Thursday, April 5, 2012

Trading Thoughts for Week of April 9, 2012

When S&P 500 began its ascent from 1075 in early October of 2011, there were very few bulls and a lot of bears on the Street. Nobody could predict back then that we would be up 32% from the bottom and above 1400 by April. So many respectable market watchers are becoming extreme bulls today. Now that 1400 is taken out, it looks like a starting point of a new bull market to them. I hear "it is 1990s all over again", and "p/e multiple expansion is coming", and "Apple is going to be the first $1 trillion market cap company - it is an asset class of its own", and "U.S. has decoupled from the rest of the world". Their bullish arguments portray the usual sentiment at the top of enormous rally. They want to be bullish now just like they wanted to be bearish in the beginning of October.

Traders, we have to relax and put our cool heads to the following facts: we have not touched 50 dsma on SPX for 105 calendar days in a row, market internals absolutely stink, and divergences are aplenty and are getting wider. God knows I have shown enough of them here in the last month to make one sick. Yet the market is plugging its ears with Fed's easy money (which may finally be ending) along with better-than-expected U.S. econodata, and just rolls on to defy any laws of gravity. Nobody gives a damn about technical and fundamental divergences, when AAPL just keeps on making new highs, while it marches to analysts' price targets of $700 - $1000 per share (which seem to be increased on daily basis), as they tell us that "AAPL is a proxy for the whole stock market". Where have I heard that before? In total dismay and awe, I have to continue saying: this is not going to last much longer. 

I do not want to turn this post into a rant, I will stay constructive and would like to expand on the decoupling theory. People who now say that "U.S. has decoupled from the rest of the world", are the same folks who told us before that "world economic growth will pull U.S. out of recession". You just can't have it both ways! I have said here before, I do not believe that U.S. stock market can continue climbing higher with the rest of the world not confirming the move. I would like to show you how other major world stock markets are diverging from S&P 500. Beside Mexico, none else took out their last year's high. Moreover, many of them topped out and rolled over, possibly flagging the end of the risk rally which began in October. These markets are on the same planet as U.S. Yes, S&P 500 has momentarily decoupled from them, but I think that it will eventually succumb to the inevitable pullback, which is long overdue.

Before I spill aforementioned charts to think about over the weekend, I would like to enlighten you on an interesting fact. As U.S. supposedly decouples and grows faster than the other economies, U.S. dollar appreciates against the currencies of those nations, thus causing a headwind for U.S. multinational corporations' earnings from abroad. Following is a good example. Try to decouple this news, which came from Gartner (information technology research company) earlier today:

Gartner's forecast for dollar-valued global IT spending growth in current U.S. dollars has been revised down from 3.7% to 2.5% for 2012. In constant U.S. dollars, i.e., stripping out the effect of exchange rate fluctuations, our forecast for global IT spending growth in 2012 has been revised upward from 4.6% last quarter to 5.2%.

As I leave you with charts of SPX and the other major world markets, I would like to wish everyone very happy Easter and Passover!

(in order below) US, Mexico, Canada, Brazil, UK, Spain, Italy, France, Germany, Russia, India, Korea, China, Hong Kong, Japan, Australia

click on charts to enlarge

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