Notes From Underground

This line comes from the Jewish liturgy of welcoming the Sabbath. I use it here to make a note to my readers about a possible signal that the NASDAQ 100 sent on Friday. Now I don’t hold myself out as anything but a third-rate TECHNICIAN (reader of chart formations), but having been taught by one of the greatest technical minds (thanks H.G.), I know to watch certain formations for signals in a POSSIBLE change in sentiment. THE CHART THAT CAUSES CONCERN NASDAQ 100 made ALL TIME HIGHS LAST WEEK BUT CLOSED BELOW THE PREVIOUS WEEK’S LOWS. Do I know when the market will reward a short position?

No. Do I know the timing of the beginning of a counter-trend move? No. I just know that a warning has been given, which may signal that a long DOW short Nasdaq play may be profitable. Maybe it is long the SPOOS and short Nasdaq, but I have been told to awaken from a complacency induced slumber. The NASDAQ provided the signal but the pundits will retort that the DOW closed higher on the day and the SPOOs were virtually unchanged. The end result for the bullish choir is that this is nothing but a healthy rotation out of the overbought tech stocks. Maybe that is correct but when I see certain historical formations I awaken to heightened market risks.

Notes From Underground has not been bearish equities and has maintained that the global central banks’ QE activities have kept global equity markets floating on the proverbial “sea of liquidity.” But to give strength to the warning sign, it happened on VERY HEAVY VOLUME. I am not recommending to rush out and sell your equity holdings or put on a massive short position. It is your job to determine the risk levels you feel comfortable with. I’m merely providing insight from 40 years as a global-macro trader. I am sure there will many comments so hopefully insights and ideas will be shared.

As weak as the NASDAQ was many correlated trades failed to materialize: gold weak, dollar firm, bonds lower/yields higher, and of course, the DOW finished up. The Nasdaq may be a false signal but the large volume numbers are telling me to pay attention. The pundits were blaming the steep drop in the Nasdaq on the Apple announcement but if our economy and equity markets are driven by the potential sales of the newest GADGET we have far greater worries. Dust off your charts and get to work.

***On Friday morning Rick Santelli and I covered the world. I noted that the biggest news on Thursday was not the British election, not the Comey hearings, but the ECB meeting and the Draghi press conference. The press tried to spin it as a hawkish stance. Even the Financial Times headlined, “ECB RULES OUT RATE CUT BUT CONFIRMS QE UNTIL YEAR END.” It led with, “The ECB took a first small step towards scaling back its ultra-loose policy when it said it would not cut its record-low interest rates any further, as it seeks to adjust to a surprisingly strong eurozone recovery.”

(Click on the image to watch me and Rick discuss the ECB.)

If NOT LOWERING RATES FROM A CURRENT -40 BASIS POINTS IS HAWKISH I AM LIVING IN AN ALTERNATIVE UNIVERSE. The key for the ECB is the balance sheet and sustaining the monthly increase is key to the DRAGHI strategy of covertly creating a EUROBOND over the objections of the German Bundesbank and Parliament. In maintaining his rationale for the QE program and citing no hint of normalization Mario Draghi noted:

1. Structural reforms in individual European states is still too slow to promote growth;
2. Global headwinds still exist;
3. Inflationary pressures revised downward because of lower oil prices;
4. Recovery needs the thrust of monetary policy to be successful.

In highlighting Draghi’s DOVISH stance, the ECB president noted several times that the central bank plans to keep the QE purchases and if NECESSARY TO EXTEND BEYOND THE PRESENT TIMELINE. Just the opposite of any type of tapering or normalization. Providing support to the ECB’s SOFT STANCE was the very sizable rally in the ITALIAN BTP market on Thursday and followed through with a greater rally on Friday. Mario’s steadfastness delivered relief to the Italian financial market.

What will be interesting is how Draghi is going to deal with the shortage of German sovereign debt. According to the ECB’s rules QE purchases have to be in line with the capital key which is based on the size of each member’s economy in relation to entire EU. Germany’s is 18% while Italy is 12%. The issue of available assets will continue to be a problem for Draghi, which raises the question about the ECB possibly buying equities in similar fashion a la the Bank of Japan and the Swiss National Bank. Something to ponder on the thinking about the undervaluations of the European equity markets in relationship to the U.S. market.

***The U.K. election. I have no opinion as to the fallout from the election mess caused by a miscalculation of voter sentiment by Prime Minister Theresa May. My main concern at this point is measuring the increase in the 18-24 group vote for if they turned out in much larger proportions than they did for Brexit it will be a game changer. Corbyn promised free everything to the young adults and if brought them to the polls. Be aware of a similar electoral stance by the Democrats in next years 2018 U.S. Congressional elections.

When I have a greater sense of what the election results mean for U.K. policy I will write, but it was interesting that the drop in the pound upon the election results revealed the impact of a weakened currency as a potential for increased corporate profits. This is a very temporal correlation, which will also decouple if the underlying policies are weakened by Theresa May being forced in an enhanced position of compromise.

Tags: Dow, ECB, Euro, Eurobond, Mario Draghi, NASDAQ, QE, S&P

This entry was posted on June 11, 2017 at 9:08 am and is filed under ECB, Equity. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.