Monday, September 15, 2014

Is bull market on dollar menu?

By Jeff Greenblatt

Last week we explored the growing divergence between the housing index HGX (see chart) and the rest of the market. You’ll recall something similar may be brewing albeit on a smaller scale from the bad old days of 2007.  Latest news from the industry is new mortgage applications are now at a 14-year low.  It shouldn’t be too hard to figure out. We have a new world when it comes to the rate environment; cluster that with rising home prices and stagnant wages. It is what it is. Despite the better economic news compared to several years ago now fast food workers are starting to become militant about the $15 per hour minimum wage.

If you really analyze that situation, why it is that fast food workers are demanding such a pay hike. Back in normal times, it was only Ray Kroc, Ronald McDonald and a few thousand franchise owners who expected to build a career with the golden arches. But in this new era it was just a few short years ago McDonalds decided to hire 50,000 new workers and people from all walks of life showed up. When I was a kid, I remember my older cousin Davey got his first job at McDonalds. I marveled at his uniform and figured it was time to go get a paper route because I was too young.  But here you have thousands of misplaced people who haven’t been able to find work elsewhere demanding more money. McDonalds is a ‘starter’ job and people used to seem to realize they either had to go to school or improve their skills to move up the ranks to get paid more. Be of greater value to others in order to bring greater value to yourself. For some reason that is getting lost. For whatever reason people can’t seem to be able to afford training or can’t find the work to move on from McDonalds. Why am I going on and on about this? Because mortgage applications are at a 14 year low and this is the reason. Before I get emails about this, there is nothing wrong with working at McDonalds. I’m not pointing my finger at the good folks trying to make a living, rather indicting an economy that does not deserve the complacency we’ve seen over the past year.

Complicating all of this is the fact the BKX (Banking index chart below) just woke up out of its slumber. Last week it broke to the upside and long term readers of this column know one market altruism is when the BKX goes up nothing bad happens to the market. So how is it the BKX is going up while the HGX is losing ground? Honestly, I couldn’t tell you. It doesn’t even matter because it is what it is.

On tap for this week is the major quarterly Fed announcement tied together with Janet Yellen’s press conference. Last week the market had a hissy fit when it was either leaked or speculated they would remove the phrase ‘considerable time’ when it came to raising interest rates. Janet Yellen and company are studying whether the employment problem is structural or not. They probably shouldn’t strain too hard. All they need to do is look who is working at McDonalds these days.

Giving everything I’ve mentioned it would be the height of stupidity for the Fed to raise rates now or anytime soon. But perhaps they’ll take the phrase out for an entirely different reason. Has it occurred to anyone this would be a convenient way for Janet Yellen to attempt to pop the complacency bubble without mentioning it by name? Last week we talked about how this year is shaping up to resemble 1937 which just so happened to be a year the Fed raised rates and Congress attempted to balance the budget. The results were disastrous as it spawned Great Depression II. With the growing military threat we can’t afford any more missteps with the economy right now. There are hawks inside the Fed who would actually choose to raise rates this week. It’s not going to happen but the mere thought of it shows how these people have not learned from history. Thankfully, Janet Yellen sat on Bernanke’s kneecap and will hold off for at least six months, after the end of tapering (most likely after October meeting).

That gets me to the BKX which reversed course last week and actually put in a buy signal when polarity flipped as they tested the cluster of red power bar and that last gap down which represented the final thrust. It’s hard to say how far this can go but for right now that’s on a buy signal. The other part of the market still doing reasonably well is the Transports which is still making new highs. So if nothing bad happens when the BKX is going up, nothing really bad happens when the BKX and DJTA (Dow Jones Transportation Average) goes up along with it. But we still have that nagging bearish divergence to housing. Since the folks at McDonalds are not likely to change jobs anytime soon it’s still going to be a concern for this market as we hit late September and early October.

My final consideration for today is the dollar. I heard Dennis Gartman on CNBC proclaim the dollar is in a new bull market and by that he must mean secular. He might be right, but the technicals don’t support him yet. Here’s a chart exclusive (below) to readers that I’ve shown you periodically for the past five years and I haven’t had to change it one iota. The greenback has been driven by the long term Andrews mid line bus.

As you can see it has strategically touched it several times and repelled every time. So here we are again and for a bull market to confirm not only does this have to take out the line but somehow technically flip polarity to breakout to such a point it does not fall back below it in order to confirm a secular bull market. There is one technical case against it. They’ve come to this point in parabolic fashion and it’s hard to imagine it will do going forward what it’s done in the past. Does anybody think it’s going to stay parabolic?

So our views have not changed. We are still looking at the big cycle point come October. Right now the plot thickens as on the one hand banks and transports push higher, keeping Wall Street complacent at the switch and the non-confirmation of the HGX keeping smart traders on their toes.

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