Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Last week saw the return of the ‘student body left’ trading environment that has marked much of the past few years; that is stock picking becomes less important and trying to guess the move of the stampede much more so. Just 2 weeks ago today, Ben Bernanke gave a speech in which the market interpreted as an open door for more accommodation – the market gapped up and surged all day. Then last Tuesday post 2 PM the market sank on Fed minutes which showed a more divided Fed. Of course the minutes were from a meeting which fell at a time BEFORE Bernanke’s speech but sense often takes a back seat in the market. Wednesday saw the harshest selling of the year, in terms of ‘everything’ being hit – even the market generals. Thursday was a return to process seen much of February and March 2012 – NASDAQ leading the charge while the Russell 2000 lagged substantially. Then as market’s were closed Friday, a disappointing jobs number wrecked havoc on futures which carry over to today.
While the Russell 2000, a much broader index than the DJIA, NASDAQ (which has a 30% weighting in 10 stocks), or S&P500 has gone nowhere since early February most eyes focus on the better known indexes. Up until three weeks ago those have continued to grind up, after a headfake down in early March. However, in the past few weeks these have also seen more of a back and forth motion building a sideways range. These indexes will now fall out of their range this morning.
Russell 2000 – no progress in 2 months
S&P 500 – grinding up until the past few weeks
Of course the question is, what will be the nature and duration of this much needed pullback? One never knows but there are important markers to keep an eye on; let’s focus on the S&P 500. First key level of support which seems to be in play today is the 50 day moving average of 1370. For Fibonacci types this just so happens to be a 23.6% retracement of the December to April move (not shown on the chart above). If the market were to stop on a dime there and “V shape” back up that would show extraordinary strength.
Below this we have the lows from that early March “head fake” down, at S&P 1340. This just so happens to be the 38.2% Fibonacci retracement (shown in purple above) of the December to April move. That would be a healthy but constructive pullback. We can also see aside from being the March “spike down” low, a lot of work was done in this area in February as the S&P 500 ran sideways, with 1340ish as a bottom for two full weeks. If that level breaks, things get more dicey but that’s a discussion to be had when/if it happens. The Russell 2000, if it keeps in line with the other indexes also has a very obvious low of 785 reached during the March “head fake” down – that should coincide with any move down in the S&P 500 to this 1340 level.
Economically the major reports of the month were out last week, and this week we move on to some inflation data which at this point have little bearing on things in my opinion unless we saw dramatic moves to the up or downside – which no one foresees near term. Bernanke speaks tonight, although the topic “Fostering Financial Stability” should have little to do with “how to pump the market with more steroids”. Wednesday brings the Fed Beige Book and perhaps most important this week a speech by Fed VP Janet Yellen, who makes Bernanke look like a hawk. Her Wednesday evening speech is titled “The Economic Outlook and Monetary Policy” and has “I want to ease” all over it – so something to be very aware of. PPI and CPI are released Thursday and Friday respectively, along with a consumer sentiment figure Friday and another Bernanke speech in the afternoon “Reflections of the Crisis and the Policy Response”. As I often repeat, it is very sad we have to focus so much on what Fed officials say or the “Fed whisperers” in the press are given to leak to Wall Street but this is the modern day market, so at times like this these comments often overwhelm economic data.
April is earnings season and this week we begin (slowly) the deluge. The next few weeks after this are when the flood happens, and as noted on this site often the data last quarter was not inspiring. The majority of S&P 500 earnings were due to Apple and AIG, and profit margins were squeezed. The market was in a full frenzy mode, apparently with the LTRO liquidity, Europe’s can “kicked” and ‘improving economic data’ – so the earnings data seemed to matter much less than usual but I don’t think that will be case with prices substantially higher, and the economic outlook less gleeful. Spain (and perhaps Italian) bond yields should also be on the radar, as yields have begun to trend back up over the past month.
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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
