Are the global central banks playing chess or checkers?
January saw an unprecedented amount of central bank activity. By Zero Hedge’s count a total of 14 independent national central banks, including Canada, eased interest rates in the first month of 2015. So the market focus was not on equities per se but on the global macro view that any experienced market watcher would have to admit is cloudy to say the least.
Central banks are the elephants in the global finance circus and their actions have significant consequences to global fund flows and ultimately asset pricing. So to have the absolute number and the actions of so many of these institutions is unprecedented.
However have a look at our model price chart for the S&P 500 and you see an equity market that is patiently waiting for all the fireworks to die down and a hair’s breath under all time highs set in December.
S&P 500 Index with weekly price bars and EBV Lines (colored lines).
As a reminder we aggregate all companies in the S&P 500 Index into one chart on a market capitalized basis (like the S&P 500 Index itself), so we can see where the market – S&P 500 – is trading relative to its EBV lines.
As you can observe the US market, as defined by the S&P 500, is still in the middle of the zone bookmarked by EBV+3 and EBV+4. If the market rallied to EBV+4 (2196) this would represent a gain of some 6.5%. If the market corrected back to EBV+3 (1756) investors would be suffering losses of almost 15%.
For people new to Model Price Theory [MPT] the index value or price can move within an EBV zone with no real consequence. However when a transit occurs – index value or price crosses one of our parallel lines – an EBV line, either positive or negative this gives Model Price users a signal that fundamentals are improving or deteriorating, respectfully.
So what are my observations for the month of January 2015?
The U.S. equity market is waiting. It’s being patient. Central banks the world over are doing stuff…mainly lower interest rates and quantitative easing…and the U.S. market is waiting for the impact or the result of all these actions.
No big deal….
And as far as answering the question of which board game the central banks are playing? I’m not sure, and willing to bet that central bankers have to improvise and modify what they are doing in different time periods as the economic analysis indicates. My point is that US equity markets seem happy to be patient and don’t really care which game their playing. And if the US equity markets are happy so am I.