Neil Young famously sang, "I caught you knocking at my cellar door; I love you baby, can I have some more; ooh, ooh, the damage done."
The bears have repeatedly knocked on both sides of the cellar door that is S&P (INDEXSP:.INX) 1850 seventeen times as they tried to break out to the upside and another seven times as they tried to knock it back down.
We've been focused on that level for over a month, and now you can see why. The pattern we identified at the time works to S&P 1960, or 6% higher. At the same time, we flagged tertiary levels that would help determine if the move would play though, namely NDX (INDEXNASDAQ:NDX) 3640, RUT (INDEXRUSSELL:RUT) 1182, TRAN (INDEXDJX:DJT) 7600, IBB (NASDAQ:IBB) 260, BKX (INDEXSP:BKX) 71.50, NKY 14K, Shanghai (SHA:000001) 1985 and DAX (INDEXDB:DAX) 9K.
Of the stateside proxies, BKX 71.50 is the only level that held in the face of the recent supply. And of all the sub-sectors, the financials carry the most weight in our forward equation, particularly given the carnage in high-beta tech, so this must be watched closely given the news last night. We should also note that China, Japan, and Germany have outperformed of late and remain above their respective technical rip cords.
There are a few charts I want to highlight this morning; the first is the Russell 2000 and the S&P 500 vs. their trend lines dating back to November 2012. You might remember that trend line as it was steadfast and true throughout 2013. A fresh peek provides the precarious perch in which the small caps now find themselves. I added the longer-term S&P chart for context; "parity," at least through this lens, is in and around S&P 1800, although it's important to note this is an exercise in perspective, not a scientific experiment.
The next charts were shared courtesy of Neil Azous. The first is the percentage of Russell 2000 stocks above their 200-week moving averages, which is at 40% (MKM Partners). Historically, when that percentage reaches 40%, it was at or near an intermediate-term top in the index. The second is the average return for the 1-, 3-, 6-month and 1-year periods following those events. Take a good look.
History doesn't always repeat but it often rhymes, and after the insane run in the small caps and biotech stocks -- here are two ways to play that complex -- perspective is an important context when mapping forward risk. As we often say, to fully understand where we are, we must understand how we got here. Hopefully, this post helps shed some light on that matter.
Why is deflation the enemy of the ECB? We first touched on this topic in 2006 and revisited the theme in 2010., Deflation in a fractional reserve banking system means that central bankers have, for all intents and purposes, lost control of the economy.
We could see large-scale asset purchases (quantitative easing) at the April 3 ECB meeting, but it is the specter of a negative deposit rate that raise an eyebrow. The presumed intention is to spur banks to lend to small businesses, but a cacophony of unintended consequences might light the fuse on our interconnected global machination should that occur.
Much of the sector rotation we've seen of late is likely a function of quarter-end, which arrives in two sessions. And yes, tax-selling is likely playing a hand in the price action as well.
- IBB 234 is a support for biotech and an area for bulls to lean against, if that's their thing. IBB 215, the 200-day moving average that hasn't been touched since 2012, is the support.
I'm not as smart as Mark Zuckerberg and can't see what he sees; history will judge his billion-dollar buying sprees as genius or madness.
So what's the end game in Russia? Whose gonna blink first? And where does it go? We don't do politics at Minyanville, but those answers are going to impact our financial decisions.
- Michael Sedacca is extremely insightful on matters regarding fixed income and interest rates. Below are his thoughts on the topic, which were originally shared in real time on the Buzz & Banter. (You can also see the full article with charts on MV PRO: Stop Worrying: The ECB Is Not Likely to Set a Negative Deposit Rate.)
Personally, I have very strong conviction that the ECB will never do it. There is, at this stage, almost no incremental gain to be had from placing it in the negative, with only problems to be had. Originally, when the deposit rate was set at 0, it was done explicitly to move the 800 billion euros of European bank deposits out from the ECB and into the money markets or onto banks' balance sheets to be used for lending. Those deposits are largely gone now, with only approximately 35 billion euros left.
The results of setting a negative deposit rate are the following:
-Money funds will break the buck, close their doors to new deposits, or close their doors period (see here [subscription required] in July 2012 when the rate was cut to 0%).
-Banks (Euro or international US) will begin charging large depositors to hold their cash, causing large-scale deleveraging as deposits leave Europe. A loan cannot be made without a deposit. What's the end result of that? Deflation.
-Short-term government bill and note yields will go into the negative, which cause problems for the aforementioned money funds and banks. It will also cause capital flight into other safe government bonds such as Swiss, US, or British bonds, which will cause problems for those countries' money markets.
However, if I'm wrong, which is always possible, there's a way to play this. The spread between German 10-year bund and US 10-year Treasury yields remains at a cycle wide. If this does play out, that spread should collapse as capital makes its way into the US dollar and, by extension, US Treasuries.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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