Tuesday, December 17, 2013

Citi FX Technicals and Why on Earth Does Consumer Confidence Rise for Exactly Four Years and Four Months?

From ZeroHedge:

Citi "Skeptical Of The Sustainability Of This Uptrend"
As the S&P 500 continues to make higher highs, Citi's FX Technicals group attempts to identify important levels to watch. As they have highlighted before, while they respect the price action and the fact that the markets are making higher highs, there is an underlying degree of skepticism surrounding the sustainability of this uptrend from a more medium term perspective. Important levels/targets on the S&P 500 converge between 1,806 and 1,833. A convincing rally through this range (weekly close above) may open the way for a test of the 1,990 area (coincidentally the Fed balance-sheet-implied levels for end-2014); however, at this stage they are watching closely over the coming weeks as we approach the New Year.

Via Citi's FX Technicals group:
As regular readers are aware, the chart of consumer confidence is among our favourite Techamental charts. Confidence is a key underlying factor to any economy/market and in this case the similarities in the way it trends and behaves in each cycle is quite telling.

In each of the three cycles, consumer confidence rose for exactly 4 years and 4 months and then turned down.

The recent prints have taken out what were support levels at 72.00-73.10 which further suggests lower levels will be seen.

As the overlay clearly shows, there is a serious disconnect between where confidence lies (and other factors such as small business confidence and economic performance) and where the S&P 500 trades. The lower the confidence index, the less comfortable we are and would be with the sustainability of the stock market rally, even though we must respect the near term price action.
A closer look at the chart reveals some difference between the previous two major highs in 2000 and 2007 and may shed some light on which time period we should be more focused on in terms of price action on the S&P 500...

– 2000: The Consumer confidence index peaked in the month of January and again at the same level in May (i.e. double top at 144.70). The S&P 500 peaked in March. However the real move down in the S&P 500 was not seen until October so equities traded sideways for more than 6 months before turning lower.

- 2007: Consumer confidence peaked in July and the S&P 500 made a higher high in October. On this occasion we saw a quicker turn off the highs in both the consumer confidence and the S&P 500 as the reality set in that the credit crisis was worse than expected, especially by the time we got into early 2008 (Bear Sterns, inversion of yield curves, coordinated emergency rate cuts among major central banks etc)...MORE