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Fundamental Stability

01/16/2014

In the wake of Monday’s sell-off, I posted a change to my “Global Risk Asset Correction Watch List,” based on the technical vulnerability of the S&P 500® Index (SPX). There are currently three positive conditions, one negative condition, and one to be determined condition on the list—none of which should not be interpreted as telegraphing an impending correction.

I also suggested watching the performance of the Japanese yen and Nikkei in the days to follow to determine if any other changes would be made to the watch list. Neither disappointed in terms of providing clarity. If there were a candidate for chart of the day, it clearly would be the Nikkei rallying 2.5% yesterday.

You could also make a strong argument for the German DAX (Figure1), up 2% Wednesday. Or, how about the Spanish 10-year yield (Figure 2) which fell to its lowest closing level since 2009 at 3.76%? Domestically, the technical sector surged 1.2%, as Apple announced a strategic alliance with China Mobile. Lastly, the financial sector rose 1.2%, led by Bank of America’s 94% EPS positive surprise ($0.52 versus the consensus estimate of $0.26).

Collectively, yesterday’s message is simple. Strong fundamentals and accelerating growth overwhelmed any apparent SPX technical vulnerability that I identified Monday evening. For early 2014, this aligns exactly with my favored strategy “search for growth.” Accelerating growth is evident in Europe and Japan, while U.S corporations continue to achieve earnings growth and execute on delivering organic and strategic growth.

There is no better time for fundamental stability to emerge than in the wake of Monday’s technical sell-off. That is exactly what has happened, beginning with last night’s Asia opening and through the U.S. close yesterday.

Fundamental stability trumped the apparent technical vulnerability….

Global Risk Asset Correction Watch List

  • SPX technical breakdown (NOT PRESENT)
  • Volatility elevation (NOT PRESENT)
  • Emerging market asset weakness (PRESENT)
  • U.S. earnings and profit margin contraction (TBD)
  • Japan, China, or European turmoil (NOT PRESENT)

Figure 1 German DAX Index

Source: Bloomberg

Figure 2 Spanish 10-Year Yield

Source: Bloomberg

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