Todd Harrison: Janet Yellen, Emerging Markets, and Mercury Retrograde
What to watch on Turnaround Tuesday.
Global markets took it on the chin at the beginning of last week, capping off a rather scathing two-week stretch.
True to the path of maximum frustration, they rallied sharply at the end of the week, working off the oversold condition and taking the tape back to the all-important S&P (INDEXSP:.INX) 1800 level, where it opens for today's trade.
While I'm not a huge fan of short-term correlations -- you can data mine pretty much anything with a short enough time horizon -- a trusted pal noted the relationship between the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) and the SPDR S&P 500 ETF (NYSEARCA:SPY) since the beginning of the year, a chart I've included below.
His observation is that EEM has led SPY since tapering has been on the table, and we would be wise to note the dynamic on an ongoing basis.
I've said in the past that I would get on all fours and watch the grass grow if I thought it held predictive clues to our forward price action, and I share this with that intention.
Obviously, there's a lot more going on today, but we'll get to that in a moment.
Orange Is the New Black
Have you been feeling on edge of late? Like the world is moving a bit faster than usual?
To borrow the wise words of Dr. Sean Maguire, "It's not your fault, it's not your fault, it's not your fault!"
According to Jeffries, of the 308 of the S&P 500 companies that have reported this season, 25% have moved over 5% on the day of announcement and 8% have moved over 10%. Consumer discretionary stocks in particular stand out for dramatic earnings moves: Of the 37 companies that have reported, over 50% have moved 5% or more the day of the announcement and 27% have moved over 10%. That's a massive increase in volatility over previous reporting quarters -- there have been nine consumer discretionary stocks that have moved over 10% on earnings this quarter vs. one stock that moved that much two quarters ago. (Hat tip, Rareview.)
You're Yellen! My Mustard? No, You're Fed Head!
Janet Yellen started her reign as Chairwoman of the Federal Reserve this morning with several prepared remarks to the House panel. Among the juicier headlines:
- She "strongly" supports current policy and is "committed to achieving both parts of her dual mandate."
- While the labor market recovery is "far from complete," the FOMC will likely continue to reduce asset purchases (read: taper) in measured steps if incoming data supports its view of ongoing improvement.
- Once the unemployment rate reaches 6.5%, the FOMC will instead look to see if broader economic activity (read: GDP) would justify a rate increase.
- Emerging markets are less vulnerable than in the past and better positioned to manage volatility (read: the Fed is going to focus on problems at home vs. managing the world).
Move along, there's nothing to see here folks? Time will tell; the judge and jury that is the market is about to walk into the courtroom.
- It's Turnaround Tuesday and before you dismiss that as nonsensical, you should think back to the price action on past Tuesdays.
- S&P 1800 is an important pivot for the tape as it represents a "lower high" in the 2014 downtrend through a stair-step lens. Technology stocks, which have outperformed of late, are looking to put this correction nonsense behind them with a move through NDX (INDEXNASDAQ:NDX) 3650.
The Russell 2000 (INDEXRUSSELL:RUT) has been lagging the broader market, which qualifies as a negative divergence for those who monitor such things. I've included the chart below so mis ojos son tus ojos.
- After fulfilling the Head & Shoulders projection from last week, Japan held and rallied where it "had" to. The next zone of resistance comes into play at Nikkei (INDEXNIKKEI:NI225) 15,500.
- Lest you haven't noticed yet, we're in the full throes of Mercury Retrograde until February 28. Be guided accordingly.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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