Federal reserve Chair Janet Yellen keeps hitting the sweet spot communicating to the stock market that she wants to stay supportive as long as possible. Recent statements that the economy is weakening short term but getting stronger underneath is the soothing message that when rates rise the economy will be able to live without the monetary steroids delivered by Central Banks.
Last Thursday with the Dow closing at 17,678 we told premium readers: 03-26-15 “The ADRO – Advance Decline Oscillator is entering an initial Buy mode, yet the buy window may extend for 2 more weeks.” Two days later the Dow is testing 18,000. (See charts below) The ADRO is a measure of trend and breadth using a moving average to achieve crossover divergence signals.
Another often used indicator utilizes Market-Harmonics.com charts for the Bull/Bear Mutual Funds as represented by the Nova and Ursa Rydex Funds. As with the ADRO we again have a pretty accurate timing model with our interpretation of oversold Buy and overbought Sell signals.
While other indicators are neutral, these signals above encourage us to expect modestly higher stocks over the near term. One of the key confirmations we would expect to witness is seeing the Yen hitting new lows in order for the US stock market to sustain a rally to new record highs. Today’s very strong stock market surge has coincided with a weaker Japanese currency, but thus far the Yen – like stocks – remains range bound. As we have explained in prior letters, carry trade currencies such as the Yen get sold in their low interest rate environment and get converted into the currency of higher yielding US rates where they are then invested in bonds and stocks. The fact remains for now that the US economy is stronger and interest rate differentials favoring the US are likely to increase. This may finally change later this year when Europe and Japan finally show clear signs of stronger than expected economic growth rates. For now we expect the Yen to struggle.
Some of the concerns we raised about forward earnings and many other US economic indicators failing are of less concern today as they have already slowed US stocks which have been stuck in a trading range for about 4 months. In addition there has been a weather effect again this year and a cyclical momentum decline that explains much of the recent US weakness. We expect the economic indicators to start reversing higher in the US during the 2nd quarter and certainly by the 3rd as demand picks up with a corresponding inventory build and employment gains. The new major Euro monetary stimulus – Quantitative Easing (QE) – injecting Euro reserves into the Eurozone banking system at a time when their economy is already in an up cycle will add momentum to European and the US economic data.
Our update today is however not so much about fundamentals and monetary policy but a reading of the technical tea leaves. For now they are again pointing higher as of March 27th. Any pullbacks between now and April 6th should be Buying opportunities.
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