US equities medium-long term outlook

So I've just been cycling through some ideas here and there and looking through some of my daily charts. One thing that keeps popping out at me more and more about this US equity rally is the hidden divergence I'm seeing with rsi and macd momentum indicators. Now I'm not one to usually to follow these for my basic analysis, but the last leg down caused some concern in this rally.

Let's look at some charts I am talking about, I look at ETFs primarily since it's what I use day to day part from FX.

Long Equities S&P ETF and Dow Trust ETF

We can see the trends have obviously been upwards, but volumes since march lows have been decreasing. At the start of this is when many investors jumped in believing it was near the bottom. As a result momentum has been fading and fading with lower peaks of the RSI (MACD looks almost identical).
Now as a rule, hidden divergence should indicate a sell-off coming up in the medium to long-term outlook. While I keep seeing this, I make the connection with the option-arm and alt-a loan predicted issues in the US that are supposed to start showing up later this year as rates start resetting. Also, the rally has not really been supported by many fundamentals this year. But those are just side notes.





Now we take a look into Short equity ETFs: DXD which is ultra Dow and QID ultrashort QQQ.

In both of these, we see a mirror image of the top two charts with hidden upward divergence with higher lows of the RSI and lower lows on the prices indicating the same thing as before.





{EDIT} I forgot to add anything about a lot of cash being on the sidelines still, and the RSI divergence being rather shallow so theres some food for thought {EDIT}

I know here at FF we usually discuss lower TF opportunities but having an outlook on longer term trends may help here and there.

What do you guys think?

Jonas

I just received this in the morning, think it's rather relevant to my outlook up top. It's more of an economic analysis that I keep up with from time to time, which I think can be helpful. One thing to keep in mind from my point of view is that markets are usually irrational and they can stay that way much longer than an investor can stay solvent. To put into context: be careful trading economic views and analysis in the markets since often they don't reflect what "should" be happening according to shallow fundamental analysis.



This is a quote from an email by RGE/Roubini Global Economics Research:


"Last week, Nouriel Roubini released an analysis exclusively for RGE clients. While maintaining his core projection of protracted U-shaped growth in the United States, Roubini argued that the risks of a double-dip recession in the United States are rising. The following content is excerpted from that analysis, the full version of which is still available just for clients on Roubini.com.

V, U and W

A slew of poor economic data over the past two weeks suggests that the U.S. economy is headed for a U-shaped recovery—at best—in 2010. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic levels of growth which RGE forecast for H1. The U.S. faces continued challenges in H2—particularly as historic levels of fiscal stimulus fade—and appears far too close to the tipping point of a double-dip recession.

This is not the conventional wisdom. Heated debate continues to rage in the United States on whether the economic recovery will be V-shaped (with a rapid return to robust growth above potential), U-shaped (slow anemic, sub-par, below trend growth for at least the next two years) or W-shaped (a double-dip recession). The V camp includes distinguished research groups and individuals such as Ed Hyman’s ISI, Larry Meyer’s Macroeconomic Advisors, the research group of JP Morgan, Michael Mussa and others. The U camp includes—among others—Roubini Global Economics, Goldman Sachs’ U.S. economic research group, PIMCO and Ken Rogoff. As early as August 2009, I worried in a Financial Times op-ed about the risk of a double-dip recession even if our RGE benchmark scenario characterizes the risk of a W as still a low probability event (20% probability) as opposed to a 60% probability for a U-shaped recovery. Others concerned about the double-dip risk include also David Rosenberg, Gary Shilling and John Makin.

Ed Hyman and I debated whether the recovery would be U or V-shaped on a February 22 conference call attended by over 2,200 listeners. Since that call, a slew of new U.S. macro data have come out. They have been almost uniformly poor, if not outright awful. Consumer confidence, based on the Michigan survey, has tanked. On the real estate front, new home sales are collapsing again, existing home sales are also falling sharply, and construction activity (both residential and commercial) is sharply down. Durable goods orders are down, initial claims for unemployment benefits remain stubbornly high (way above the 400K mark). Real disposable income for Q4 has been revised downward while real disposable income (before transfers) for January was negative again. The manufacturing ISM index—while still expanding being above 50—has now fallen a couple of notches and its production and new orders index levels are falling, too; and global PMIs suggest a loss of momentum in the global economic recovery. Real inventories look unchanged in Q1 relative to Q4; auto sales were at best mediocre; core CPI was falling and core PCE was close to 0%, suggesting anemic demand and economic weakness. Q4 GDP growth was revised upward to 5.9% but most of it (3.9%) was due to inventories; final sales grew at a 1.9% rate while consumption grew at a dismal 1.7% (down from 2.8% in Q3). Q3 growth has been revised from an initial 3.5% to 2.8% to 2.2%, with final sales growing only 1.7%. So, at the time of maximum policy stimulus (H2 of 2009), final sales were growing only at a pathetic 1.8% average rate.

The eurozone (EZ) debt crisis, which RGE discusses in depth in a major new paper, predisposes Europe to a rising double-dip risk, due to the wave of fiscal austerity sweeping the periphery of the EZ. Even if the EZ doesn’t enter a double dip, the growth of domestic demand there will be as or more constrained than in the United States. This, in turn, will be a drag on the potential for U.S. export growth. The U.S. dollar rally on risk aversion reflects this risk. The U.S. dollar is settling back down and the threat of a debt crisis is headed off by a stronger Greek fiscal adjustment and potential adjustment package. But fiscal spending cuts, confidence hits and the looming threat of either rising unemployment or falling wages in the public sector—on top of private sector retrenchment—will remain. A similar retrenchment may well lie ahead in the United Kingdom, given rising fiscal sustainability concerns and the threat of a sterling crisis. Europe then will have great difficulty being a source of demand for U.S. exports, and may even provide impetus to faltering global demand growth, contributing to the threat of a wider double dip across high-income countries.
"