Prior to crude oil’s double bottom low in Q1, there was a chorus of investor/strategists /analysts/pundits who suggested that low oil prices would be a boon for corporations as the result of lower input costs, while consumers would also benefit from lower prices at the pump. When Q1 earnings were reported, and Q2 outlook give in April and May, and the perceived benefits were not evident, proclamation of the benefits of lower for longer oil prices were pushed out, as past cycles indicated that it usually take 6 months to a year to begin to make a meaningful impact. Well, we are more than a year out from crude’s multi-year highs (it topped out in June 2014) and down nearly 60% from those levels, and it appears that the benefits from lower input costs have been offset by the strength of the U.S. dollar and oddly poor retail spending. Yeah yeah, I know peeps are still buying their Nikes, Under Armour, iPhones, Starbucks Lattes and cant get enough of Frozen/ Avengers / Star Wars / ESPN, but aside from what we call U.S. Consumer Teflong™ Portfolio (here and here), it appears the U.S. consumer is feeling a bit skint, despite drastically lower gas prices at the pump.
And we know why. That Employment Cost Index for Q2 showed the slowest increase in U.S. wages since 1982 (not reflecting the enthusiasm associated with the lowest unemployment rate since before the crisis).
Add that to what we see globally, like a weakening Chinese economy (highlighted by the worse than expected manufacturing data just this weekend) and the obvious fact that Europe’s economy is in a very delicate recovery with the backdrop of a perpetual debt crisis.
This with the S&P500 (SPX) up more than 200% from its financial crisis lows and just 1% from its all time highs. Your favorite market cheerleaders (I mean pundits) will tell you that this sort of pessimism is an opportunity to buy more of your favorite stocks at a discount, but that sort of rhetoric (for the first time in years) has been made hollow by the SPX’s under-performance in 2015 to almost every other major equity index, and its very tight trading range that it has been unable to break out of. The SPX could most definitely breakout on confirmation of some sort of stabilization or uptick in any of the trouble spots listed above, but it appears that the path of least resistance is no longer up, and a breakout for the wrong reasons (e.g. the Fed) would most likely fail and be the perfect set up for the elusive 10% decline that the SPX has not witnessed since 2011.
These charts make me nervous:
Crude Oil – a break of the 2015 lows would cause many to re-think the reasons why crude was unable to stabilize:
Copper – making new five year lows with no technical support for another 30%, what does that say of demand for industrial commodities:
U.S. Treasury Yields – despite the Fed’s inclination to raise the Fed Funds rate in 2015, the yield on the 10 year treasury remains in a massive downtrend:
Shanghai Composite – Oh and Chinese stocks, when the levee breaks, gonna be ugly and KNOW ONE knows what the fallout will be:
With all that ugliness over the last year, investors is U.S. stocks have not been too bothered, as the SPX has treaded water for the better part of 2015. You could make the argument that the SPX acts well, despite the volatility in almost every other major risk asset class the world over, especially if what we are witnessing is a consolidation for a move higher. And that may be the case, but the uptrend off of the October lows is broken, and the prior highs are becoming formidable technical resistance as breadth appears to be waning:
I am sure all of these charts can be easily dismissed by cheerleaders, but it’s important to note that most have heavily vested interests in risk assets going up most of the time. For the most part, stocks usually go up. Until they don’t. And if the last 15 years is any guide, they go down quickly (twice in that period they have been cut in half.)
Is this year’s stall in the SPX a sign of a top? Or is it building steam for a sustained breakout. The other charts would point to weaker global economy after a very protracted bull market. What’s the SPX chart telling us?
Obviously we’re nowhere near panic time. I am merely trying to poke holes in what has become a very tired bull case for U.S. stocks over the past year. Keep an eye on these charts. If they don’t suddenly improve it’s hard for me to see how the SPX isn’t due for a correction.