Yes, I have used the quote above in earlier articles. It always seems to pop into my mind when thoughts of “two-handed economists” come along. Two-handed economists give both sides of the analysis and say, “On the one hand…but then on the other hand…” without ever reaching a conclusion or providing a recommendation. This must be an everlasting occupational hazard since this notion was immortalized by George Bernard Shaw in the early twentieth century when he said, “If all economists were laid end to end, they would not reach a conclusion.” But I digress.
The current market is a prime “two-handed” example for market observers. On the one hand, almost all of the technical analysis community is looking for an overdue technical pullback. On the other hand, every down move in this market has been met by more buying.
For the fundamental crowd, it’s a two-handed market as well. On the one hand, many economic metrics continue to improve, albeit from monstrously horrid numbers in the spring of 2009. On the other hand, inflation is heating up and unemployment numbers have not significantly improved over the last 18 months.
Which “Hand” Is It?
When faced with conflicting viewpoints, it’s useful to see if narrowing down information to an applicable time frame offers some clarity. Luckily in this case, I believe it does.
For the short-term viewpoint, the market has spoken. Despite being technically overbought (by some measures, severely overbought), and in the face of significant political turmoil in the world’s most volatile region, the market shook off Friday’s big drop and in two days hit new 52-week highs.
When the market shakes off bad news (specifically the massive protests in Egypt) and heads the other way, we cannot ignore the signal it provides. The market is a bull until price action tells us otherwise.
In the intermediate time frame, the data may tell a different story. Technically, we will need a pullback to relieve the intermediate term overbought condition in the market. The inflationary pressures of rising commodities prices are starting to affect corporate earnings. Hershey blamed rising cocoa and sugar prices for their earnings miss and Whirlpool cited the rising cost of plastics (think petroleum) for theirs.
The threat of inflation is meaningful. By now, we all know that quantitative easing really means “printing more money.” Even my third grade economics students know that when there is more money chasing the same amount of goods and services, prices go up. So all things denominated in dollars have been going up.
A Revealing Chart
The most interesting inflation graphic that I have seen in awhile came from Barclay Leib’s newsletter. The “Food and Fiber Index” depicts a commodity-based index to its 200-day moving average. The index tracks cocoa, coffee, sugar and orange juice (the foods) and lumber plus cotton (the fibers). 511-drchart.jpg 42,61К 0 Количество загрузок:
Again, this chart shows how far the food and fiber index has moved away from its 200-day moving average. The two times in the past where it rose more than 40 points away from the 200-day MA in the past 15 years were followed by memorable market corrections. The index hit that level two months before the Asian currency crisis in 1997 and two months prior to the 2008 market highs. With cotton hitting all-time highs recently and other commodities hitting extreme levels as well, the index has alerted us to a “red flag” point once again.
Bear in mind that this chart tells a fundamentals story; it’s not a piece of technical analysis. When prices for consumables get too high, they begin to have a material impact on corporate profits. So the rosy earnings picture that we’ve seen over the past couple of quarters could be in jeopardy. Should the Fed decide to slow inflationary pressures, their actions definitely will impact the markets in the intermediate term.
The Traders View
An equities market’s slow and consistent climb higher doesn’t always end when the technical analysis says it should. Meanwhile, we can’t ignore the bigger forces that continue to work in the intermediate to longer time frames. These subdued but ultimately stronger forces lend a cautious tone to the equation.