Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Yesterday the initial reaction to the Cyprus situation was knee jerk selling, followed by Pavlovian dip buying. Today the indexes opened up as Cyprus was stuffed back into the closet as an issue but we saw a bit of a reversal in the morning and now a more substantial bout of selling as the Cyprus finance minister is reported to have resigned. In the day and age of algo chasing headlines it is difficult to know what is real and what is not, but whatever the case we do see the S&P 500 touching and slightly below the upward channel it has been in since mid November.
Unlike 2012 when a break of this channel led to some sideways action for 3-4 weeks and then a 10% type of correction in two instances, the two breaks of this channel since November have meant nada mucho. As always the close is the most important thing but we’ll see if this channel holds or not by the end of the day. I am also going to begin showing a new line underneath connecting the lows of the 3 selling climaxes (light blue) – mid November, late December, and mid February. This is a far stronger line in the sand if you will as it marked all the ultimate bottoms.
At this time this break (if it happens) is more like the late December situation (fiscal cliff) in terms of sector complexion – you are still seeing relative strength in places like transports, housing, industrials, consumer discretionary. That was due to a news event. Meanwhile the February event was far more tricky as not only did you have a channel break you saw a rotation into safety sectors such as utilities, healthcare, and consumer staples. But it didn’t matter in the end as the market just resumed a new leg up.
Here is the chart from last year showing the two major channels and why when they break they “usually” matter. The break in July 2012 was nasty in the fact it appeared the trend was over but then Mario Draghi said he would do “whatever it takes” and there was an epic rally overnight. Compare this to the chart above which now has had not one but two channel breaks – but both have not mattered. Of course history need not repeat exactly but essentially central bankers words or actions have come at very interesting times,and we are currently in a permanent QE situation to boot.
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
