Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
The market put in another solid week, with Tuesday (FOMC + JPMorgan dividend) dominating the action. The small break of support (20 day) on the S&P 500 and NASDAQ two Tuesdays ago, which seemed to be the first chance of any sort of correction this year, was quickly put to rest with a rumor of sterlized quantitative easing floated in the WSJ the very next morning. And since then there has been no looking back. At this point talking of ‘corrections’ and even ‘pullbacks’ makes one look foolish – which usually is a good sign there is one around the corner. But as readers know, we no longer work in normal markets but ones flooded with central banking “not so invisible” hands.
In the near term we have some clear levels with the break out over last year’s highs of 1380 on the S&P 500; resistance becomes support. So any “pullbacks” contained by that level (+/- a handful of points) would be normal. If anything we’re in a super abnormal point where the S&P 500 and NASDAQ have been over their upper Bollinger band the entire back half of last week – amazing strength and rarified air.
This week I pulled out a much longer chart to show (a) the 1380 level I spoke about above and (b) how we are almost perfectly mimicking the “QE2” aka “David Tepper” rally from August 2010 thru February 2011 since mid December. (see purple box #1) There was one modest pullback back in November 2010, about 3.5 months into that rally – after which the market ‘went vertical’ immediately after on the way to months more of advances. Perhaps that tiny pullback (3%ish) we saw the week before last was the replica; it was again followed by a ‘vertical’ movement. If history repeats – then there is a lot more pain for bears ahead.
Now what differs was the market rally faltered in anticipation of the end of easing in 2011. So as the Fed pulled in its reigns (for a few months) the market crumpled that summer, which of course led to more easing later in the year. That differs starkly from the framework for 2012 in which Bernanke looks to put the foot on the accelerator by following Operation Twist with (apparently) “sterlized QE” this summer. So what that means for the market is interesting – as the parallels of the latter 2010-early 2011 period and “now” will end there. If you believe that central bankers are more powerful than markets, than your framework has to be uber bullish I suppose.
The other big news of last week was the move in bonds – I found it a bit overblown as shown by the chart below, which takes a longer term view of 10 year yields as an example. We are simply at the top end of a range we’ve been stuck in for many months – as you can see we are not even near any of the levels seen during more of a ‘crisis’ period last year. That said those who have been hiding in bonds, did take some pain last year – when you lose 4-6% in principal that is already 2-3 years worth of interest payments gone down the tube. If indeed there is some serious reversal to come in the future, a lot of people hiding in the ‘safety’ of U.S. bonds are going to be shocked by the loss of principal. But for now, it’s too early to speak of such things.
Economic reports last week were mostly in line, but for the most part not the market moving type of reports – the announcement by JPMorgan trumped anything the government said last week. This week is similarly ‘quiet’ as most of the data will surround housing: housing starts Tuesday, existing home sales Wednesday, and new home sales Friday. As always, existing home sales are more important for the housing market as that is 90% of the market, but new home sales are more important for potential economic activity as that adds incremental growth.
We have a few earning reports that people will be paying attention to Fedex, Oracle, Nike et al – and the big news overnight was Apple will announce what it is doing with its huge cash hoard at 9 AM. The stock is of course up in premarket – as noted, until Apple begins to correct its huge move, it is difficult to make any bear case as the name has become dominant in the NASDAQ and has a material weighting in the S&P 500. It of course also dominates sentiment. As for Europe, it’s been “LTRO’d” away. China’s market did experience some weakness last week as hopes for easing on controls on real estate were rejected – but the market currently could care less about such things.
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
