Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
The two major standout markets of the year have been the U.S. and Japan, both with central bankers in extreme aggressive postures – in the U.S. already completed, and in Japan anticipated… until last night. As expected, the Japanese unleashed a full array of Bernanke like actions. With this the U.S. Federal Reserve will be buying $85B of assets a month, while Japan buys $75B.
Those measures include the doubling of its holdings of Japanese government bonds and exchange-traded funds over two years. As a result, the BOJ would buy 7 trillion yen ($75 billion) of JGBs a month, up from the current ¥3.8 trillion. The bank will also expand purchases of real-estate investment trusts.
With that the Nikkei went from a 1.7% loss to a 2.2% gain yesterday. So we are now at the Clint Eastwood moment for investors in those 2 countries – “Feeling lucky punk?”. As just about every other world market (ex Mexico and Australia) struggles can these extraordinary actions prevent any meaningful corrections. Is a “central banker decoupling” possible – or put another way, can outright manipulation create fake prices for an extended period? No one knows – there is no precedent for what is being done.
Yesterday’s action was troubling on many fronts. This had been foreshadowed for a while here, but as the senior indexes continued to grind up, one could hide in some narrow parts of the market (the big 3 of safety – healthcare, staples, utilities). Not so much yesterday. In normal times without central bankers intervention this cocktail of weakening in small caps, transports, semiconductors, copper, breadth, et al would point to obvious future outcomes. But anyone who has fought “$85B a month!” has been made to look like a fool in the perpetual meltup.
Amazingly a day after a 52 week high the NYMO is pointing to oversold conditions – that shows you how horrid breadth is even as the S&P 500 and DJIA continued to make new highs. Further it actually worsened Tuesday (an up day in the indexes, save for the Russell 2000) versus Monday (which had been a broad down day).
Speaking of breadth yesterday was among a handful of the worse days of the past 5 months, on matched by a few days in February and late December.
The S&P 500 has yet to make a “lower low” during this rally – the key level is 1538 for that measure which also coincides with a trend line connecting the lows of November, December, and February.
The NASDAQ came within 5 points of printing a new lower low versus mid March.
The Russell 2000 already blew past that level.
The past three days has also done a lot of damage to individual charts, in almost all sectors except for the three safety sectors. With oversold conditions (again one day after 52 week highs) already here, especially in the small caps, one can expect a bounce in the near future but unfortunately the pickings for decent technical setups have narrowed considerably so it becomes a very tenuous situation. As with February one now has to monitor how the market deals with this selling and the ensuing bounce. Is $85B (+$75B across the ocean) enough to ignore everything else happening.
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
