Macro Month in Review/Preview August-September 2011

by Greg Harmon

Last month in this space my Monthly Macro Review/Preview suggested that the monthly charts had shifted to showing Gold ready to move higher in the coming months along with US Treasuries while Crude Oil and the US Dollar Index are biased to the downside. The Shanghai Composite and Emerging Markets were set to slowly drift lower in a sideways consolidation. Volatility was on the edge of a break higher at a critical level. A move above 28 would signal regime change while a fall back, more of the same. This was reflected in the Equity Indexes as well with the SPY, IWM and QQQ all consolidating with indicators starting to point negative, but holding in their ranges. A catalyst that pushes them higher could lead to a major rally. The QQQ is the strongest of the Indexes as of the end of July.

Gold and US Treasuries held true to the charts and moved higher, a lot higher, while the US Dollar Index and Crude Oil consolidated. The Shanghai Composite and Emerging Markets also drifted lower as anticipated in the charts. Volatility took the high rode and held higher all month concurrent with a move lower in the Equity Index ETF’s. A month that was true to the technicals. How does the month impact the longer term picture. let’s look at some charts.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

Gold, $GC_F

Gold broke above the rising two year trendline resistance and did not look back until it ran near the 10 year resistance line at 1917.00. The Relative Strength Index (RSI) remains elevated, but under 80 and the Moving Average Convergence Divergence (MACD) indicator continues to move higher. These indicators along with the Simple Moving Averages (SMA) sloping higher and volume increasing point to more upside for Gold in the coming months. Support for any pullback now stands at 1720 and 1550 below that while a move over 1970 resistance may slow it down.

West Texas Intermediate Crude, $CL_F

Crude Oil printed a Hammer candle this month, a possible reversal if confirmed higher, giving hope that the short move lower may be ending. But the RSI continues to look lower as it hits the mid line and the MACD is about to cross negative, both suggesting more downside to come. The upside should be capped by the overlapping Fibonacci levels a between 95.36 and 96 if it can get above the Upper Median Line of the bearish Pitchfork. Downside support comes first at 84.10 and then 79.12 and 74.43 before strong support at 71.

US Dollar Index, $DX_F

The US Dollar Index continued its series of tight doji’s after breaking the symmetrical triangle lower in March. The RSI continues to linger near 40 as the MACD stalls in negative territory. Both give no guidance for the future. The SMA’s continue to slope lower adding to the understanding that the trend is still lower. Any upside should be capped at a retest of the triangle near 77.50 and the downside support levels of 73 and 71.50 are the only thing between it and targets of 52 and then 40 on Measured Moves (MM) out of the triangle and from the 120 top in 2002.

US Treasuries, $TLT

US Treasuries, as measured by the ETF $TLT, broke above the two year symmetrical triangle on massive volume. It has a RSI that points higher and a MACD that has just crossed positive both supporting more upside. It printed a double top near 112 and pulled back slightly just above the Bollinger band top, so it may consolidate. But longer term this chart looks bullish. If it can get over 112 it has a MM on the pattern break to 137! If that double top wins out and it moves lower, suggesting the volume is indicative of a blow off top, then support lower comes at the previous top in 2010 at 104.80 and the top rail of the triangle at 101.26 before a move back to the 95.30-97.50 area. Again, the chart favors the upside.

Shanghai Stock Exchange Composite, $SSEC

The Shanghai Composite continues to honor the resistance of the falling trendline. The RSI is now moving lower like the shorter SMA’s, and the MACD remains flat and not useful. Look for more grind lower from this Index with any upside moves capped at 2715. Support on the downside comes at 2415 and then 2050.

iShares MSCI Emerging Markets Index, $EEM

Emerging Markets, as measured by the ETF $EEM, rejected at the 48.20 resistance level and fell hard before recovering and retaking the 42.20 support level. The candle for the month, suggests more downside, despite the long shadow, and is backed up by a RSI that is rolling down hard and a MACD that is about to cross negative. Look for more downside in the coming months with any move higher capped at 44 and then the 48.20 area. Support for the anticipated move lower may slow it down at 42.20 followed by 37.40 and 36.

VIX, $VIX

The Volatility Index looks to have printed an interim double top at 48.22 this month with a long upper shadow similar to the other topping candle. With the Bollinger bands expanding it could be prepping for more upside. If so resistance should come at 35 and then the previous top at 48 followed by 60. But it appears more likely that the longer term move will be lower with support at 25.50 followed by 22.30 and 20.50. The charts above give a mixed view on the future of the $VIX so keep watching.

SPY, $SPY

The SPY continued down along the Upper Median Line of the bearish red Pitchfork during August, printing a long bodied red candle with a long lower shadow, technically a Hanging Man since the long uptrend. The RSI pointing lower and the MACD heading towards a bearish cross negative suggest more downside to come. Any move higher over 123 can expect resistance at the Upper Median Line, near 131.20 and then 136.62. Support on a continuation downward comes at 118.50 and then next at 116 and 114 before 108.77.

IWM, $IWM

The IWM also continued down along the Upper Median Line of the bearish red Pitchfork during August, with the same characteristics of the SPY. The RSI pointing lower and the MACD heading towards a bearish cross negative suggest more downside to come. Any move higher over 73.60 can expect resistance at the Upper Median Line, near 81.15. Support on a continuation downward under 72.40 comes at 68 and then next at 66 and 63 before 61.37.

QQQ, $QQQ

The QQQ continued to consolidate near its highs but with a wider candle reaching down from the Upper Median Line of the bearish red Pitchfork. Also a Hanging Man, it is bearish if confirmed lower next month. The RSI pointing lower and the MACD heading towards a bearish cross negative suggest more downside to come. Any move higher can expect resistance at 57 and then 60. Support on an expansion downward under 54.26 comes at 50 and then next at 46.20 and 44 before strong support at 42.20.

The monthly outlook suggests the upside for Gold and US Treasuries will continue while the trend lower for Crude Oil and the US Dollar Index will also continue. The Shanghai Composite and Emerging Markets look to continue to move lower as well. Volatility can go either way but looks to remain above the lower range experienced in the last six months with the VIX in a wide range between the mid 20′s and 48. Despite that uncertainty, the Equity Index ETF’s SPY, IWM and QQQ are set up to continue lower in the coming months. As noted on the individual charts there is room for some short term upside without breaking the downward bias. Use this information to understand the long term trends in Equities and their influencers as you prepare for the coming months.

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WEAK HOUSING CONCEALS HIGHER INFLATION

By Tom McClellan

I’ll bet you did not know that housing makes up 42% of the Consumer Price Index (CPI). All the rest of it, food, energy, clothing, recreation, education, transportation, toys, cosmetics, etc. makes up the other 58%. So whatever housing prices are doing has a big effect on the headline CPI number.

The softness of housing prices continues to artificially supress the growth of the CPI inflation rate. Some Fed officials are even saying that they need to strive for higher inflation to help the economy rebound, in spite of the Fed’s mandate to promote “stable prices”.

Most people have heard about the CPI variant that excludes food and energy. But not many people outside the economics community know that the Bureau of Labor Statistics also publishes a long list of alternate permutations of CPI calculations, including or excluding various components. This week’s chart shows a comparison of the CPI-Housing growth rate versus “all items less shelter”, which is that other 58% of the CPI calculation I mentioned above. When we exclude the contribution of the housing price data, we can see that the inflation rate for everything else is already up to 4.68%.

And this high inflation rate is occurring at a time when the yield on the 30-year T-Bond is just 3.51%, and 10-year T-Notes are yielding just 2.15%!

The chart also reveals that the CPI-Housing growth rate is already working on catching up to where the inflation rate has gone for everything else. And if the next chart is correct, the future should bring even higher housing costs.

This chart shows that the CPI-Housing growth rate follows the movements of lumber prices, with a lag time of about 18 months. So the bottom for housing prices in 2010 was just the echo of the bottom in lumber prices in early 2009. The current uptrend for the growth rate of CPI-Housing is following the path of an up move in lumber prices that occurred 18 months before. Lumber prices peaked in December 2010, which suggests that the CPI-Housing numbers should continue rising until around June 2012.

If so, that is going to take away the depressing effects of low housing prices on the headline CPI data. And a higher input from housing prices joining with the already 4%+ inflation everywhere else is going to make it really hard for the Fed to live up to its promise to keep interest rates low until 2013.

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