John Noyce, Goldman’s arguably best technician, in his weekly Charts that Matter, has released one (among many) interesting observation on just how overbought the market currently is, and more specifically just how desperate the velocity of the pick up in the stocks since August has been, in order for levered beta players such as hedge funds, as we predicted in the end of August, to make up as much of their year as possible before seeing redemptions (even so many will not survive into 2010 as the entire 2/20 model is now crumbling). Specifically, by looking at where the S&P is relative to its 55 DMA, Noyce notes that every time the market has gotten to above 5% its trailing average, it has always entered a period of consolidation (read at least modest selling). Furthermore, compared to the recent trend extreme of 7% above 55 DMA, the market moved meaningfully above one just one occasion in the past: in January 2009… just before the crash to the decade lows of 666 on the S&P occurred.
In the FX realm, Noyce appears to stand behind the FX team’s long EURUSD recommendation with some technical back up.
Our EUR/Broad Index appears to have completed a similar size bear market from the December ‘08 highs to the September ‘10 low to that which it completed from the September ‘98 high to the May ‘00 low
- While the bounce need not be in a straight line it certainly looks as though the EUR has stabilised on a broad basis and further recovery seems quite likely over time.
- This supports the idea that after a period of consolidation/correction to unwind extreme moving average setups on the daily chart EURUSD should again begin to move higher.
- As a reminder the EUR/Broad Index shows the performance of the EUR versus an equally weighted basket of the other “Old World G10” currencies, it’s EUR-based so higher is EUR-strength.
And last, looking at the 10 Year, Noyce notes a comparable record overstretching relative to the 55 DMA:
U.S 10-year yields have now spent 126 consecutive trading sessions below their 55-day moving average on a close basis. This is beyond the prior extreme set in July ’95 of 124 consecutive sessions below the 55-dma
- Given the concerns we’ve expressed on the prior slide this does seem to be a warning sign that the market is becoming increasingly susceptible to an upside correction in yields.
- The pivot to watch is 2.58-2.61% where the downtrend from the April highs and the 55-dma are converged.
- A break above that point would leave the 200-dma as a possible target a long way above at 3.23%.
- Overall, it now appears very important to watch for any signs of a turn higher in yields.
There is much more in Noyce’s latest, but it all just goes to confirm the old maxim that the market can frontrun the Fed for far longer than the 55-DMA can stay solvent.
