BarroMetrics Views: A Tale of Two QEs
The USD and stock indices have two very different tales about the end of QE.
Figure 1 shows (weekly chart) the majors with the AUD and CAD. Except for the CAD, we see the USD in full flight north. For USD traders, it appears that it is not a question of ‘if’ but rather a question of ‘when’ (and a reasonably close to a today ‘when’).
Figure 2 shows the S&P. We see an upside breakout above 1992 that has been followed by reduced range and volume. Now normally, this would be a warning of a possible sell-off. But in this age of QE, we see that each time that S&P has attempted to sell off, buyers have come in (arrows).
Figure 3 is the Russell 2000. The divergence between this index and the S&P is normally bearish. Moreover, Russel is showing the same lack of follow-through after its recent rally attempt.
So whose going to be right?
Looking at the stocks first: I am holding to the view that stock indice traders believe that whatever the FED may say, it will come to the rescue of a drop in the stock market. We need to see some black swan event to knock this belief on the head before we see any meaningful decline. But, that is not to say, there are no storm clouds gathering:
- an indicator I am testing uses Jungian Archetypes as a sentiment indicator. Testing is incomplete but so far the indications are that this sentiment indicator is better than the ones I am currently using. Recently the indicator turned from supporting the continuation of the bull run to withdrawing the support.
- we are see a spate of more QE from the the press (e.g. Why the Federal Reserve Will Launch Another Round of QE). For me, from a sentiment viewpoint, this spate is bearish.
- finally US short-term yields have been moving higher (even in the face of the last week’s job number) – after lagging behind Fed expectations.
For the moment, I’ll run with USD strength and wait for the CAPE system to generate a sell signal before turning bearish.
FIGURE 1 USD
FIGURE 2 Weekly S&P
FIGURE 3 Weekly Russel 2000