Friday, July 18, 2014

Equities Ready to Put Yesterday in the Past - Onward and Upward



Equities and fixed income markets appear quite ready to slowly turn away from the shock of yesterday’s dual events.  The Emini S&P future readies to recover all of yesterday’s decline, possibly creating an extraordinarily large bullish engulfing on the daily candlestick chart while Eurodollar and Treasury contracts reversed much of the continued overnight gains. 

Even without a full reverse today of yesterday’s declining equity prices, there appears to be even less likelihood now for a more protracted decline over the coming weeks.  Yesterday’s events were all that some bearish minded participants had needed to find greater conviction in recent or longer-dated calls that equities were due a 10% or more pull-back.  We noted early yesterday that as many as 61% of a recent quarterly Bloomberg survey showed respondents as seeing stocks as either nearly too elevated or at bubble territory. 



For our guide, we recognize the strong conviction on the part of many participants that central bank liquidity has engineered a bullish advance as indicative of an underinvested condition. Further, they expect the nearby elimination of additional securities purchases by the Fed, expected to expire in October, will bring about a big equity market correction.  We are not of like ilk.  Instead, we think the low volatility and VIX technical developments dating to Q1-’13 support a longer period (12-18 months) of modest and relatively steady advancing prices. 

The VIX appears ready to remove more than half of the open to close advance from yesterday (12.945).  The high of 15.38 will likely mark the high for the balance of the summer.  The low of 10.28 from July 3 may fall, but we should expect good support there and it will be difficult to get below this level.  



We remain patient with an earlier call that the ESU4, July 1 bullish break-out and settle above the June 20th 1953.25 close, will usher in a 3-5% advance to 2010 and 2050 respectively.  Interestingly, ESU4 settled 21.25 lower on the day yesterday, but managed to settle 0.25 point above the June 20th close, further supporting the importance of the July 1 bullish breakout. 

All may not be well, but that is not reason enough to be bearish on the S&P’s.

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