Last week’s weakness and the big sell-off yesterday have made considerable progress toward taking care of that overbought condition in the U.S. market.
A number of important global markets that were in the same short-term overbought condition have led the way, and perhaps ominously did not find support at their 50-day m.a.
The question on these markets is whether the short-term technical indicators are becoming short-term oversold enough to reverse to the upside yet.
The short-term gyrations don’t mean much unless the intermediate and longer-term indicators indicate a short-term move is likely to worsen into something more serious.
But the market is close to another important short-term juncture.
The next ‘monthly strength period’ is due to begin tomorrow and to run through the following Wednesday. So we shall see.
The outcome could have an effect on the currently tumbling safe havens of gold and bonds.
Italy’s election, sequestration concerns, and weaker economic reports .
In my weekend newspaper column How Long Can Economy’s Sweet Spot Last This Time- I noted that “this sweet spot in the recovery is not likely to last much longer before running into its next rough patch”.
I noted the similarity to the last three years when the the market was similarly in an impressive favorable season rally that carried it to then new highs, after the economic recovery which had stumbled each summer got back on track each time.
But each time the effect of QE stimulus faded, the recovery stumbled again and the stock market topped out at the end of the favorable season into a double-digit summer decline.
And here we are with the market at yet another new high, the end of the favorable season approaching, and warning signs beginning to appear again, as they have in the early spring in each of the last three years.
In recent writings I have said I expected this winter rally to also only last until the end of the market’s favorable season as measured by our Seasonal Timing Strategy, and then for a setback in the spring and summer.
I said that it was not yet possible to see the catalysts that would result in a setback, that it could be brought on by any number of problems, “the slowing effect of government spending cuts to bring budget deficits under control, or the Fed beginning to remove the stimulus punch-bowl, a return of the eurozone crisis, the U.S. economy stumbling again, or inflation finally beginning to show up.”
And the last few days have seen several of those potential catalysts beginning to appear.
We’ve had the indications that Washington will let the sequestration spending cuts take place; talk in the Fed’s FOMC minutes that the Fed is beginning to consider shortening its promise on how long its will continue to run its QE program; unexpected negative economic reports; and yesterday the panic created in Europe over the election in Italy that apparently resulted in fears of a grid-locked government again, just as hopes were high that progress was being made.
In recent U.S. economic reports, consumer confidence fell unexpectedly in January (the report for Feb will be released at 10 a.m. this morning). 4th quarter GDP was revised down to –0.1% (the next revision will be released Thursday morning). Yesterday it was reported that theChicago Fed’s National Business Activity Index fell to -0.32 in January from +0.25 in December. (But the 3-month m.a. rose to +0.3 in January from +.23 in December). The Dallas Fed’s Mfg Index declined from 12.9 in January to 6.2 in February.
So the question really is “How long can the economy’s sweet spot last this time.”
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