Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Yesterday morning I wrote the market needed a “flush” and we definitely saw one. The last of the holdout sectors such as housing, REITs, and even some of the most defensive names were raided. That said, a close on the low on large volume should lead to a bad open and it looked like that was setting up to happen 4-5 hours ago but overnight futures have rallied some 15 points (from 1293 to 1308). It’s been a very “curious” week in the overnight session as “someone” has been buying each and every night to support this market. But I’ll leave black helicopter thoughts to myself. Europe is bouncing a bit and some traders are saying it’s due to hopes for “the global intervention” (that most assuredly will come if things continue to degrade) as there are some G8 meetings this weekend. I don’t remember the G8 doing one darn thing during 2008-2009 but I assume the hope is central bankers unite etc. That can come at any time and those caught short will get blasted as they always do when all the King’s Horses (and Men) arrive to save the day. We’ve seen this pattern repeatedly now for 4+ years.
As for the market yesterday’s losses have taken the indexes to the second major pullback area in the 1280-1320 range. (The first obvious pullback range was 1340). If you are a Fibonacci fan you can see below the S&P 500 has not even yet pulled back to the 38.2% retracement which would be near 1290. That shows you how massive the run was from October til the end of March.
[click to enlarge]
I can’t show it on stockcharts.com charts but the 23.6% retracement level was 1340. The rising 200 day moving average is also 1280ish so the most bullish outcome here would be a convergence of that 200 day and the 38.2% retracement to form an ultimate bottom. Less positive would be a 50% pullback to the 1240s, and then if we have to deal with lower levels than that, we can circle back at that time.
In the very near term this indicator of % of S&P 500 stocks below the 50 day moving average is reaching extremes. Any reading below 20% is usually a flag saying we are late in the game and one of those infamous furious dead cat bounces should surface relatively soon. Of course you do have outlier events such as last August when we saw readings in the single digits – also due to European fears. (May 2010 was the flash crash if you recall)
So we are in one of those spots where the intermediate term is bearish but in the very near term a “rip your face off” rally has the potential to surface at any moment. Hence an uneasy spot for bulls AND bears at this moment in the short term. Unfortunately, a lot of damage has been done technically to individual equities and as we saw yesterday random spots of extreme oversold (gold miners, silver, a few other commodities) are what rallied – but those are 2-4 day type of bounce candidates, nothing lasting.
Last, if you are an uber bull who believes the Federal Reserve can literally run the markets as a puppet master, the scenario I outlined in April (one of two really), could be playing out. [Apr 1: Is it Really as Simple as Don’t Fight the Fed?]
So as Operation Twist ends in June, and talk of sterlized bond buying to replace it happens, will back half of 2012 just be “that easy”? And does April-May… the only period the market may doubt a new easing program is coming down the pike, represent the only time this year the market “would be allowed” to correct?
Disclosure Notice
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
