BarroMetrics Views: S&P – Warning Signs?
I have been watching the S&P for signs that we may be seeing a cracking in the wall of ‘belief in the FED’.
On Wednesday, Yellen suggested that she had concerns about the housing market slowdown, and employment situation (long-term unemployment, slow wage growth, greater numbers working part time).
Financial Times suggested that her comments may the tapering at around $10b per meeting. Whatever the implications, the S&P took heart and rallied. Figure 1 shows a day where there was a downside rejection on good volume and range. Normally, we would have expected to see follow-through buying. Instead on Thursday, we saw a neutral day. In a trending market, such a day would have been a warning of at least a possible pause in the trend. In the current context, all it may mean for today is another attempted sell-off.
Much more interesting are the FRED ABM graph (Figure 2), and Tom McClelland’s FED COT Graph (Figure 3).
The FRED graph shows a turn down in the ABM. A turn down of US$200B has, in the past, provided around a 3-week warning of a S&P decline. The biggest drop prior to the current move was in Dec 2013- Jan 2014, about US$50B. So, far the AMB has declined US$84B, well short of the US$200B.
Tom has an interesting graph is his Chart in Focus. He uncovered a relationship between the 30-Day FED Fund Futures COT and the S&P: about a 4-week’s lead time. The current levels of COT are higher than in the 2007 crash. It would be best to wait for the COT to move down since Tom suggests that with the COT moving up we should see more upside on the S&P.
Finally we are starting to move into seasonal weakness; the charts from the SignalGroup suggest that greatest weakness will appear next week (Figure 4).
Let’s see what happens .
FIGURE 1 S&P Normalised Volume
FIGURE 2 FRED
FIGURE 3 FED COT & S&P
FIGURE 4 S&P Seasonal