Archive for May, 2013

KBW Bank Index Breaks Above Key Resistance

Posted in Keefe Bruyette & Woods U.S. Bank Index (BKX) on May 29th, 2013 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

Despite overbought conditions on long-term monthly charts, the Keefe, Bruyette & Woods U.S. Bank Index (BKX) broke solidly above key trend line resistance at 57.60 and appears to be in position to extend a lot higher.

No doubt, hints from Fed Chairman Ben Bernanke that the Fed could pare back on its monthly treasury and MBS purchases (which now total $85B monthly) in coming sessions (if economic conditions warrant it) caused the treasury yield curve to steepen with treasury 10-year notes closing Friday’s session above the 2% level.

The economic conditions required to cause such a paring back of Fed purchases would clearly have to be reasonably good for FMOC to consider it. Such a premise combined with a steeper yield curve would clearly be welcomed news for banks and bank stock holders alike since in theory, greater lending margins would likely increase bottom line profits.

Moreover, a steeper yield curve would also encourage banks to make more loans which, in turn, would likely lead to an increase in domestic GDP, employment and economic activity in general. That being said, the ironic twist to this rosy economic outlook is that it could cause investors to reduce equity purchases for fear of a limited quantitative easing (QE) participation going forward.

While this irony could result in a period of investor retrenchment, it is interesting to note that the Dow Jones Industrial Average and the Dow Jones Transportation Index are both approaching long-term trend line resistance levels at 15,840 and 6,590 respectively with the Dow Jones Utility Index already having pulled back from a test of its key resistance at 537.

Although this scenario does fall into the “sell on good news” category over the short-to-intermediate horizon, it does remain positive for both the economy and investors alike longer-term. In addition, it also suggests that bank stocks should begin to “outperform” as a market sector in coming months.


U.S. Dollar Index Extends Higher With Big Test In View

Posted in U.S. Dollar Index (DXY) on May 22nd, 2013 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

A set of better-than-expected Q1 earnings reports, a marginally improving jobs picture, falling demand for raw materials globally and an increase in central bank interest rate cuts have helped the U.S. Dollar Index (DXY) resume its upward path.

From a technical point-of–view, the DXY is approaching a test of key trend line resistance at the 86 level on long term charts. In the absence of overbought conditions at the moment, the greenback could be in position to “breakout” to the upside and carry much higher.

Although it is a bit premature to speculate whether a trend line “break” will actually occur, it is interesting to note that since early 2003, the U.S. dollar index has arguably been tracing out a broad, bullish “reverse Head & Shoulders pattern. That pattern targets an eventual move up to the 105 area. Coincidentally, key long-term trend line resistance, which currently sits near 102, rises over time. As a result, an eventual test of the 105 area would not be out-of-line.

A growing U.S. economy, no doubt, will likely lure foreign funds into U.S. investments over the short-to-intermediate term. But a prospective move of this magnitude on the dollar index could have drawbacks later on. To start with, a move toward 102-105 would imply that inflation fears going forward would likely be tempered, with the possibility of deflation becoming a modest “risk”.  Further, domestically produced goods and services could face increasing price competition from global businesses which, in turn, could crimp margins and eventually earnings growth going forward.

Nevertheless, the prospect of economic and earnings growth in the U.S. could become enhanced by a further move toward energy self-sufficiency. If so, reduced energy costs could give U.S. companies the edge they need to keep a competitive advantage for years.