Central Banks Spark Bullish Conditions

By: Chris Ciovacco | Mon, Jul 30, 2012
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As outlined in a popular October 2011 video on the European debt crisis, we are well aware of the serious nature of the problems facing the financial markets. However, our market models have been telling us, and continue to tell us, to be open to ongoing bullish surprises. Debt market and economic fundamentals are being offset, at least for now, by the expectation of further central bank intervention. From a technical perspective, the markets are in a bullish posture. The posture is fragile and subject to change, but for now, it is what it is - bullish.

With little in the way of consensus relative to what actions may be taken by the European Central Bank (ECB) and Fed this week, it is a good time to take a step back and look at the health of the markets. Along the way we will sprinkle in some recent media coverage regarding this Thursday's all-important ECB meeting.

Moving averages are used by traders to filter out day-to-day volatility, allowing for easier identification of a market's trend. The chart of the S&P 500 below shows various moving averages from short-term (20-day in blue) to long-term (200-day in pink). Under bullish conditions, markets tend to remain above their moving averages and the slopes of the moving averages tend to be positive. Using those simple parameters, it is hard to argue the S&P 500 currently has anything but a bullish bias.

$SPX (S&P 500 Large Cap Index) INDX

While it may not look like it in the small chart above, all the moving averages, including the green 100-day, had positive or bullish slopes as of the close on Friday, July 27. As shown in the table below, the same bullish look is present on the chart of the Dow Jones Industrial Average (DIA).

S&P 500 DOW Chart

Across the pond, Bloomberg reported one possible plan of action for the ECB:

European Central Bank President Mario Draghi has gone on the offensive as he seeks a game changer in the battle against the sovereign debt crisis... Draghi's proposal involves Europe's rescue fund buying government bonds on the primary market, buttressed by ECB purchases on the secondary market to ensure transmission of its record-low interest rates, two central bank officials said July 27 on condition of anonymity. Further ECB rate cuts and long- term loans to banks are also up for discussion, one of the officials said.

The video below analyzes numerous markets, including stocks, bonds, commodities, and precious metals. A "risk-on vs. risk-off" analysis appears at the 1:22 mark of the video using the ratio of stocks (SPY) to bonds (AGG). Like the charts and tables above, the weight of the evidence favors bullish outcomes. The video also covers concerning developments, including nearby areas of possible resistance. DeMark exhaustion counts are reviewed for stocks, the euro, and bonds. The follow ETFs or markets appear in the video: S&P 500 at the 00:25 mark, SPY/AGG 1:22, $NYUD 2:55, $XEU - euro 4:02, FXE DeMark 4:53, NASDAQ 5:49, European financials 6:09, EFA 6:33, Dow 7:16, NYSE Composite 7:55, RSP 8:34, SPY 9:01, VEU 12:53, the VIX 14:53, DBC 15:27, DBO 15:39, EEM 15:52, FXI 16:16, GLD 17:05, IYM 17:50, JJC 18:22, CRB Index 18:40, TLT 19:08, SLV 19:24, VTI 19:53, TLT DeMark 20:22, S&P 500 DeMark 21:26. DeMark charts and indicators are proprietary tools from Market Studies, LLC.

 

 

It seems unlikely the ECB will take no new action at Thursday's meeting after Mario Draghi's "do whatever it takes" comments last week. From the Washington Post:

Draghi "put his personal credibility on the line" and "would not have done so without being confident about his key constituency," Erik Nielsen, global chief economist at UniCredit Bank AG in London, wrote in a note to clients yesterday. "The ECB under Draghi does not like to mess around in the market, but if it sees a need, it will come with overwhelming force."

Last week, the Dow and S&P 500 closed above the moving averages below, giving the bulls an edge. Until some red returns to the tables shown here, we will continue to give the bulls the benefit of the doubt.

Price Relative to Moving Averages - S&P 500 and DOW

Readings on weekly and monthly charts are more meaningful to investors than those found on daily charts. The table below shows two important moving averages with postures that are indicative of bullish trends.

Weekly and Monthly Readings Lean Bullish - S&P 500 and DOW

Other European leaders have also hinted at the possibility of imminent action from the ECB. According to Bloomberg:

"We have reached a decisive point," Jean-Claude Juncker, who heads the group of euro-area finance ministers, told Germany's Sueddeutsche Zeitung in an interview. "The world is talking about whether there will still be a euro zone in the next few months. We have to make abundantly clear with all available resources that we're completely determined to guarantee the financial stability of the currency." Juncker confirmed that the temporary bailout fund, the European Financial Stability Facility, is working with the ECB on a plan to reduce borrowing costs, adding "we have no time to lose," the newspaper reported yesterday.

A widely used and effective tool for market analysis is the Relative Strength Index or RSI. All you need to know about RSI is the bulls tend to be in control when RSI is above 50. Below 50, RSI identifies a market controlled by the bears. As shown below, RSI also sides with the bulls on three different time frames.

RSI sends bullish signal

If the ECB and Fed disappoint the markets this week, the bears could regain traction in a rapid manner. However, given what we know today, the path of least resistance is up. If central bankers deliver this week, we will continue to favor foreign stocks (EFA), commodities (DBC), and oil (USO). Our respect for the fragile nature of the bull's grip is reflected in a relatively small hedge (RWM) we are holding. We are willing to maintain the bullish course or increase that hedge in a headline-driven environment.

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

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