Break in Status Quo

Submitted by Mark Hanna

Courtesy of MarketMontage. View original post here.

Two down weeks in a row for the S&P 500  – the worst “streak” since November 2012.   Obviously the near term world changed a week ago Wednesday as the “outside day” on the chart (which coincided with Bernanke testimony) actually meant something rather than being completely dismissed within 2-3 sessions as we have come to expect in QE markets.   The horrid damage in the utilities, REITs, and consumer staples since has helped “uncrowd” those very crowded “yield” trades.   While I believe QE “tapering” is much ado about nothing right now, the market is taking it a lot more serious as shown by these movements.

Late Friday the key 1636 level was broken (lows of the previous 2 weeks), and with that an avalanche of technical sell orders hit markets in the closing minutes; literally a 6 point drop in minutes.   This took the index to the trendline support that has carried the market, with the exception of a false breakdown in April, since November.  Obviously one of these times the market is going to break support and stay broken rather than “V shaping” straight back up, but until it happens it will remain more of a Loch Ness monster belief that things can act somewhat normal again.

Two weeks ago I remarked about how abnormal things had become on the monthly chart [May 15, 2013:  SPX Reaching Historical Extremes on Weekly/Monthly Charts]  – this is what happens when you don’t get even a modest correction for months on end.  The S&P 500 was so far above the upper bollinger band there was no similar comparison in the past 15 years.  I didn’t look back farther since that included the bubble of 1999 but I am sure the data set would show the same for prior years as well.  All this selling of late has only just taken the S&P 500 back to touch the upper bollinger band, so still overbought on a historical basis but no longer in a historical sense.

Keep in mind a 5% correction would only take this index back to the primary breakout level of 1600ish (1597).   That is where the 50 day moving average waits; there are very few years we don’t see a 5% correction or at least have had one in the first 4 months of the year – this has been one.    A 10% correction?  That would be down there at the 1500 level – where the 200 day moving average is slowly headed.  Of course 10% would strike most in the current market as “outlandish” or “impossible because Ben has our back”.

On the positive side, the ‘better’ sectors continue to lead – last week financials were the star, and industrials and technology help up relatively well.  The damage was concentrated in the defensive sectors.

Yields continue to stick over 2% on the 10 year – something all eyes are on.

So as we ask during each of these pullbacks “is this one going to be the one or is this just Lucy about to pull the football back from Charlie Brown once again?”.  Obviously we never know until after the fact.

This week is the one each month chock heavy with economic data (both ISMs, and employment) – last Friday ironically was a day with a huge beat in Chicago PMI yet the market puked.  So maybe it’s no longer “good news = good, and bad news = better”?  Or maybe it was just an extremely overbought market that needed excuses to sell – i.e. tapering, Japan, etc.   Overnight we have poor but better than usual European PMIs and mixed PMIs out of China.

As usual there are a host of divergences forming, and a lot of important action in currencies and bonds – but this QE market simply has not cared for more than a week or two during previous ones.  It shall be interesting to see if this is just a repeat.

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