Is the end nigh?

August 4, 2016 03:10 PM

Even as the U.S. equities remain very near their recent all-time highs, there seems to have been a significant shift in sentiment. Tuesday’s September S&P 500 future drop below the 2,151.25 low of the last couple of week’s narrow trading range would not seem very troubling in and of itself. Yet, coming in the wake of Monday’s opening gap higher to a 2,177.75 new all-time trading high (above the July 25th 2,172.50) left a more negative tone than might have been possible from any weakness, which would have occurred prior to that Monday new high.

The question now is whether this means there was an UP Break failure (i.e. from above 2,172.50) that has exhibited a definitive topping indication that might carry over into the broader trend? Or is this just the next bear trap like so many others that have occurred across the long up trend in this very resilient bull market? 

The Bank of England provided a rate cut to a new 0.25% all-time low and accommodative communication at the accompanying Quarterly Inflation Report press conference. Yet, this was only modestly constructive for equities. The rate cut and expansion of the long-dormant Asset Purchase Facility (the BoE name for its quantitative easing program) is important in its own right.

The BoE action today is also the culmination of recent central bank and government actions, and the last central bank influence for a while. It is also critical in the wake of the UK June 23 Brexit vote and the June 14 BoE "no action" pending further developments.

Market reactions are much more important now in the context of the weakening economic data in spite of the multi-year accommodation and stimulus. It gets back to our previous assertion (beginning back in our Feb. 11 Market Fear & Loathing post):  

The next financial crisis will occur when the investment and portfolio management community (and ultimately the investing public) realizes that the central banks alone cannot restore the robust growth from prior to the 2008-2009 financial crisis.

So is it possible the end is nigh? Maybe, but only after tomorrow’s U.S. Employment report in the wake of the lackluster response to today’s BoE action.

That point about the central banks not being able to restore robust growth on their own goes equally for the fiscal blandishments of the various national Treasuries. It is in fact another means to avoid tackling the much tougher structural reforms the political class has so studiously avoided. Referring back to our April 10 Broken "Promise" post, it is not the commitment to provide extreme accommodation that the central banks have violated. It is rather the "promise’"(expected positive result) of it possibly delivering the more robust growth everyone would like to see.

And along with the Fed’s "normalcy bias", there are no others more hopeful than the political class that maybe things are getting back to normal. And that is after they totally failed to deliver the structural reforms necessary reforms to expand on any of the central banks’ quantitative easing programs. A highly partisan U.S. Congress may be the worst offender, yet this is true of all the other governments around the world. 

The very limited number of financially enlightened members of Congress (and the same for legislatures in other countries) who understand why wages are weak came to Janet Yellen’s defense at her February congressional testimony and Q&A. While there was general criticism of the Fed for the lack of greater economic strength and higher wages, some of the more economically savvy politicians allowed that they are in good measure to blame for the lackluster nature of the current U.S. economic situation.

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About the Author

Alan Rohrbach is Lead Analyst and President of Rohr International, Inc.  He is an international equity index, interest rate and foreign exchange trend advisor. His forte is ‘macro-technical’ analysis of how fundamental influences blend with technical aspects to drive trend psychology. Clients include international banks, hedge funds, other portfolio managers and individual traders.