic forecasts would be of little use in an unhampered market economy, and their market value would accordingly be very low. Given its record, it seems especially odd that people are taking actions in the markets based on the forecasts released by the FOMC.

With respect to the gold market, what is actually medium to long term bullish or bearish is often not as obvious as is generally believed. One must keep in mind that the gold market tends to discount future developments far in advance; because of this, superficially bullish or bearish developments may ultimately turn out to have a different effect than expected.

See the original article >>

Tuesday, March 24, 2015

Who Left the Crash Window Open?

by Charles Hugh Smith

Can stocks keep hitting new highs even as sales and profits fall?

Given that we live in a world where a modest 3% decline in the stock market triggers panicky demands for more quantitative easing (QE 4), few observers expect much a correction, regardless of the souring fundamentals such as sales and profits.

A correspondent notified me of a Puetz "crash" window (based on the analysis of Stephen J. Puetz) opening in late March-early April. (Since I am not a subscriber to Puetz's work, I can't confirm this.) As I understand it, while these windows do not predict a crash/sharp correction, such moves tend to occur in these windows, which are based on cycles and events such as eclipses.

So I decided to look for any evidence that a sharp correction might be in the offing.

One classic precursor of corrections is weakening market leaders and narrowing of breadth/liquidity/volume. When leaders who pulled the index higher roll over, the index is usually not far behind.

Consider the chart of Apple, (AAPL), long the engine that has been pulling the indices higher for years. Apple's chart is looking weak:

Another classic precursor of a decline is high levels of complacency, which is reflected in a low VIX or volatility index. When fear has been vanquished, the VIX declines to the 10-12 range. These levels reliably indicate market tops.

Interestingly, the VIX has been tracing out a descending wedge, a pattern that is usually bullish. (The VIX soars when stocks fall sharply and fear comes alive.)

The signs of a global slowdown are so plentiful that even the most ardent bulls should start feeling caution. Yet the central-bank-driven stock markets in the UK and Germany are hitting new highs, and the S&P 500 (SPX) in the US is within a few points of its all-time high.

But the S&P 500 is acting rather tired. Despite the declining VIX, the SPX has only managed a tepid 30-point gain in the past three months--months that are typically among the best in the calendar year for strong equity gains. This is characteristic not of a robust Bull trend but of a topping process--a process that typically takes several months to manifest.

Can stocks keep hitting new highs even as sales and profits fall? History suggests we've reached Peak Central Banking--the faith that central bank easing can push markets higher forever, regardless of fundamentals, has reached near-euphoric levels. Few fear a decline or an increase in volatility.

So it's all smooth sailing even as the global economy slides into recession? That is a disconnect from reality that beggars belief.

Perhaps the VIX will soon awaken from its slumbers, reflecting a "surprise" plummet in stocks.

See the original article >>

Sunday, March 22, 2015

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Monday, March 16, 2015

Italian Bad Debt Hits Record $197 Billion As Bank Lending Contracts For Unprecedented 33 Consecutive Months

by Tyler Durden

Repeat after us: the biggest threat facing Europe's banking system is not a Grexit, is not the Austrian "bad bank" black swan (although it is pretty bad), it is the trillions in non-performing loans on the balance sheets of European banks, which Europe has no idea how to and which continue to multiply in the process threatening to impair depositors with bail-ins (see Cyprus). It is also why, after years of debate, the ECB finally agreed to flood European banks with what it hopes will be over €1 trillion in excess reserves a la the US (of course, if Zero Hedge, and now JPM, is correct, the ECB will break the bond market long before it achieves its goal) in order to mitigate the relentless cash demands of a constantly rising NPLs.

And unfortunately for the third largest issuer of sovereign bonds in the world, Italy - the country all eyes will focus on once Greece and/or Spain exit the Eurozone - when it comes to NPLs things are going from bad to worse because as Reuters reported earlier, citing ABI, gross bad loans at Italian lenders continued to rise, totaling 185.5 billion euros ($196.5 billion) in January from 183.7 billion euros a month earlier.

As the chart below shows, Italy now has over 10% of its  GDP in the form of bad debt.

But there has to be a silver lining though, right? If the banks are issuing loans with reckless abandon, at least many more loans are entering the general population right, something which also happens to be the biggest hurdle for ECB's clogged QE plumbing - the unwillingness of European banks to lend money.

Well, sorry, no silver lining, because as NPLs rose, total debt issuance contracted once more. Again Reuters:

Lending by Italian banks to families and businesses decreased 1.4 percent year-on-year in February, its 33rd consecutive monthly fall, even though the pace of decline is slowing, banking association ABI said. ABI said the February figure was the lowest rate of decline since July 2012.

Loans to households and non-financial companies had fallen 1.5 percent in January, a figure revised from a 1.8 percent drop announced a month ago.

Lending by Italian banks has been steadily falling since May 2012 as the euro zone's third biggest economy grappled with its longest recession since World War II.

That's ok, though, because all that needs to happen for banks to resume lending after nearly 3 years of consecutive declines in loan issuance, is for the ECB to start printing money. Because Draghi said so. Oh, and for Italy et al to change the definition of GDP once again so that economic growth under a Keynesian voodoo regime is no longer purely a function of how much credit is being created. Because across Europe, none is.

See the original article >>

Wednesday, March 11, 2015

The End of the Great Debt Cycle

by Bill Bonner

Rushing Toward the Limits

“It’s the end of the great debt cycle,” says hedge fund manager Ray Dalio of Bridgewater Associates, taking the words out of our mouth. Bond fund manager Bill Gross adds context:

In the past 20 to 30 years, credit has grown to such an extreme globally that debt levels and the ability to service that debt are at risk. […] Why doesn’t the debt supercycle keep expanding? Because there are limits.

Neither Mr. Dalio nor Mr. Gross nor we know precisely where those limits are. But the Europeans and the Japanese are rushing toward them.


Photo credit: William Stark

A Poke in the Eye for Lenders

In Europe, bond yields are lower than they’ve ever been. Between $2 trillion and $3 trillion in sovereign and corporate bonds now trade at negative nominal yields. We don’t need to tell you that it is unnatural and perverse for lenders to accept a poke in the eye for giving up their valuable savings.

But that’s just part of the perversity of the present system – no real savings are involved. The money never existed in the first place. Getting a negative yield seems almost appropriate, if nevertheless incomprehensible. Today, banks create “money” from thin air, in the form of new deposits, when they make loans.

As our friend Richard Duncan explains in his book The New Depression: The Breakdown of the Paper Money Economy, by the turn of the new millennium the reserve requirement – whereby banks are forced to hold some cash or gold in reserve against new loans – was so low that it played “practically no role whatsoever in constraining credit creation.”

That means as long as banks meet regulators’ capital adequacy requirements, they can create as much new money (loans) as they want. No risk of mining accidents. No need for anyone to sweat or strain. No self-discipline or forbearance required. Savers can eat their cake. And borrowers can have it too.

TMS-2 vs. bank reserves, linear

Mr. Duncan is correct about the fact that so-called “reserve requirements” have been utterly meaningless to the expansion of the credit and money supply. Reserves only rose sharply after the 2008 crisis, as a balance sheet item created by QE. QE also vastly increased the money supply (more than doubling it between early 2008 and early 2015) when banks temporarily slowed down their inflationary lending – click to enlarge.

Doomed Public Finances

Economists who still have their wits about them – if there are any left – are baffled. The lowest bond yields in history… and along comes the European Central Bank with a plan to drive them lower by way of €1.1 trillion ($1.2 trillion) of QE. What is the sense of it?

No one can say. Rather, no one wants to admit that the real motive is to relieve banks of their bad debt. Banks bought the debt of bankrupt European governments. Everybody knows there is no way governments will pay it back. Fortunately, when central banks buy government debt, it is effectively canceled – forgotten forever. So, the ECB helpfully exchanges this bad debt for new bank reserves before the public catches on.

Over in Japan the government has been running budget deficits for 25 years – funded largely by Japanese “salary-men” who think they are saving money for their retirements. What a disappointment it will be when they discover that the money was not saved at all, but spent by their government.

And now, Tokyo’s debts have grown so large that 43% of tax receipts are required just to service its debt, to say nothing of the amounts needed for current and future deficits. You can imagine how far you’d get if you tried this at home. Try living on 57% of what you earn (the rest goes to pay your creditors)… while still spending more than your income. See how long that would last…

The Japanese are too polite to mention it, but their public finances are doomed. And it can only be a matter of months – okay, maybe years – before the entire Ponzi scheme blows up.

Public debt to GDP ratios

Gross government debt to GDP ratios of selected future insolvency cases – click to enlarge.

Tokyo … Then Harare

Since 2009, we’ve been saying that our itinerary was likely “Tokyo… then Harare.”

By that, we meant that we were probably going to experience a Japan-like deflationary slump… and then a Zimbabwe-like hyperinflation.

We are now in year six of that slumpy, lumpy, bumpy ride. The US economy has been growing, but it is the weakest postwar “recovery” on record. And what little growth we saw was in asset prices. And it was bought with about $4 trillion in central bank stimulus. Few people realize it, but this also retarded real economic growth.

You can see that by looking at the difference between what has happened in the financial markets and what has happened in the real economy. Wall Street is as bubbly as ever. But Main Street is still struggling. Real wages and real business investment, for example – things that mark and measure genuine prosperity – are as limp as a Tokyo noodle. Why?

Prosperity depends on savings and capital formation. You have to devote real resources to new output capacity. You have to hire people and find new and better ways of doing things. But business investment has gone down since 2007. Based on fourth-quarter figures from 2007 and 2014 and annualized, $400 billion was invested in business development in 2007 against only $300 billion in 2014.


Although this chart by Smithers & Co is slightly dated by now, it does get the point across …

Borrowing Binge

Meanwhile, businesses borrowed about $3 trillion more. Where did all this money go? It appears to have gone into share buybacks, mergers and acquisitions, bonuses, fees and other speculator payoffs. These things benefit the 1% of the 1% – the insiders who are in on the deals. They do nothing for the real economy, except deprive it of the capital it needs to make real progress.

In 2000, we had a bubble in tech stocks. In 2007, we had bubbles in finance and housing. Now, we have bubbles in corporate bonds ($14 trillion)… securitized auto loans ($20 billion)… and student loans ($1.2 trillion).

Pop … pop … pop – that’s what will happen to these bubbles. And when it does, it will complete our travel to Tokyo. That is when our slumpy ride turns into a terrifying train wreck. Yes, Tokyo deflation before we get to Harare hyperinflation.


Exponential growth in money supply inflation and its effect on prices in Zimbabwe.

Charts by: St. Louis Federal Reserve Research, Bloomberg, Smithers & Co., pixshark

The above article is taken from the Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

See the original article >>

Sunday, March 8, 2015

The Week Ahead: Does Your Portfolio Need Adjusting?

by Tom Aspray

The US stock market was not impressed with the details of the ECB stimulus plan and then sold off sharply Friday in reaction to the very strong jobs report.
For February, 295,000 new jobs were added, considerably more than the estimate of 230,000. Bond yields rose sharply on the news and interest rate sensitive stocks bore the brunt of the selling.

The impact of weaker crude oil prices and the strong dollar on earnings had many again questioning the strength of the US economy. After the jobs report, the focus has turned again to what language, if any, the Fed may change at their March 17 meeting. Investors should not let this change their strategy.

Many have likely panicked over similar concerns in the past only to have the market move higher after the weak longs have been shaken out of the market. This obsession with the Fed’s verbiage creates more uncertainty and should increase the bearish sentiment as I hoped last week (Calling All Bears).

Click to Enlarge

The recent ETF flow data from Markit shows that-so far in the first quarter-$16.8 billion has moved out of US equity funds. The big beneficiaries have been the Japanese and the EuroZone markets where a looser monetary policy is being pursued. One needs to remember that over $100 billion moved into US equity ETFs in the last quarter of 2014.

The German Dax has been very strong so far in 2015 as it is up almost 18%. As pointed out on January 23, the Dax (see chart) had completed its continuation pattern. This bullish action suggested that the US markets would also soon breakout to the upside as they did in February.

Many are therefore wondering whether they should be shifting into the overseas stocks markets or making other changes in their portfolio. Let’s look at the overseas stock markets first.

Click to Enlarge

Since the start of 2015, the Spyder Trust (SPY) is up just about 2%, but it is lagging well behind the iShares MSCI EMU Index (EZU) which is up over 5%. EZU has total assets of $7.93 billion with an expense ratio of 0.48%. There are 236 stocks in the ETF with just 24.6% in the top ten holdings and it has a yield of 2.94%.

The Vanguard FTSE Pacific (VPL) is doing even better as it is up over 7.5% so far in 2015. This ETF has an expense ratio of 0.12% with 812 stocks in the ETF. In addition to having 56.4% of its holdings in Japan, it has 19.3% in Australia, 11.3% in Korea, 8.9% in Hong Kong, and 3.7% in Singapore. It has a yield of 2.56%.

In last month’s European ETFs on Sale I recommended both EZU and SPDR STOXX Europe 50 (FEU) in light of their discounted price, based on the cyclically adjusted price/earnings ratio. As of the end of January, the discount was over 25% below the long-term average.

Neither of the European ETFs have had enough of a pullback to reach the previously suggested buying levels. It is my view that this week’s lower close is the start of a correction in these two overseas ETFs. Therefore, I would not chase them at current levels as I think there will be a better entry point in the next few weeks and the weekly charts explain why I have this opinion.

Click to Enlarge

The iShares MSCI EMU Index (EZU) looks ready to close the week lower and the 20-week EMA is now at $37.71. There is further support in the $37-$37.40 area with the quarterly pivot at $36.38.

The relative performance broke its downtrend at the end of January and is trying to hold above its rising WMA. The weekly OBV completed its bottom formation in January as resistance at line b, was overcome. Investors should go 50% long EZU at $37.59 and 50% long at $36.88, with a stop at $35.27.

The Vanguard FTSE Pacific (VPL) has been trading near its weekly starc+ band for the past few weeks as it is back to strong resistance from $61-$62. The monthly projected pivot support and the 20-week EMA are now at $58.94. There is additional support at $58.25 with the quarterly pivot at $57.51. A completion of the weekly trading range, lines c and d, has upside targets in the $70-$72 area.

The weekly relative performance is above its WMA, but is still well below the downtrend, line e. A strong new uptrend is needed to indicate it is outperforming the S&P 500. The OBV has surged sharply to the upside breaking through the resistance (line f) in early January. Investors should go 50% long VPL at $59.24 and 50% long at $58.36 with a stop at $56.83.

Click to Enlarge

There has been some improvement in the EuroZone economies and it has been my view since last summer that their economy would turnaround in 2015. The EuroZone PMI hit a seven month high and is very close to breaking its downtrend, line a. A move above the 55 level would be very positive and job creation has just hit a three year high. A drop below support at line b, would be a sign of weakness.

The euro dropped sharply last week at the 1.09 level and this will continue to drive the exports from the EuroZone. Denmark cut their deposit rate last month as it joins the long list of countries that are lowering their rates.

Click to Enlarge

Things are not nearly looking as good for the Russian economy as its PMI is in a well established downtrend after a brief bounce back above the 50 level last year. This is likely to put more pressure on Putin and may be enough to cut into his support at home or slow down his overseas aggression. Let’s hope so.

For the US, the manufacturing data is still mixed as last week the PMI Manufacturing Index was better than expected while the ISM manufacturing Index was a bit weaker. It has declined steadily from last October’s peak at 57.9.

This week’s economic calendar is light with Retail Sales, Import and Export Prices, as well as Business Inventories coming out on Thursday. The Producer Price Index will be released on Friday along with the mid-month reading on consumer sentiment from the University of Michigan.

What to Watch

The strong jobs report certainly shook the market on Friday and the sharply lower weekly close likely sets the stage for more selling this week. The light economic calendar will turn the focus on the bond market as well as the EuroZone.

In Thursday’s daily column I reviewed the daily technical studies and pointed out that an increase in bearish sentiment was needed before the market could move higher. The drop on Friday should create more fear as CNN’s Fear and Greed Index has dropped 16 points. On a short-term basis, Friday’s drop has created an oversold condition that should lead to a sharp rebound this week.

In last weeks trading lesson Avoiding Bear Markets, I took a look at past bear markets to point out what warning signs the market and the economy give you before the start of a bear market. There are no such signs at this time and they would take many months for the economic indicators to top out.

There are also no signs yet of a sharp 15-20% correction at this time as the warnings signs are also not in place now. The patterns that one typically sees in the A/D line would take three to five weeks or more before they could develop.

There are some divergences in the weekly volume analysis that is contrary to the positive signs from the weekly A/D lines. The new highs in the NYSE, Nasdaq 100, and S&P 500 A/D lines suggest that this is a correction.

Now that the S&P 500 has decisively broken the support in the 2085-2090 area, the next likely support is in the 2060-2068 area. The market should bounce from this level this week. If the rally back to the 2080-90 area is weak, then a drop to the 2020 level becomes a possibility. This would be a correction of 5% from the highs.

Sentiment is mixed, as while the put/call ratios are positive, the small speculators are heavily long the S&P futures according to COT Expert John Person.

I still view this correction as a buying opportunity, as while the market is concerned about higher rates, the jobs data is sending a strong message that the economy continues to improve. Therefore, stocks continue to be the best bet, though yields did rise last week.

There are many stock charts that continue to look better than the market indices and the strong A/D numbers is a healthy sign for the market. Some stocks are already starting to buck the trend as Apple (AAPL), which was discussed last week, was up on Friday.

Click to Enlarge

One of the negative signs comes from the % of S&P 500 stocks above their 50-day MAs as it has turned down after failing to make it to overbought levels. The lower highs, line a, are also a reason for concern.

The weekly chart of the NYSE Composite shows the sharply lower close last week as the 20-week EMA at 10.823 is already being tested. The monthly projected pivot support is at 10,658 with the quarterly pivot at 10,597.

A weekly close below 10,400 at line a, would be negative with the weekly starc- band at 10,358.

Click to Enlarge

The weekly NYSE Advance/Decline made a new high just two weeks ago as it moved through the longer-term resistance at line b. The A/D will be lower once the final weekly numbers are in, but it still will be above the support at line c and the WMA. It is a positive sign that the WMA is still clearly rising.

The weekly OBV did not make a new high with prices and it will close the week back below its WMA. The support, at line e, is much more important as a weekly close below it would start a new downtrend.

S&P 500
The weekly chart of the Spyder Trust (SPY) reveals that a low close doji sell signal was triggered last week with the close below the doji low of $210.48. The close Friday was below the daily starc- band with the 20-week EMA at $206.05. There is additional support now at $204.50-$205 with the monthly projected pivot support at $201.60.

Click to Enlarge

The weekly S&P 500 A/D line made a new high the week of February 20 and its WMA is still rising. There is more important support going back over a year at line b. As I noted on Thursday, the daily A/D line (see chart) gave a short-term warning of Friday’s drop.

The weekly on-balance volume (OBV) dropped below its WMA on Friday and also failed to make a new high with prices two weeks ago. There is next strong support at the January lows and then at line c, which connects the lows from 2014.

There is first resistance now at $210.50 and the 20-day EMA.

Dow Industrials
The SPDR Dow Industrials (DIA) also closed well below the prior week’s lows with the 20-week EMA now at $176. The monthly projected pivot support is at $173.45 with the

The weekly relative performance is trying to again turn higher as it has just tested the uptrend, line d, that goes back to the middle of last year. The weekly OBV is still above its WMA but does show a pattern of lower highs. A drop below the late January low would confirm the negative divergence.

Nasdaq 100
The PowerShares QQQ Trust (QQQ) did hold up better on Friday than the other major averages. There is next minor support at $106 with the sharply rising 20-week EMA at $103.43. This also corresponds to the breakout level, line a.

The weekly Nasdaq 100 A/D made a new high last week and is still above the breakout level, line b. The A/D line has next support at its WMA with further at the long-term uptrend (line c).

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The weekly OBV is acting much weaker than the A/D line as it has been diverging from prices since late 2014, line d. It has now dropped back below its WMA but is still above the January lows.

There is short-term resistance now at $108.50-$109 with the daily starc+ band at $110.26.

Russell 2000
The iShares Russell 2000 (IWM) looks ready to close down 1.7% on Friday but is still barely above the three-week lows at $120.90. The rising 20-week EMA is just above $118 with the monthly pivot support at $116.85.

The weekly Russell 2000 A/D line is still above its WMA, but has turned down after forming lower highs. The A/D line now has important support at line f.

The weekly OBV shows a similar negative divergence, line g. A drop below the recent lows, line h, would confirm the negative divergence.

We are still long both SPY and IWM from our January recommendation . I adjusted the stops last week but will be watching any rally this week closely. If there are signs of a rally failure, I will likely take profits. If so, I will let you know via my Twitter feed.

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