Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
The bipolar, macro driven market that has dominated most of the past 4 years continues. Last week was on pace to be the worst in 9 weeks as Thursday came to a close, only to turn 180 degrees Friday morning in yet another big gap up open that left no one an opportunity to get in. Once 10 AM passed the S&P 500 essentially traded in a 5 point range the rest of the day. Looking back, a lot of commentators pointed to the jobs report for the move but that is inaccurate. The indexes were screaming higher premarket as European indexes raced ahead; the key reason being short term Spanish bonds seeing a large drop off in yield. Market players were initially disappointed in Draghi’s lack of action Thursday, by Friday it appears they saw the light – the ECB will move together with the Euro rescue fund (once launched) and purchase sovereign debt in a 1-2 punch: the rescue fund in the primary market and the ECB in the secondary market. And with that all our problems are solved. Or at least enough to kick the can for the 78th time. Of course we will also get QE sooner rather than later which the market believes is somehow an end all, be all.
As I said Friday you have to tip your hat at the market – right now the belief that central banks can force prices up supersedes everything that has been thrown at it. A large part of the gains since June have come in very few days, and much of it has come in the overnight session. So anyone trying to avoid the many days of losses is left on the outside looking in during these gap ups. Hence the only way to participate in the pleasure is to be around for the pain since you don’t know when these headlines will be released. While this is not dissimilar to 2010 and 2011, the difference is traders now believe there to be a put underneath everything and hence the selling is far more constrained (removing May) than the previous 2 years. The only fear is the fear of being left behind – even as global economic conditions are far worse than the previous 2 years. It is an interesting dynamic.
Looking at the S&P 500 we have an ascending channel since early June. The bottom of this ascending channel was broken briefly pre-Draghi comments but just as Lucy has taken the ball away from Charlie Brown each time it looks like a new breakout has begun, so has she swiped it from the bears. That breakdown in the making was crushed by a few phrases from Draghi. As you see we are now in the upper third of this ascending channel with upside to low 1400s.
There are now a multitude of gaps in the U.S. indexes, of which I highlighted 3 in orange above. The first two are a lot nearer to current prices so what will cause the mood to change to fill them will be interesting to find out. But this being one moody market, it doesn’t seem like it will take too long to find out. (The blue arrow is the Euro Summit gap which filled within 7 sessions of forming)
Meanwhile the Russell 2000 is in a different world. It also approaches resistance soon but has been making a series of lower highs. Thus far less participation than the DJIA and S&P 500 would lead you to believe. This has been a theme throughout the year as small caps have lagged continuously. But the divergence of late is particularly striking. If anything you’d think the relationship would be the complete opposite as all we hear is “invest in U.S. centric companies as they will avoid the pain overseas” but the charts show different. It makes me wonder if institutional money is simply flipping into the names that are the most liquid so as to try to partake in these violent moves up and hence a relatively narrow group of names doing most of the work.
Watching the S&P 500 and the euro tick for tick throughout the day is fascinating – they essentially move together. And with the euro being the main counterpart of the dollar index, weakness in the greenback has led to rallies and vice versa.
As mentioned Friday there has been the beginning of a move into more pro cyclical groups – either the global economy is set to improve markedly “4-6 months from now” (if you believe in market efficiency). Or traders simply are going into groups that would normally run in an economic expansion, and if central bank intervention is the only reason – so be it. It’s a Twilight Zone sort of market where many are scratching their head with old relationships thrown out the window.
Economic news is extremely light this week with very little to move markets.
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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
