Weekly Overview for June 2nd

After the long weekend, U.S equities opened up making gains only to later lose them and finish off the week down across the board leaving the indexes very technically weak on the back of what appeared to be ok economic news out of the US. The Dow and the S&P were the biggest losers ticking -2.35% and -2.37% respectively, while posting their biggest declines on Friday. The Dollar Index consolidated and finished the week off also; yet, while stocks tanked on Friday the dollar made back some of its weekly losses to finish up .13% on the week.

The bond markets didn’t do too well at all last week with the US 10yr yield making a new yearly high of 2.21% before settling down at 2.16% for the week. And the media seemed to have missed the Euro’s 10 year hitting 1.19%–up 21 basis points. The BOJ managed to keep their yield down to .88% after last week’s poke over 1% by committing itself to additional debt purchases. Not only this, but they are talking about buying debt maturity from 1 to 5 years also, so as to calm investors’ nervousness about that end of the yield curve.

Inflation is still at bay all over the G8 regardless of all the monetizing going on. This week saw an uptick in the rates across the globe, but nothing in the ranks of causing banks to turn off the presses. This week, Europe and Japan came out and said that they would keep the easy money policies active as long as the markets demanded. Not much talk out of the Fed however, with the media and currency analysts still talking of Fed tapering as being the impetus behind recent dollar strength.

I read on Reuters about how Wal-Mart and Target are having price wars in Canada along with the other local retailers, leaving the BOC worried about the downward pressure on their inflation expectations. And on top of them fighting over customers, Canadians are heading south to take advantage of the lower prices in the US. This wouldn’t be happening if consumers were drowning in cash. Friday saw both Personal Spending and Personal Incomes fall -.2% vs. 0.1% eyed and 0.0% vs. 0.1% eyed respectively. Not too good for the argument of a strengthening economy. Just think, real Personal Income is only up 1.0% year over year while personal expenditures are up 2.1% over the same period. And buried under all the media hype the savings rate plunged to under 2.3%–the lowest since 2007; and with expenditures growing faster than incomes, one has to wonder how the Reuters/Michigan Consumers Sentiment Index beat consensus printing 84.5%–the highest since July 2007! Just how could consumers be so happy while their wallets are not keeping up with prices in addition to their savings being depleted?

It can only be from two things: the reviving housing numbers and the rising stock prices—all paper gains caused by the Feds easy money. Not only that, but the help from the media, which is inflating the economic news and cheering Wall Street’s gains while ignoring a broke consumer sounds like misguided spending financed by inflated asset prices.

This week also saw GDP revised down from 2.5% to 2.38% while Jobless claims jumped to 2.986M and Personal Consumption Expenditure Prices hit 1.0 vs. .9; and, even though Pending Home Sales missed consensus at 12.6% printing 10.3, it still increased 3.2% up from 7.0%. The only highlight of the week came in on Friday with the Chicago Purchasing Managers’ index beating consensus by 14.8% coming in at 58.7%.

Friday was particularly exciting. After bond holders took a beating, Friday saw the Dow lose more than 200 points with 70 points of it being lost in the final five minutes of trading alone. According to the media the catalyst seems to have been the falling bond prices. Not only this but also the week ended on the most interesting news, I think you as a trader should read to interpret on your own is the May 17th minutes released late Friday afternoon. I saw it first on Market Watch and then on Zero Hedge and then went to the Fed website myself to take a look, and this is the way I see it.

My Summary: The 12 bankers advising the Fed basically admitted, even though euphemistically, that the Fed monetary policy has not produced real economic growth—that all it has done is inflate asset bubbles which have made consumers much too confident, spending too much money and distorting the market—and that if the QE is stopped it will be a disaster. They even went on to say, in a nut shell, that all this was causing bank deposits to be at risk. At risk!? Does Cyprus ring a bell? Now this is my take on what was said very carefully and I repeat once more to go on the Fed website and read it for yourself to see if I am the one “drunk.”

What does this all mean for us as traders? First let me start with the VIX. It closed Friday’s market action at 16.30 15.6% above the 10 period moving average with the RSI (5) in overbought territory. (Remember that VIX is an indicator of fear and complacency in the S&P futures market, and that it is used as a contrarian indicator.) However, you have to keep in mind that even though we printed a spike in fear in the market it is still low relative to past market readings and Elliott Wave structure is telling us that there is more fear to come. What we do know is that fear has crept into the market and looking at all three indexes as seen in the S&P below they are all sporting very bearish candlesticks.

SPX VIX

Remember that the S&P closed at the low and by looking at the EW pattern that appears to be forming on the one hour, it looks like the index is yet to finish off a zig zag with a c wave before any rally takes place.

SPX2

Technicals tell us that the trend is still up for the Dollar index until they say otherwise. Both the Euro and the Pound appear to have finished zig zags at nice Fibonacci numbers. And the Dollar index has met the minimum requirement for a corrective 2 wave. However, the moves down do look a little choppy and shallow for impulse waves so far and could still be correcting. However, the trend is still up until proven otherwise in the US Index.

DX

Japanese CPI printed consensus at -.7% and excluding food beat coming in at -.6% vs. -.7% eyed. Housing also came in beating consensus and the JPY strengthened against the USD and the rest of the G8 for that matter. It looks like that JPY just might be correcting the massive sell off it has been on. Here is the USD/JPY weekly.

USDJPY

If one looks at the yen pairs you can see that they are all showing JPY strength. The week ahead is looking very risk off like in nature with the JPY leading the USD. This might be the correction the market has been waiting for, or maybe even the bigger fractal move most Elliotticians have been expecting. It will be an interesting start to June.
Happy trading!

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