Tags: TRIN | stocks | technical | Fed

Stocks Could Still Move Higher, But Correction Looming

Tuesday, 18 Jun 2013 11:36 AM

By Hans Parisis

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While I believe there are too many G8 and G20 meetings, where a lot is spoken about good intentions and plans but normally very little is accomplished, the latest G8 meeting in Lough Erne, Northern Ireland, could very well be remembered as the one where the G8 got back to its earlier concept of the “G7 + 1” because of the profound disagreement between Russia and the other participants on how to stop the violence in Syria. Maybe not unexpected, but it is nevertheless a sign of the “dire” situation Syria is in.

The Russian government sharply criticized intentions of the United States, France and Britain to provide weapons to the insurgents against Syrian President Bashar al-Assad's regime.

Remember that Russia has already vetoed at the U.N. Security Council three resolutions against the leadership in Syria. Interestingly, it always has considered its own weapon supplies to Syria as legal and justified. No, Russian President Vladimir Putin wasn’t very helpful when he said on Monday he still doesn't see eye to eye with the United States on Syria.

By the way, Russia will host on Sept. 5 and 6 the eighth meeting of the G20 heads of government in Saint Petersburg, Russia. The only thing for sure is the event will cost a lot of money.

Nevertheless, it could also become somewhat interesting to see if Japan, with its “Abenomics” policies, will definitively be put on the agenda. Questions will be if Japan will have been able by that time to address the challenge of defining a credible medium-term fiscal plan.

Japan revised its industrial production growth for April lower, to 0.9 percent month-on-month from 1.7 percent initially after rising 0.9 percent in March, which is not bad but can’t be considered as really good since the yen/dollar exchange rate has lost about 22 percent since October 2012.

Indeed, all this and alongside so many other ongoing problems, like the depression and still growing unemployment in several European countries (with no sustainable solution in sight yet), confirms we are definitely living in a world where we face a global conundrum wherein literally no one seems to be able or is willing to provide sound, trustworthy, transparent leadership.

So, once again, the G8 summit has published its communique on it global economy working session, which shows, as usual, very little substance on how to really stimulate sound growth and create jobs in the global economy.

Interestingly on the U.S. we read: “The US recovery is continuing and the deficit is declining rapidly in the context of a continuing need for further progress towards balanced medium-term fiscal sustainability and targeted investments to enhance growth.” So, policymakers in Washington know what they have to do.

In the context of all this, I don’t think it’s an overstatement to say too many are living in an “illusion” that the uncertainties and volatilities the world had to endure since the start of the Great Recession have become less threatening.

I’m afraid these threats haven’t gone away, let alone been resolved, and in my opinion, there is a great probability the same classes of uncertainties and volatilities will trigger new crises (yes, plural) in the developed as well as the emerging economies in various places on the globe in the next couple of years.

Long-term investors would do well trying to prepare their portfolios, as well as themselves, for upcoming “abnormal” events that will, without any doubt, be generally considered as “surprising” and that could, and probably will, develop at uncommon high speeds once they happen. Be sure, it will be “fasten seatbelts.”

No, that flickering light at the end of the tunnel is not better times. There is a serious chance it could be the light of one of those unexpected locomotives coming our way.

Believe me, as a long-term investor, it won’t be an easy task to keep over the coming years what you have today. Serious investors would do well trying to avoid short-term thinking, or the “complacency trap.” Of course, everybody will have to decide and establish their priorities for themselves.

Also, please keep in mind as geopolitical risks seem nowadays to be in a period of remission, never trust these kinds of appearances, as they certainly doesn’t mirror what’s going on in the real world.

In the United States, speculation about the Federal Reserve announcing it will begin tapering its bond-buying program seemed on Monday to be reaching ever-higher levels of absurdity, with some even pretending to have special insights even though the Fed respects a complete seven-day blackout before any Federal Open Market Committee (FOMC) meeting.

Remember, St. Louis Fed President James Bullard was the last Fed official to speak in public before the FOMC meeting. Bullard said on June 10, in Montreal that the Fed should not taper early.

When Fed Chairman Ben Bernanke speaks after the meeting on Wednesday, he certainly will choose his words carefully and try, as much as he can, to avoid putting in peril the apparent fragility, at least for now, of the Japanese “Abenomics” undertaking that is considered as key to the health of the global economy, which includes, of course, the United States.

Whatever Bernanke will say on Wednesday, it’s a fact that the Fed is undeniably approaching the unavoidable reversal in its monetary policy, which will reach far beyond "to taper or not to taper."

“When?” is now the question that keeps all speculators busy. But it should not cause sleepless nights for “prepared” long-term investors.

Over the next days, volatility could spook the markets and wild swings could result from it.

My expectations on a correction haven’t changed and short term U.S. Treasurys remain my preference for the time being.

Technically speaking, the decline in stocks since the top on May 22 hasn’t been sufficient enough to be completely sure the final top is in. Yes, stocks could still move higher.

That said, it’s a fact that bullish complacency remains well in place while closing TRINs (five-day moving average as well as 13-day moving average) have remained below 1.00, which means we have remained technically in overbought territory. TRIN is derived from dividing the stock advance/decline ratio by the upside/downside volume ratio, and it becomes very meaningful when normal market patterns reverse.

Of course there are no guarantees in financial markets, but as a technical indicator, this is a serious blinking light for a major decline to start.

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