Daily Digits for March 17, 2014

Happy Leprechaun Day!

If you’re looking for a pot of gold, you may have missed the train.  Gold markets have shot up recently – like over 10% year-to-day!  Of course, the stock market wasn’t exactly lousy recently.  January may have been tough, but February was a ripper.  Here we are half way through March and now it starts to get tricky.  In a lot of respects this market looks fully valued right.  If that’s the case, what would be the catalyst to push us higher?  Frankly, I’m not entirely sure.  We may simply be in for a ‘breather’ before long.

The issue at hand is that the macro picture really is starting to change.  Yes, economic numbers are improving.  But by and large we’ve had a jobless recovery.  Assuming the Fed continues to withdraw QE, who economically stands to drive the 70% consumption the US economy is built upon?  And IF we are causally linked to China’s success now, and we’re not able to ‘consume’ as much, who is going to drive their rapidly growing economy to new heights?

I know there are a lot of smart people out there that have engineered ways to justify the entirely market going higher.  It seems to me a lot of this is built around central bank meddling though.  Take them out of the mix and the economy would eventually figure out how to drive asset prices higher.  But haven’t we deferred some pain through these asset policies?  And deferral is just that — kicking the can down the road.  So when would we expect to actually feel the pain?

Apparently the most popular answer is ‘later.’  I just don’t know when later is.

In the short term, the answer to ‘how do we play this’ is simple:  don’t fight the tape.  While the big-picture pattern is getting extended, the short-term pattern has held together remarkably well.  The low 1900’s are probably still pretty likely given where the fixed income markets are at right now.  I suspect money doesn’t want to rotate into those markets so near the top.  That alone should probably give us a little more oomph as the derivatives market players look to squeeze some more out of this current short-term trend.

Futures have been pretty erratic.  We’ve seen an overnight swing from negative to positive, though the move is not exactly earth-shattering in either direction.  The 1850 level for the S&P500 has been a consolidation range for some time.  In the short-term 1825 looks over-sold.  If we do see those levels it’s probably a decent entry level.  We’re likely to bounce back up above 1850 again.  Looking at the bigger picture, the low 1900’s continues to be a viable target at this point.  If we get within a stone’s throw of this level we could be ripe for a more material pull-back though.  At this point a 10-percent pull-back would drop us back near 1700.  At the risk of sounding like a broken record, I suspect this level is entirely possible in 2014.  It may be a ‘sell in May’ kinda year.  The technicals seem to be shaping up that way.

For this week:  Look for the markets to continue consolidating around 1850 for the SP500.  In fact, look for about 1858 as a pivot.  We have a bunch of economic news on the horizon, including industrial production, housing, and jobs numbers.  We also hear from the Fed on Wednesday.  I’ll be looking for a more material ‘directional commitment’ after Wednesday.  Odds are policy won’t budge much, so this market up-trend is also unlikely to be dead just yet.

Try not to get too sea-sick as this market rotates and consolidates.  Process, process, process!!!

Weekly Estimated Range 3-17-14



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