Europe advances

Germany’s DAX is testing the band of resistance between 12000 and its April 2015 high of 12400. Rising troughs on Twiggs Money Flow indicate strong buying pressure. Breakout is expected but we are likely to experience consolidation below 12400, or a moderate correction, ahead of this.

DAX

The FTSE 100 followed through above resistance at 7350, signaling another advance. Rising troughs on Twiggs Money Flow indicate strong buying pressure. Target for the advance is 7600*.

FTSE 100

* Target: 7350 + ( 7350 – 7100 ) = 7600

Europe advances

Dow Jones Euro Stoxx 50 represents the 50 largest blue chip stocks (Volkswagen, Bayer, Allianz, L’Oreal, Phillips, Unilever, etc.) in the Eurozone, in terms of free-float market capitalization. Breakout above resistance at 3330 signals an advance to 3500*.

Dow Jones Euro Stoxx 50

* Target: 3300 + ( 3300 – 3100 ) = 3500

The FTSE 100 is testing support at its former resistance level of 7350. Rising troughs on Twiggs Money Flow indicate strong buying pressure. Respect of support is likely and would confirm an advance to 7500*.

FTSE 100

* Target: 7100 + ( 7100 – 6700 ) = 7500

Long-term target is 8000: 7000 + (7000 – 6000).

The key component driving inflation

Two interesting graphs on inflation from Niels Jensen at Absolute Return Partners:

….similarities between the story unfolding in the UK and the one in the US. Core inflation in both countries is significantly higher than it is in the Eurozone – just above 2% in the US and just below 2% in the UK whereas, in the Eurozone, it is only 0.9%. Furthermore, services are very much the engine that drives core inflation in both the UK and the US (exhibit 6).

Exhibit 6: The drivers of core inflation (US only)Source: The Daily Shot, BEA, Bureau of Labor Statistics, Haver Analytics, February 2017. Data as of December 2016

To a very significant degree that is down to rising medical care costs (exhibit 7). As the populace ages, this can only get worse – at least in the US, where almost all healthcare is provided privately and paid for by insurance companies.

Exhibit 7: US personal consumption expenditures by component (%)
Source: The Daily Shot, BEA, Haver Analytics, February 2017

Source: A Note on Inflation: Is it here or isn’t it? – The Absolute Return Letter

Europe: Long-term buying pressure

The FTSE 100 is consolidating below resistance at 7350. Rising troughs on Twiggs Money Flow indicate strong buying pressure. Breakout above 7350 is likely and would signal an advance to 7500*. The long-term target is 8000.

FTSE 100

* Target: 7100 + ( 7100 – 6700 ) = 7500

Dow Jones Euro Stoxx 50 is similarly consolidating while Twiggs Money Flow reflects long-term buying pressure. Breakout above 3330 would signal a fresh advance with a target of 3500*.

Dow Jones Euro Stoxx 50

* Target: 3300 + ( 3300 – 3100 ) = 3500

Michael Gove on Brexit, productivity and innovation

Interesting viewpoint on Brexit.  How the EU became anti-innovation, erecting barriers to entry which favor incumbents.

Europe: More bull markets

The FTSE 100 continues to advance after respecting its new support level at 7000/7100. Rising troughs on Twiggs Money Flow indicate strong buying pressure. Follow-through above 7350 would signal an advance to 7500*. The long-term target is 8000.

FTSE 100

* Target: 7100 + ( 7100 – 6700 ) = 7500

A weak correction on Dow Jones Euro Stoxx 50 over the last 6 weeks suggests buying pressure, also reflected by rising Twiggs Money Flow. Recovery above 3300 signals a fresh advance with a target of 3500*.

Dow Jones Euro Stoxx 50

* Target: 3300 + ( 3300 – 3100 ) = 3500

Europe: Footsie finds its feet

The FTSE 100 respected its new support level at 7000/7100. Rising Twiggs Money Flow indicates buying pressure. Follow-through above 7350 would signal an advance to 7500* and offer a long-term target of 8000.

FTSE 100

* Target: 7100 + ( 7100 – 6700 ) = 7500

Dow Jones Euro Stoxx 50 is a long way below its 2007 peak at 4500 but has formed a solid base at 3000. Rising Twiggs Money Flow signals long-term buying pressure, while long tails on recent weekly candles indicate shorter term enthusiasm. Recovery above 3300 would signal a fresh advance.

Dow Jones Euro Stoxx 50

Europe: Dax & Footsie strengthen

Both the DAX and FTSE 100 display Twiggs Money Flow troughs above zero, indicating long-term buying pressure.

Germany’s DAX is approaching its 2015 high of 12400. Twiggs Money Flow signals long-term buying pressure but expect resistance between 12000 and 12400.

DAX

The FTSE 100 is retracing to test its new support level at 7000/7100. Rising Twiggs Money Flow indicates buying pressure. Respect of support is likely and would signal an advance to 7500*.

FTSE 100

* Target: 7100 + ( 7100 – 6700 ) = 7500

How to survive the next four years

Donald Trump

We are entering a time of uncertainty.

Donald Trump started his presidency with a continuation of the confrontational approach that he exhibited throughout his campaign, with scant regard to unifying the country and governing from the middle. Instead he has signed off on two controversial oil pipelines that, while they would create jobs, have met fierce opposition and are likely to polarize the nation even further.

Subtlety is not Trump’s strong point. Expect a far more abrasive style than the Obama years.

Trump also signed off on constructing a wall along the border with Mexico. Again, this will create jobs and slow illegal immigration — two of his key campaign promises — while harming relations with the Southern neighbor.

Another key target is the trade deficit. The US has not run a trade surplus since 1975. Expect major revision of current trade agreements like NAFTA, which could further damage relations with Mexico, and a slew of actions against trading partners such as China and Japan who have used their foreign reserves in the past to maintain a trade surplus with the US. Floating exchange rates are meant to balance the flow of imports and exports on current account, minimizing trade surpluses/deficits over time. But this can be subverted by accumulating excessive foreign reserves to suppress appreciation of your home currency. Retaliation to US punitive actions is likely and could harm international trade if not carefully managed.

Apart from wars, Trump and chief strategist Steve Bannon also seem intent on provoking a war with the media, baiting the press in a recent New York Times interview:

Bannon delivered a broadside at the press…. saying, “The media should be embarrassed and humiliated and keep its mouth shut and just listen for a while.” Bannon also said, “I want you to quote me on this. The media here is the opposition party. They don’t understand this country. They still do not understand why Donald Trump is the president of the United States…..”

Trump and Bannon’s strategy may be to provoke retaliation by the media. One-sided reporting would discredit the press as an objective source of criticism of the new presidency.

On top of the Trump turmoil in the US, we have Brexit which threatens to disrupt trade between the UK and European Union. If not managed carefully, this could lead to copycat actions from other EU member states.

Increasingly aggressive steps by China and Russia are another destabilizing factor — with the two nations asserting their global power against weaker neighbors. Iran is another offender, attempting to establish a crescent of influence in the Middle East against fierce opposition by Saudi Arabia, Turkey and their Sunni partners. Also, North Korea is expanding its nuclear arsenal.

We live in dangerous times.

But these may also be times of opportunity. Trump has made some solid appointments to his team who could exert a positive influence on the global outlook. And confrontation may resolve some long-festering sores on both the economic and geo-political fronts.

How are we to know? Where can we get an unbiased view of economic prospects if confrontation is high, uncertainty a given — the new President issuing random tweets in the night as the mood takes him — and a distracted media?

There are two reliable sources of information: prices and earnings. Stock prices reflect market sentiment, the waves of human emotion that dominate short- and medium-term market behavior. And earnings will either confirm or refute market sentiment in the longer term.

As Benjamin Graham wrote:

“In the short term the stock market behaves like a voting machine, but in the long term it acts like a weighing machine”.

In the short-term, stock prices may deviate from true value as future earnings and growth prospects are often unclear. But prices will adjust closer to true value as more information becomes available and views of earnings and prospects narrow over time.

We are bound to experience periods of intense volatility over the next four years as hopes and fears rise and fall. These periods represent both a threat and an opportunity. A threat if you have invested on hopes and expectations rather than on solid performance. And an opportunity if intense volatility causes prices to fall below true value.

It will pay to keep a close watch on technical signals on the major indexes. As well as earnings growth in relation to index performance.

Also, keep a close eye on long-term indicators of market risk such as the Treasury yield curve and corporate bond spreads. These often forewarn of coming reactions and will be reviewed on a regular basis in future newsletters.

Europe on the mend

Bellwether European transport stock Deutsche Post (DHL is a subsidiary) is in a primary up-trend, indicating rising economic activity.

Deutsche Post

Dow Jones Euro Stoxx 50, representing 50 mega-stocks in the Eurozone, broke through 3100 after a lengthy consolidation (or “line” as Dow would have called it). Breakout matches a similar pattern on the DAX and signals a primary advance with a target of 3500*.

Dow Jones Euro Stoxx 50

* Target medium-term: 3100 + ( 3100 – 2700 ) = 3500

The Footsie (FTSE 100) has also been making some headway but is running into resistance at the all-time high of 7100. Declining Twiggs Money Flow, above zero, warns of medium-term selling pressure. Breach of 6700 remains unlikely but would warn of a correction to 6500.

FTSE 100

Footsie resurgence

The Footsie (FTSE 100) respected support at 6700 and a strong weekly candlestick suggests another test of the all-time high at 7100. A Twiggs Money Flow trough above zero would confirm long-term buying pressure. Breach of 6700 is now unlikely but would warn of a correction to 6500.

FTSE 100

The DAX is back

Germany’s DAX broke out of its narrow line (or consolidation) between 10200 and 10800, signaling a primary advance with a target of 11500* and confirming a bull market.

DAX

* Target calculation: 10500 + ( 10500 – 9500 ) = 11500

DAX retreats

Germany’s DAX is retracing to test support at 10200. The DAX has formed a narrow line (or consolidation) between 10200 and 10800 over the last quarter. Declining Twiggs Money Flow is typical during a consolidation and does not have much significance unless it crosses below zero. Breakout will signal future direction, either an advance to 11500* or a test of support at 9000.

DAX

* Target calculation: 10500 + ( 10500 – 9500 ) = 11500

Footsie selling pressure

The Footsie (FTSE 100) is again testing support at 6700. Declining Twiggs Money Flow warns of selling pressure. Breach of 6700 is likely and would warn of a correction to 6500.

FTSE 100

Brexit negotiators identify UK’s trump cards

From Alex Barker:

Some British ministers reckon that Europe will eventually realise there are negative consequences for all sides from a hard, sharp Brexit. One is the competitive threat posed by a UK unbound. Dubbed the “Singapore model”, this is a scenario of British tax and regulatory “dumping” that European capitals fear. Britain is too big, too close and too similar an economy to not worry about being undercut…..

The second is the City of London. This remains Europe’s main financial hub and a hard exit could raise costs for corporate Europe and inflame weaknesses such as Italian banks.

David Davis, Brexit minister, has noted that more EU companies request a financial-services passport to operate in the UK than vice versa….

Source: Brexit negotiators identify UK’s trump cards

DAX in line

Germany’s DAX formed a narrow line (or consolidation) between 10200 and 10800 over the last quarter, in line with its earlier April/May highs. Declining Twiggs Money Flow is typical during a consolidation and does not have much significance unless it crosses below zero. Breakout above 10800 would signal a primary advance with a target of 11500*. Reversal below 10200, however, should not be ruled out before then.

DAX

* Target calculation: 10500 + ( 10500 – 9500 ) = 11500

Footsie dull rally

The Footsie (FTSE 100) found support at 6700 but short candlestick bodies and declining Twiggs Money Flow indicate a dull rally, without much enthusiasm from buyers. Breach of 6700 is likely and would warn of a correction to 6500.

FTSE 100

DAX hesitates

Germany’s DAX is consolidating below 10800 but Twiggs Money Flow still reflects selling pressure. Breakout above 10800 would signal a primary advance with a target of 11500* but another test of 10200 looks equally likely.

DAX

* Target calculation: 10500 + ( 10500 – 9500 ) = 11500