Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
The mini breakdown seen a few weeks ago was the second headfake of this rally from mid November; the first being the late December fiscal cliff drama. There seemed to be a confluence of secondary indicators supporting a meaningful correction – not only had the S&P 500 fallen out of its major trend, but had reached the logical conclusion of the inverse head and shoulders formation that had started in mid November – recall the distance from the head to the neckline is doubled to create a target; in this case it called for mid 1510s to mid 1520s (this is the vertical dotted blue lines below). Further, safety sectors such as consumer staples, healthcare, and utilities had taken over the baton for a 10 day period, while a host of secondary indicators such as broad weakness in the commodity sector (oil, copper, agriculture), a faltering of new highs, and quite a few others flashed caution. Last, there were multiple distribution days (high volume selling) clustered over that period.
However, the market upended the bears once more, and Tuesday’s surge up took this index back into its channel and created a new mini inverse head and shoulders formation, with a new target of 1565. Not far off from the all time highs area. Definitely a very interesting week in light of all the warnings signs that had been forming, but we are operating in a new environment of risk taking fully supported by global central banks, so it seems to have changed some things.
To that end I highlight Japan. The yen had spent February trying to bottom at 3 year lows from May 2010. Last week it broke that very important support, and started a new leg down. That of course meant everything priced in yen, namely stocks by definition goes up. And we can see the Nikkei continued its spectacular run from the time the then candidate for PM Abe announced he was going full monty on monetary and fiscal easing if elected. With a new Bank of Japan head now installed, and expectations of American like “open ended QE infinity” in Japan announced at the next meeting, we continue the global race to devalue.
In this environment one would think gold would be acting better – it acts poorly, and that copper and oil would be rolling with the risk on trade. For some reason they are not. Maybe they are just so directly tied to China nowadays, but copper is especially strange considering the “rebound” in U.S. housing and purported re-acceleration in China. Agricultural products are also in the dumps. But for now it does not matter, equities march up with or without these commodities supporting it.
Last we have U.S. bonds, which much like the yen broke through some key support last week – see the popular ETF TLT for example. To that end we said in the previous week “someone was lying” as bonds were holding up as the equity market rallied, now it appears bonds were lying which is again unusual as it is generally thought that if there is a divergence between the two markets, you go with the more intellectually based bond market. But not this time.
Friday there was a decent jobs report, with the normal labor force participation warts. Somehow this number continues to fall; even if it held to where it was 12 months earlier the unemployment rate would be mid 8%s, not to mention if you go back 3-4 years (when we’re talking 11%’s). But bigger picture if you have a federal government supporting the labor class (which they are to extraordinary levels) while corporations take more of the national GDP slice of pie, you have the “best of both worlds” in a way. Corporations take profits that once were shared by labor, and to make up that gulf massive deficit spending by the federal government comes in. How many years/decades this can go on is a good question but for the near term those are the trendlines.
Outside of some inflation reports, the major report of the week will be Wednesday’s retail sales report which calls for a 0.5% increase; 0.5% ex-autos as well. To show you how fervent this market is, there was a leaked memo out of Walmart citing the worst start to February sales in many years. How is the stock doing now, two weeks after the fact? Presented without comment!
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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
