Market Update: A look at interest rates during QE’s and is the correction over?

In times of uncertainty and increased volatility, I find it prudent to take a look at the bigger picture. Most of the time I find that we can eliminate a lot of the outside noise and distractions that get perpetuated by the media, and come up with a clearer, rational plan of attack when we simply look at what has happened in the past and compare it to what the current environment is.
In the chart above (weekly S+P 500) I have highlighted the last 3 corrections along with this most current one. On June 2012 I created this post that challenged readers to look at the big picture and look for value as opposed to being hypnotized by the headline news. The next week the market bottomed and proceeded to move some 40% higher over the next 12 months. Although I do not have the same conviction on the buy side at these price levels 12 months later, I do believe there is still value to be found and some more upside to be discovered before a correction of 20% or more commences.
So we see in 2012 we had 2 corrections of roughly 9% and 11% lasting 9 weeks in length. This year we had a 7.5% correction that lasted 5 weeks and so far we have a 4% correction lasting 3 weeks. So we could have another 2-3 weeks or more of potential downside, but as of now we can see this is not anything that we haven’t already seen.
Now here is a look at the Dow Jones Industrial Average during the same time span. Two correction of 8-9% spanning 5-6 weeks and this year we had a 6% correction lasting 5 weeks. So far we have a 5% decline in 3 weeks.
This week the Dow has hit some strong short term support which could provide a solid bounce across the board of major averages.
Any further weakness below this week’s low would signal to me that the Dow would likely be headed back to test it’s 2007 bull market high around the 14,198 area. This would be a healthy correction with confluence to match.

I believe that drop in the Dow (which has underperformed the S+P) would coincide with the 1597 level in the S+P 500. I believe some strong support emerges here. Resistance now comes in at the 1675 level and 1685 level going forward. This week we hit some short term support at 1642 which we pointed out in last week’s review post.

TLT, or the very popular long term treasury etf, came into strong support this week defined as the weekly unfilled gap from July 2011. There is some strong support also in the $98 level, I think the next big short term move will be higher.

Taking a look at the 10 year treasury interest rates once again because it seems to be a hot topic of discussion right now. I have highlighted how interest rates have moved during each of the Federal Reserves Quantitative Easing programs. QE 1+2 produced a 1.41-1.55 basis point rise in yields.

So this week we have hit the “zone” in which matches the size of the rises in interest rates in terms of basis points. It is likely the next short term move is to the downside, which inversely would be good for bonds. However since I do not believe QE 3 will be completely finished until sometime next year, I think it is very likely we make our way to the next upside target around 3.37% before all is said and done.

It is worth noting that although we have just now match the size of the previous moves higher in terms of basis points, in terms of percentage moves this current move higher has been larger, basically doubling off the all time lows.

Taking a look at the advance – decline line we see a little improvement to end the week, but remain relatively weak overall.

Here’s a look at sector performance since during this current correction. It doesn’t matter which way you look at it, Utilities continue to be the worst underperformers while interest rates are rising.

The economic calendar for this upcoming week, to end the month of August, remains relatively light. Tuesday we have consumer confidence and Thursday we have a preliminary GDP q/q announcement. Saturday China comes out with their latest Manufacturing PMI reading.

In conclusion, there is no way we can tell if or when this correction will be over with absolute certainty.  Personally I believe we have some more downside remaining over the next few weeks. Once we broke back down below 1700 and failed to get back above we had to assume this was the beginning of a correction. I have pointed out a strong support level for both the Dow and S+P 500 that I believe will hold going forward. I fully expect the S+P 500 to trade over 1750 in the coming months and the Dow to hit our long term upside target around 16,600 over the next 6 months or so.

But really the purpose of this post was to give readers a look at the big picture. Hopefully it will help give a little better perspective and plan of attack going forward.


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