Who is lying - the market or the purchasing managers?

Who is lying - the market or the purchasing managers?

04 November 2019 from Carlsquare

A stronger-than-expected job report in the US sent the US stock indices higher. Additional energy came from ISM Manufacturing PMI which came in at a level above previous month. None of the numbers were exceptionally strong as the job figure was cut by the strike at GM and ISM showed the third month in a row with shrinking finances. But since everyone knows that the US economy is working in the headwinds right now, the figures were still better than expected, which is enough.

The graph below shows how the job figure (NFP) and the S&P 500 follow each other. No sign of declining business cycle is emerging, rather the contrary. 

However, when looking where in the economy the job is created you may become more concerned. Jobs are disappearing in the manufacturing industry but increasing in the service industry, including education and health care.

The global purchasing managers' indices clearly show how optimism falls. The ISM for the US manufacturing industry declines for the third consecutive month, which also is in line with the job statistics. The trend is the same if you look at how global macro statistics turn out right now.

 

There are two major themes at present: One is that the recession is here and that we are facing a severe economic slowdown and that the markets will soon fall freely. The other major theme is that the central banks have already started stimulating the economies and this will counter the downturn and support the stock exchanges.

The Fed has been very active in supporting the markets with liquidity lately. Above is M2, which is the measure of liquidity in the market in the form of banknotes, coins, funds etcetera that can easily be converted into money. They keep themselves on the best data as it is only updated on a monthly basis. The US has stopped reporting the wider measure M3. But at least this give us a hint that, after a period of stagnant growth during the first half of 2019, M2 has started to grow again.

It is completely impossible for anyone to calculate the outcome between these two forces, i.e. the business cycle and the increased liquidity support. The only way is to follow the trends in the graphs and act accordingly. Leading indicators are the USD and the S&P 500 as well as the emerging markets. In addition, the risk appetite can be viewed through various instruments such as VIX, Skew and junk bonds.

It is easy to think that the stock market is not lying. But remember that former Fed chief Bernanke stated at the time of QE being introduced that it was a purpose to support stock exchanges because rising stock markets give consumers a feeling that they are wealthier, which supports consumption. When the central banks buy bonds and other instruments directly in the market, this capital moves on from the bond market to the stock market. The indication we get from the market is thus distorted since 2008 when the grants became grotesquely large.

As can be seen from the graph below, S&P 500 set a new all-time-high on Friday. Next level on the upside can be found around the 3 100-level shown by the extended Fibonacci sequence. Momentum is strong but is soon meeting the falling trendline with its start in the beginning of the year. A rising EMA9 and previous high is acting as support levels on the downside:

 

Tech-heavy Nasdaq closed the week on a new all-time-high. Once again, by extending the Fibonacci sequence the next level of resistance can be found around 8 285. As well as for S&P 500 the momentum is strong but MACD is now facing the falling trend. EMA9 and previous top act as support levels on the downside:

The USD declines on the belief of fewer interest rate hikes in the US. Even Greenspan is stating that negative interest rates could happen in the US as well…A weaker USD should add support to the stock market. It is mainly emerging markets that are favored from this, as these countries have large loans in USD.

Below shows EUR/USD. As can be seen the currency pair closed last week above Fib 50%, now acting as support along with rising EMA9 and MA100. Momentum is strong and rising. A break above the falling MA200 and Fib 61.8% calls for further upside up until 1.125 where the next level of resistance is found.

Technical signs of weakness in Europe

Below is the weekly graph for the German DAX index. As can be seen trading take place in an upwards pointing rising wedge, a bearish pattern that tend to break on the downside:

Also, as can be seen below in the daily graph, DAX is having trouble breaking through its first level of the extended Fibonacci sequence. As shown by MACD momentum is strong positively but also fading. EMA9 serves as first level of support followed the previous top from early July. A break above the 12 993-level and the next resistance can be found around 13 135.

Swedish OMXS30 turned south quite nicely around the first level of the extending Fibonacci sequence. However, EMA9 acting as a first level of support is still intact and the 1 755-level also serves as first resistance level on the upside. On the other hand, MACD is getting close to generate a weak sell-signal and the 1 700-level makes up the second level of support on the downside.

A gap could be closed in Alfa Laval  

The Alfa Laval share gapped up on its strong Q3 report. However, the share has not been able to continue the rally increasing the probabilities for a close of the gap. See daily graph below:

Another bearish sign can be found in the weekly graph below. As can be seen last week’s trading ended up on a scary doji signaling high uncertainty.

The first level that need to be broken is EMA9. In such a scenario the share may continue to drop to the 210-level thereby closing the gap. In case of continued strength, the first level of resistance on the upside can be found around 231.8 and around 236.6.

Google in a continuation pattern

The Google (Alphabet) stock shown in its weekly graph below trading in a longer ascending triangle, which is seen as a continuation pattern. The trend is rising meaning that the pattern calls for further upside and new all-time-highs.

In the daily graph below, one may identify that the psychologically important 1 300 is the level to break on the upside. The next level of resistance can be found by extending the Fibonacci sequence. On the downside, a cluster of support levels can be found between 1 241 and 1 222:

Gold is breaking up

Gold closed last week above the ceiling in a shorter falling trend and MA50 now serving as support levels along with Fib 23.6%. A weaker USD added some strength. The next level on the upside can be found around 1 534 followed by previous top from early September.

Legal notice

This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

11/11/2019 20:23:06

 

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