View from the Hill 17 November 2014

by J. Clinton Hill

Deflation is casting a larger shadow over the U.S. equity bull market, and I believe that the Fed may be forced to defer raising rates if the U.S. Dollar continues its upward trajectory while weaker G-8 members (Japan, China, and Europe) maintain highly accommodating policies. As the last man standing, the USA is winning by default, but is this sustainable? Meanwhile, some market pundits regard the drop in oil prices as a long term positive influence for the economy.

Perhaps, but I am inclined to disagree as the trifecta of a stronger dollar, oil supply glut and falling demand for energy are actually the consequences of a global deflationary feedback loop. Agriculture and other export prices are declining and our booming energy sector could very well become a pocket of employment weakness. Continually lower energy prices do not benefit the global economy or its geopolitical stability (i.e. Russia or ISIS). Something has to give to restore equilibrium in the capital markets before things get ugly. Global economic growth or a truce between Shale Producers and OPEC?

Market Summary: November 10th – 14th, 2014

Market Conditions

Despite the economic backdrop mentioned above, price trends for major U.S. equity indexes remain bullish. However, this week’s trading volume was @ 40% to 50% less than average weekly volume for the SP-500 (SPY), Nasdaq 100 (QQQ) and Russell 2k (IWM). Market momentum is robustly positive, but if our benchmark SPY is to be regarded as a reliable indicator for the broader markets, it is showing signs of deceleration, besides being overbought. Regardless of any of the above, the trend is our most respected friend and deserving of reverence by both traders and investors.

Bullish Events

Consumer

Economic Growth