Is the stock rally already over?

Hope..one word so powerful that can draw the line between success and failure, life and death..so powerful that can even convince markets to overlook bubbles and recessions and keep pushing stocks higher..but what are the markets hoping for?Well, the list gets longer every week as investors are trying to justify why you should buy overpriced stocks when the economy is about to face another recession. The past week for example it was all about oil, the hope in this case was that the talks between Saudi Arabia and Russia about freezing oil production would somehow solve all the oversupply issues. But, here there is another hope, hope that talks about freezing oil production will miraculously translate into production cuts. Iran’s oil minister thought it was a joke and reacted laughing as Iran just got back into the oil market after the sanctions were lifted and has no intentions in cutting production now..on the other hand one of Libya’s government (yes Libya has 2 governments, most countries have troubles with one government, imagine how much damage can 2 governments make to a country), anyway I was saying Libya would probably agree to a production freeze..but only after it catches up to 2010 production levels, which means only after it increases oil output of at least another million barrels per day.

Libya oil

Oil output in Libya

In the meantime Iraq is pumping oil like crazy because it has to pay for all the military expenses it faces in its war against ISIS. If we look at the chart below, it seems like oil price is stuck into a bearish channel, so despite the last oil rally, the trend is still bearish from a technical point of view (how’s hope going?).

oil

US oil price chart

But let’s get back to our list of hopes..next there is hope that SuperMario (Mario Draghi) will finally unleash his bazooka and flood the market with more stimulus in March. Markets are pricing in an epic amount of stimulus but I fear Mario’s bazooka will turn out to be another water pistol so the likelihood of disappointment here is quite high.  Next, there is hope that the FED will also refrain from additional rate hikes, that’s why bad news is good news for the stock market as the worse the US economy gets the less likely the FED will hike rates (this sounds really like a healthy way of investing, doesn’t it?). I admit a year ago I was skeptical myself that the FED would really hike rates but I did not consider that they have been talking about it for so long that it would have damaged their credibility if they didn’t hike at least once..so the last rate hike had nothing to do with economic data but it was all about credibility..the question is will the FED keep hiking rates as they promised?Not even the FED can answer that because they don’t seem to know what they are doing anymore..so this is a wait and see..common sense would say that the US economy could barely cope with the past rate hike, let alone with more…Overall the markets hope that central banks got their back, but the last central bank intervention in Japan did not go that well, the BOJ in fact, introduced negative interest rates in the hope to prime another market rally and to weaken further the yen.. the result?The USD/JPY pair collapsed 1000 pips..so the yen strenghtened instead, hope gone wrong in the chart below!!

japan

USD/JPY chart

But in the midst of all this what’s the SPX500 doing? The past week was the second consecutive week of gains but markets has yet to shake worries about corporate profits, economic growth and digest the mess with interest rates

spx500 chart

SPX500 chart

But if we look at the chart above it looks like despite the recent rally, the SPX500 is still in bearish territory and MACD and RSI indicators signal caution as the rally may be over soon

MACD SPX500

MACD indicator from SPX500 chart

RSI SPX500

RSI indicator from SPX500 chart

But, keeping a lid on gains is how much money has been bleeding out from the stock market. In the last few weeks in fact, investors pulled more than 20 Billion from the stock market. This was due to persistent concerns about oil prices, lackluster earnings and weakening expectations for global growth, no wonder investors feel skittish.

One thing is for sure, the upside in stock prices seems to be limited for the time being but March promises to be an interesting month.

Filed in: Blog, Economy, Featured, Oil, Stocks, Technical Analysis Tags: , , , , , , ,

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