Russell 2000 showing signs of Fatigue

The Russell 2000 is another one of those key indices that traders can use to gauge risk sentiment. By keeping tabs on it, one can hope to better understand overall market sentiment in general and thus, by consequence, money flows.

Last month, it appeared that the index was in real danger of breaking down as it flirted with the February low before it staged an impressive recovery. However, it has failed ( as of today) to go on to make a new all-time high. As a matter of fact, it has stopped short of reaching its previous peak and is currently down near 0.85% as I type up these comments. This is a warning from a technical analysis aspect that the market is showing some signs of fatigue.

I have noted a POTENTIAL ( and I am heavily emphasizing that this is a 'potential' ) Head and Shoulders pattern that could be emerging after a very long and protracted run higher. I am not one that jumps and shouts about the formation of everyone of these patterns as does seem to be the habit of too many novice analysts, but when one of these patterns arises after a very long trend, either higher or lower, it pays to monitor it closely.

I have noted the left shoulder, the head and a potential right shoulder. The pattern would however only be confirmed by two successive closes below then neckline noted. That is a good way's off just yet.

One of three things will happen -

1.) the pattern will be confirmed by two successive closes below the 1080 level which would generally indicate a more extended move lower.

2.) the market will move down and test the neckline and bounce higher setting up a potential consolidation pattern.

3.) the market will briefly set back before going on to make yet another all time high.

Notice, I am not making any predictions here - I am merely noting probabilities that we as traders need to be alert to.

The indicator I am using has not yet generated a sell signal in spite of today's move lower in the index itself but it is up near levels commensurate with previous downturns that have occurred over  the last 9 months.

I am also noting that the VIX is sharply higher today for some reason. Some nervousness is creeping back in! I wonder if it might have anything to do with the fact, that Yellen, Carney and Trichet are all on the record recently talking about the economy growing slower than anticipated? Who knows - but whatever the reason - equity bulls seem unwilling to drive stocks sharply higher right now.

It is going to be interesting to see the GDP numbers.

Average Hourly Wages

One of the factors that we are trying to closely watch here is anything that might result in the Velocity of Money beginning to rise.

From my armchair perspective, I am of the view that it is the slack in the labor market that has kept inflation pressures well at bay, in spite of how many years now of Federal Reserve Liquidity efforts, also known as Quantitative Easing. I have commented here many times that until that huge sum of "money" that has been created by the Fed, begins to make its way out of Wall Street and onto Main Street, inflation pressures are simply not going to build.

I think many of us who are regulars here view the current stock market rally into all-time highs, seemingly without ending, as a product of these QE programs and a ZIRP ( Zero Interest Rate Policy).

Simply put - if Yield is the name of the game, and it is, then the money flows to where the yield potential is the greatest. For the last several years now, that has been into the general equity markets and out of commodities in general.

Recently however, we have seen the Commodity indices all breaking higher, led primarily by sharply rising energy prices. We have also seen the TIPS spread hitting its highest level in 6 months. These are signs that inflation pressures are building, albeit rather slowly.

What the missing ingredient has been is rising wages. let's face it, the employment situation in this country is rotten. While some folks are indeed getting some long-sought for jobs, many of these are not high-paying. One of the few exceptions has been in the energy sector where things are on fire. There is a shortage of skilled labor there that is very real.

Today we say new home sales pick up so that is a good sign. Also, someone has to build these new homes so construction guys are staying busier than they have been for several years.

All of this is leading me to beginning focusing on another piece of economic data and that is the Average Hourly Wages numbers that we get from the government on a regular basis. For many years, employers have been in the driver's seat and have been able to choose and pick whom they want to hire and what they are willing to offer them in wages pretty much without any sort of hindrance. It has been, and to some extent, still remains an "Employer's Market".

We therefore might want to start watching more closely for any signs that this might be changing. If wages were to pick up, it should tend to see consumer spending rise and in terms of the Velocity of Money, perhaps begin to arrest that long downtrend. If that were to happen, the TIPS spread would widen out even more and the inflation genie would start pushing even harder against the cork that is presently in his bottle.

Here is a chart of the Wages data. I have taken the liberty to convert the data into PERCENTAGE CHANGES compared to the same period in the previous year. In other words, we can see what percentage wages are rising or falling from the previous year to gauge whether wages are beginning to ramp up.

Notice how wages ( again - on a percentage change basis) were falling throughout the height of the credit crisis. Layoffs, firings, hourly wage cuts, etc. all show up on the chart during that time frame. The Fed's QE programs finally seemed to kick in somewhat and arrest the downward trend but what I find really most interesting is the fact that since the decline ended in late 2009/early 2010, wages have essentially gone nowhere.

This is what I mean when I say wages are flat. It does not mean that they are not rising - it means that the rate of percentage change upward is not moving higher.

I believe this is the single most important factor in determining whether or not we see an outbreak of inflation from the Fed's monetary policies.

Remember they are bound and determined to generate inflation of at least 2%. To do so, they are going to need to see wages continuing to rise at a fast clip or at the very least, as fast as overall prices are rising in general.

When I look at the recent rate of increase in the cost of energy, and in the cost of meat for example, it does not take much in the way of math skills to realize that consumer wages are not keeping up with those.

Let's see how things shape up as we move forward. I see that there are several misguided efforts by politicians mandating higher minimum wages ( that is a self-defeating effort to buy votes anyway )  but they might just get some of that legislated into existence. I guess these economic nitwits think that business owners will just gladly surrender their profits and will not pass on higher labor costs to the general public. If we see a movement towards higher minimum wages, it just might be the catalyst to push everything higher for all of us.

Bank of England's Mark Carney Sounds Dovish Note - Up goes Gold

Wow! What is it about these Western Central Bankers all of a sudden? First it was Trichet of the ECB; then it was Yellen over at the Fed, and now it is Mark Carney over the Bank of England! They all sound as if they are using the same notes and passing them around for each other to read.

Commenting today about Britain's economy, Carney remarked that wage growth remains subdued allowing spare capacity to remain and that needs to be taken up before a tighter stance in monetary policy would be appropriate. Translation - higher interest rates are not in the immediate future. Does that not sound eerily familiar to what Janet Yellen said last week? And of course, lest you have forgotten, Trichet and company actually went the "other way" on rates, namely down!

The British Pound, which recently had set a 5 year high against the US Dollar, moved lower on the news and gold moved higher.

This is really getting interesting to say the least. We are back, it would seem, to which Central Banker can undermine his or her own currency the fastest! No wonder gold is moving higher!

It really is becoming a rather tragic state of affairs when consumers are trapped in a box of stagnant wages at the same time Central Bankers are talking down their own currencies and pushing the price of basic needs higher! I really wonder if any of these people have the least bit of realization what they are doing to the average Joe? That of course was completely a tongue-in-cheek comment as they do not care about Joe and Jane - they care about the monied class and rising stock markets.

At least with deflation pressures dominating, the stagnant wage thing was not as big of a deal ( not that it is any good at all) because the cost of food and energy was sinking lower. What these constantly meddling monetary lords and ladies are doing however is  ensuring that the consumer continues getting squeezed as they set about their quixotic task of "reaching a 2% inflation rate".

I sometimes wonder which is more dangerous to consumers - a foreign invading army or a host of Western Central Bankers.

A saving feature, at least for now, is that benign weather is creating excellent growing conditions for this year's major grain crops and prices in that sector are falling. The meats keep rising however meaning that while the cost of our favorite box of cereal might go down ( I am not holding my breath waiting for the makers to pass along the lower costs) my bar-b-q brisket and ribs are continuing to rise. Hey, if you ever were thinking of going Vegan, now is the time to do it ( at least until later this year)!

Beans decided to forget about "Chinese demand" because of a manufacturing purchasing managers index print yesterday and focused on the Crop Conditions report which shows over 70% of the crop in good/excellent condition. I mentioned yesterday how goofy I thought the idea of manufacturing = soybean demand was to me. Corn and Wheat are also moving lower.

I want to take yet another opportunity to remind hog producers to continue any scale in hedging program that they might have instituted for late Q4 and Q1 2015 expected production. We have a major Quarterly Report out for the hogs this Friday. With the Board at high levels, corn prices sinking and incredible profit potential for you as a producer, make sure you lock in some before Mr. Market decides to take them away from you. Again, you don't have to lock up 100% of expected production, but get SOME coverage. It is always better to be able to shrug your shoulders and think, " I could have made a bit more if I had gambled" instead of kicking yourself and thinking, " I cannot believe I left all that potential profit disappear". Don't take risky chances with your farm's income - lock in some profits and leave the risky chance taking to we wild-eyed speculative types.


Shifting back to gold - I am watching the tape and noticing that it is meeting up with some pretty good selling here near the $1320 level. That is a key chart area and it is showing by the price action. Dip buying is very evident as well however.

You can see the selling on the chart. I am closely watching how gold performs right at this level. The indicator below the price graph is well up into the previous regions that foretold a move lower. The ADX is showing the bulls in control but the market has not yet entered into a trending phase. One usually wants to see a breach of a horizontal resistance level alongside of an ADX above 30. It is currently at 22.81 with the resistance level yet unbroken. The price however is not setting back very much which is indicative of that strong dip buying that is still taking place.

There is some light technical downside support coming in near the $1300 level followed by much stronger support back at our old friend $1280.

I should note that there still remains a great deal of skepticism as to this current move in gold among some of the larger banks. The general thinking is that the Fed can easily get control of any inflation ramp up. That may or may not be true but based on that TIPS spread chart I have been maintaining and following, it sure seems as if they are getting well behind the curve when it comes to managing the expectations game. That being said, some of the bigger boys are still looking at the current move higher in gold as a selling opportunity. We definitely have a battle on now.

By the way, here is a freshly updated TIPS spread versus the gold price chart for you. Check out the big spike! Our monetary masters want inflation - they sure as hell are beginning to get it, at least insofar as the market expectations are concerned. 

Silver is working closer to resistance near the $21.50 - $21.65 level. Above that lies $22. That would be a big deal technically if it breached $22 and held its gains.