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June 21, 2014 – Weekend Market Comment

June 21, 2014 – U.S. stocks rose on Friday, driving the Dow and the S&P 500 to close at record highs as the shares of 330 companies hit 52-week highs on the New York Stock Exchange. The S&P 500 scored its third record closing high in a row while the Dow surpassed its previous record close on June 10. The blue-chip index hit an all-time intraday high at 16,978.02, coming close to the 17,000 mark. For the week, the three major U.S. stock indexes rose 1 percent as investors brushed off geopolitical concerns about Iraq and focused on the Federal Reserve's comments indicating that it will keep interest rates low for a long period of time.

Canada's main stock index was little changed on Friday as a decline in shares of gold miners was offset by strength in the energy sector, which extended a solid run since the start of the year. Energy shares received a boost from the continuing conflict in Iraq, which fueled worries about oil supply in the region and helped push up the price of U.S. crude oil. The energy group has had the biggest influence on the market this year, gaining more than 23 percent. The Toronto Stock Exchange's S&P/TSX composite index is up about 11 percent so far in 2014. It hit an all-time closing high on Thursday and ended the week higher.

Because the benchmark S&P 500 has gained for six consecutive days, supporting a cautious view that a near-term correction may be inevitable. In fact the charts are just a begging for it lets see why:

Let start with this gem, it shows for the last few days what stocks are performing better or worse than the S & P 500.

Oh dear it looks like nothing good is going on here. The top leaders are materials and Energy. Why is that bad? Well it goes like this, the big money used to jump from equities to bonds, depending on what was doing well, if business was making a killing they would buy industrial companies and high tech firms, if that stunk they would park in safe government bonds and clip coupons until things were better. However there days bonds don't give much return so the new place to go when you are sure that trouble is coming is "STUFF". This stuff is the commodities like oil, gold, copper and so on. Another place you can hide is utilities, no matter how bad things go, people still need heat in their homes and power for the TV set and the fridge full of snacks. Well those three bars to the right that are doing well are utilities, materials and energy.

Another messy problem is there are are signs of inflation creeping in, read these links:
Fast food
Consumer prices
Car Prices

The problem goes like this, low interest rates stimulate the economy (go figure) but they can't stay low in an inflationary environment. The governments in the western world want to avoid two problems, 1) raising interest rates effectively increases the cost of carrying a deficit, a problem that can only be solved by raising taxes.  2) without carefully balancing the M4 money supply, taxes, inflation and growth -- the economy could fall in to the dreaded state of stagflation.

Of course if we are going to start another commodity super cycle we know who will benefit. Australia, Brazil and Canada. Of course this week the Canadian markets are up and so is the Northern peso, the Canadian dollar.

Of course the concerns should be in the charts, but in this case we are seeing the problem early.

The VIX looks very bullish

Yowsers the Primary Sell seldom goes this high

The NYSE % of stocks above the 50 day moving average looks very overbought.

The green arrow graph looks out of steam.

What Works Now
Well if Brazil is good and Utilities are good CIG is doing well

I still love Canadian banks like Bank of Nova Scotia finds innovative ways to build value. Other Canadain Banks take risks in over served US markets while BNS finds great new niches. For example Bank of Nova Scotia agreed to pay US$280 million for retailer Cencosud SA’s credit-card and consumer-loan operations in Chile to become the Latin American country’s third-largest card operator.  Scotiabank will buy 51 per cent of the financial-services unit and take over the entire loan portfolio, transferring an additional US$1.2 billion to Cencosud, the companies said in separate filings to Chile’s securities regulator.

Heck I even love Spanish banks -- I hope you followed me in to Santander recommended here May 24.

Interesting Reads
China has run out of ways to fake its bad results and the inept corrupt officials are starting to admit things are awful there. Read this great bit from Quartz.

China’s wobbly housing market isn’t the only thing dragging down growth—not by a long shot

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