Analysts Still Edgy Before Payroll Data – Too Much Lipstick On This Pig

This fully annotated chart of the S&P 500 for the past ten months may appear to be over done to the extreme, but one like it has more than likely been present on the desks or computer screens of every analyst employed by one of our major investment houses.

The last month, the same 30-day period when the tech sector began signaling problems, has not been stupendous from anyone’s perspective. The Head-and Shoulder pattern is apparent and portends a fall to the previous support line at 2380, but a 3% decline is by no means a correction. What is all of the hoopla about anyway?

For you traders out there, the MACD indicator has certainly delivered timely and correct Buy/Sell signals since September of 2016. The last Sell signal was before mid-month in June, but the jury is out as to when the next Buy crossover will occur. Is the air out of this balloon? Analysts, however, have noticed greater ebbs and flows in the NASDAQ, where 5% drops are more the norm. Observers in this arena, the 100 top technology stocks, are expecting more downside this week. Yes, tech stocks had their best first half of the year since 2009, but the road ahead is filled with obstacles and headwinds.

When you try to dig deeper into this puzzle that pins our hopes and dreams on tech stock behavior, you quickly run into “technical speak” of a higher order. It seems that a multitude of money managers have converged together upon a strategy that seeks to invest only in low volatility stocks, the goal being that stability and steady earnings will deliver the goods in the end.

The problem, from a technician’s perspective, is that high-tech stocks currently have implied volatility values that are significantly below the VIX, a fact that may have pumped up values in this sector for all of the wrong reasons. What will happen when there is a slight reversion to the mean and these same managers suddenly jettison tech stocks to achieve their artificially mandated rules for success?

As with stocks, volatility indices with respect to major pairings have been lower than low, as if traders in unison had decided to take a break.

Surprisingly enough, most all major pairings, with perhaps the exception of the USD/JPY coupling, are exactly where they were a year ago. The yen has depreciated by ten percent, in line with expanded QE measures from the Ade-driven BoJ. There is an eerie calm that has set in. The USD index is sitting at 95, and experts see a possible decline to 94 as a near-term possibility, but from that support level, they also see a rebound in the making.

In line with this thinking, most currency aficionados do not see much upside for the euro. The pound has shown some possible improvement due to a milder perception of Brexit, but in both European scenarios, no one is forecasting a pullback in central bank accommodative measures.

Economic growth has been meager, although there have been recent reasons for optimism, but inflation targets remain elusively unachieved. In his last public appearance, Mario Draghi, the head of the ECB, repeated oft-heard ECB-speak. “The downside risks to growth have dissipated,” and “The threat of deflation has been turned back”, but, even though he is now dropping hints, there was no timetable given for removing accommodation.

There also are no signs of a slackening stance toward QE programs by Japan, one specific reason that the yen could weaken from its present value of roughly 112, to fall back to 118, a price level not seen since December of last year. The Aussie and Kiwi have both been winners of late, appreciating at roughly the same pace and doing so at slopes greater than 45 degrees. The only problem with both currencies is that each has reached historical resistance levels that have not been penetrated twice previously in the last year. Unless China goes on a growth tear or Europe and the United States step up demand demographics, neither the Aussie nor the Kiwi will find the support necessary to continue upward.

Trump’s decision against TPP and to renegotiate all trade deals weighs heavy on the prospects of each currency, as well.

The author of the above headline is concerned. His rather cute metaphor was not crafted in haste. Per his narrative: “The U.S. economy is economic utopia for those who invest in risk assets. It is critical that this utopia leads to a steady improvement in the economic fundamentals that are necessary for continued expansion. This is not happening. Instead, we have seen a steady deterioration in the hard data that dictates fundamentals, but this has been glossed over by soft data and rising stock prices, serving as the proverbial lipstick on a pig.”

Economists may continue to be the optimists in the crowd, claiming that a host of favorable data points suggests that good times will continue. Several trusted recession models have not signaled a slowdown for 2017, although 2018 remains suspect. One irrefutable fact, however, is that long-term trends do not appear to be reversing any time soon. The following chart is one more clever way to demonstrate the obvious: