This is an update on the Refi Charts in my Sunday’s market Chartmentary.
MBA reported this morning the latest Refinancing Application Volume as of Friday, 7/1/2005, increased by 10.2% to 2788.2 from 2529.2 the week before. The Refi volume is now at the highest level this year, and it’s climbing to the same level as April last year. The big difference is that last April the Refi volume was in the midst of a rapid decline; this April was the beginning of an uptrend.
This is indicative that the 2nd quarter GDP may come out better than expected.
David's Weekly Market Chartmentary 7/10/05 Is It Rally Time?
Is It Rally Time Yet?
"There is only one side of the market and it is not the bull side or the bear side, but the right side." --- Jesse Livermore
There’s no need to be a bear or a bull, but there’s every need to be a true student of the market who studies the language of the market objectively. The grand debate of the bullish and the bearish ideologies may fulfill some of our emotional needs, but it renders little pertinence to the understanding of the market’s constant and unpredictable fluctuations. If the purpose of being in this business of investment is to be profitable, then we'd want to put aside our personal beliefs and heed the teaching of the market.
Let's turn to the market and see what the market's saying about Friday's action. Is it rally time yet?
In last Sunday’s market commentary, I pointed out how the market would be buoyed last week by the favorable confluence of the interest rates, the mortgage refinancing volume, the Personal Consumption Expenditure, the retail sector, and finally the price of oil. We know that if we’d only pay attention to the consumption, we’d have a very clear view to the path of our economy, and thus, the market. Since the retail sector is directly affected by the consumption, let’s take a look at it first.
Chart 1 below shows a high degree of positive correlation between the S&P Retail Index and the 4-week SMA (simple moving average) of M1 (green curve), which is the most liquid forms of money that consists of currency in the hands of the public; travelers checks; demand deposits, and other deposits against which checks can be written. The black dotted zigzag lines are the weekly fluctuations of M1. I use the 4-period simple moving average to smooth it out. The red curve is the S&P Retail Index. The Fed’s money stock report has an 8-day lag time behind the weekly S&P data.
M1's 4-week SMA had been in a downtrend due primarily to the $49 billion sharp decline from 5/30 to 6/13 (from 1 to 2 on the chart). Coincidentally, in the following week (6/13-6/20), the Retail Index dropped 3.60% (black short slant arrow). In the most recent week ended 6/27, M1 increased $7.6 billion (from 2 to 3). This provided a big uptick for the Retail Index, and it should also give the moving average of M1 a lift this week when the report comes out.
Chart 1
Removing the Retail Index and the moving average gives us Chart 2 that provides a better visual of the weekly M1 movement. On this chart, we can see a very strong uptrend in progress from June through December of the election year last year. The strength was particularly noticeable in the final three months of 2004. It didn’t even touch the lower channel support line once (see x marks). The reversal of M1 uptrend occurred abruptly after the election. From 12/27/2004 to 1/10/2005, M1 dropped a hefty $55.8 billion. This knocked M1 supply into a sideway motion. And, that’s what happened to the Retail Sector.
The weekly S&P Retail index was 443.23 for the week ended 1/3/2005, and it’s at 446.32 as of 7/5/2005. The difference is less than 1%. This, interestingly, also set the market going sideways. The weekly S&P 500 moved from side to side, from 1186.19 to 1194.94, during this same period.
As I’ve mentioned last week, the consumption stems primarily from extracting the equity from the “wealth effect” of the home price appreciation via mortgage refinancing. And, the interest rate movement has a positive correlation with the refinancing volume. So, let’s check in on the interest rates next.
Chart 2
Since banks generally peg mortgage interest rates to the bellwether 10-year T-bond yield, let’s take a look at this 7-10 year T-bond iShares, which has an inverse correlation with the yield. The technical pattern on Chart 3 shows an obvious trading range after it broke the uptrend around June 9. That's confirmed by the 9-day RSI that never went over the overbought territory of 70 or under the oversold territory of 30. In addition, the PVO (Percentage Volume Oscillator), one of the best volume (or enthusiasm) indicators, also stayed within a range. These all translate to a range bound interest rate after the previous period of decreasing rates (increasing bond prices). This seems to be in concert with the recent M1 trend.
However, Chart 3 does show some bearish bias. If the bond prices continue to form lower highs, the dotted red slanting arrow could become the upper resistance line of a bearish Descending Triangle pattern. This could potentially mean higher interest rates, which would reduce the refinancing volume and would then reduce the consumption. But, this bearish bias may be neutralized by the short-term oil price top.
Chart 3
Last Sunday, I mentioned how the equivalence of a tax relief from the drop of 8%-10% gasoline price at the pump in April and May, due to the drop of 17.44% in the price of crude, had provided a boost to both the consumption and the consumer confidence. To carry this further, let’s take a look at the price of the crude as a ratio to the Dollar by dividing the oil price into the USD Index.
Here once again, from the CCI's lower highs formation, it would seem that the price of oil had just topped out. However, as I also mentioned last Sunday, the decline this time may not be as drastic as it did in April and May. The reason is that the intermediate term uptrend trendline (blue line) that started after the New Year is still far from being violated. The dip below this trendline in May coincided with the France “No” vote to the new EU constitution referendum. It’s highly probable this dip in oil price was due to the sudden rise of the USD. And, without accounting for those 4 days of irregularity, the uptrend seems very well intact.
It’s very likely that the price of oil could come down and test this trendline again within a month. Nevertheless, barring unforeseen events, it should continue to hold above this trendline. And, that is why the market is going to stay “afloat” for now. However, I can’t see how it’s technically possible for any meaningful rally to gather momentum. Friday’s “big” rally should not be deemed as the commencement of such momentum. Since there’s no intraday volume available for the major indices, I’d like to use QQQQ intraday chart as the proxy for the market.
Chart 4
On this 30-minute, 15-day intraday chart below (Chart 5), I blacked out about three quarters of Thursday’s action that appeared to be the obvious reaction to the event in London. And, without taking Friday’s parabolic rise into account, that leaves us with the market pretty much resuming its sideways movement right under 37.20 (red arrow) since June 28. Coincidentally, 37.2 happened to be the approximation of the average of Friday’s “aftermath” high and Thursday’s “bombing” low.
Chart 5
This average seems to indicate that without the London “bombing” low and the “aftermath” high, the market should continue to wander around the 37 - 37.20 area. Since any sudden reaction in the market tends to eventually revert back to the means, it shouldn’t come as a surprise if the market reverts back to the sideway movement along the 37 support level next week.
The move of the 12-period RSI (6-hour on this 30-minute chart) to the 80’s territory also indicates Friday afternoon’s action was an overbought reaction. And, the TRIN Index table shown below also confirms this overbought condition. NASDAQ’s TRIN Index reading dropped from the “healthy” 0.88 to 0.71 to the extreme overbought reading of 0.43 on Friday.
Perhaps it'd be time better spent to take a vacation rather than sitting around waiting for the major rally to take place.
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