Sage Weekly Letter – 4/29/2012

• Posted by Robert Sinn
• on April 29th, 2012

What a difference a week makes! Just a few days ago equities were staring at a deeper correction with many calling for a move down to the low 1300s for the S&P 500 – then $AAPL reported a blowout quarter and Bernanke made it clear that additional monetary policy easing is still very much on the table. Last week I made a point to emphasize the importance of the dollar in the context of the current global macro market situation:

“US Dollar Index Weekly ($DX_F $UUP) – Like many charts this one is open to interpretation, I view the Dollar Index as most likely forming a bear flag with a weekly close below 78.10 setting in motion the next leg lower. Meanwhile, one can also make a strong argument that the Dollar Index has been forming a two year rounded bottom (inverted head & shoulders?):

 

If I were allowed to view only one chart of any market it would be the Dollar Index – I believe that whichever way the dollar breaks will dictate major movements and trend changes across almost all other asset classes/markets over the coming months & years.”

Last week the dollar index printed a large bearish candle and broke the symmetrical triangle to the downside:

 

The daily chart of the US Dollar Index shows the precarious situation in which the dollar currently finds itself:

 

My friend J.C. Parets over at All Star Charts made a valuable observation on Friday concerning the dollar rally’s fading momentum:

“The Relative Strength Index (RSI) is my momentum indicator of choice. When prices make new highs, we also want to see RSI confirm that with new highs of its own. Unfortunately for the U.S. dollar, the new highs in January were not confirmed by RSI. These lower highs in momentum are a sign of weakness. And with the dollar testing this trendline, we’re watching 78 as the last line of defense for the bulls. After the break is confirmed, we’re looking at a 76 target and then 73. In the currency world, these are huge moves.”

I agree with J.C. that the 78 level is absolutely key, if the dollar index loses the 78 level and the 200-day SMA on a weekly closing basis momentum could quickly accelerate to the downside. A significant move lower in the dollar will have major implications for other asset classes, namely equities and precious metals.

Why the recent weakness in the dollar? Two quotes from Fed Chairman Bernanke’s press conference last Wednesday immediately stand out:

“We remain entirely prepared to take additional balance sheet actions if necessary……We will not hesitate to use them (policy tools) should the economy require that additional support.”

While additional QE may not be immediately forthcoming from the Fed, Bernanke clearly made a point to specifically make clear that the Fed stands ready to provide additonal stimulus should the economy require additional support – this has two primary implications for financial markets: Equities continue to have a “Fed floor” underneath them and the dollar is highly unlikely to be able to mount a sustainable rally with the specter of additional QE ever-present.

Perhaps the most bullish factor which has recently emerged is the fact the ECB President Mario Draghi “gets it”. Draghi has been pushing EU leaders to come up with a “growth compact” to help soften the harsh blows dealt to eurozone economies by the various recent austerity policies. With the two most important men in global finance (Bernanke and Draghi) clearly still reading from the Keynesian stimulus playbook while remaining more than willing to keep the liquidity spiggots open at full throttle, the sell in May meme is in jeopardy of being forced to take a vacation this year.

Last week I also made a statement regarding equities that I am having second thoughts about this week:

“….a rally back above SPX 1400 should offer a final excellent opportunity to “sell in May and go away”.”

One week later the S&P 500 ($ES_F $SPX $SPY) is solidly north of 1400 and May is just three days away – should equity investors and traders sell stocks with both hands tomorrow morning?

The historical evidence in favor of the “sell in May and go away” thesis is strong, however, if markets were as easy as following a few trite axioms we wouldn’t need Bloomberg terminals, proprietary research, or cutting edge finance blogs like the one you’re reading right now….. . While I may sound a bit too bullish given the headwinds emanating from China and Europe, something struck me as being quite peculiar this weekend: Whether one reads Hendry, Gundlach, or various other pundits they all agree that Europe is deteriorating and likely to get much worse before it gets better. Meanwhile, US equities, high yield corporate debt, and the most important stock market in Europe (Germany’s $DAX) have remained firm and in fact rallied impressively last week:

 

While I remain a firm euro-skeptic longer term I believe that policymakers, in their misguided effort to save the common currency at all cost, will be able to evoke the next round of animal spirits which could help rally the S&P 500 to as high as 1470 (14 x my 2012 EPS estimate of $105) this summer. Finally, here is a list of important events to keep on your radar this week (the ECB meets in Barcelona, Spain this week amid large austerity protests, ECB President Draghi’s press conference at 8:30am EST on Thursday is the #1 event on my radar during the week ahead):

Source: Forex Factory

MONDAY

8:30am	USD		Core PCE Price Index m/m			0.2%	0.1%
8:30am	USD		Personal Spending m/m			0.4%	0.8%
8:30am	USD		Personal Income m/m			0.3%	0.2%
9:45am	USD		Chicago PMI			60.9	62.2

TUESDAY

10:00am	USD		ISM Manufacturing PMI			53.0	53.4
10:00am	USD		Construction Spending m/m			0.5%	-1.1%
10:00am	USD		ISM Manufacturing Prices			59.2	61.0
10:30pm	CNY		HSBC Final Manufacturing PMI				49.1

WEDNESDAY

5:00am	EUR		Unemployment Rate			10.9%	10.8%
All Day	EUR		ECOFIN Meetings
8:00am	USD		FOMC Member Tarullo Speaks
8:15am	USD		ADP Non-Farm Employment Change			179K	209K
10:00am	USD		Factory Orders m/m			-1.4%	1.3%
9:00pm	CNY		Non-Manufacturing PMI				58.0

THURSDAY

5:00am	EUR		PPI m/m			0.6%	0.6%
Tentative	EUR		French 10-y Bond Auction				2.98|2.6
7:30am	USD		Challenger Job Cuts y/y				-8.8%
7:45am	EUR		Minimum Bid Rate			1.00%	1.00%
8:30am	EUR		ECB Press Conference
8:30am	USD		Unemployment Claims			382K	388K
8:30am	USD		Prelim Nonfarm Productivity q/q			-0.4%	0.9%
8:30am	USD		Prelim Unit Labor Costs q/q			2.6%	2.8%
10:00am	USD		ISM Non-Manufacturing PMI			55.5	56.0

9:30pm

AUD

RBA Monetary Policy Statement

FRIDAY

4:00am	EUR		Final Services PMI			47.9	47.9
5:00am	EUR		Retail Sales m/m			0.1%	-0.1%
8:30am	USD		Non-Farm Employment Change			176K	120K
8:30am	USD		Unemployment Rate			8.2%	8.2%
8:30am	USD		Average Hourly Earnings m/m			0.2%	0.2%

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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