Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
While the corrections since 2009 have come in all shapes and sizes, the rallies have almost all taken almost an identical shape… that of the now infamous “V shape” bounce. Once the Fed induced market begins to go, it just goes and does not act like it used to, backing and filling, going sideways for long periods of times, etc. So during each correction one must constantly be thinking of when the 180 degree turn happens because that is how they happen nowadays.
Looking at the S&P 500 chart without any squiggly lines we can see the 50 day moving average has generally contained (more or less) the corrections. If that was the end of the correction Thursday, this was the biggest of the rally but only because the market was the most extended – especially on weekly and monthly time frames. It was still only a 5%ish type of drop from peak to valley, and less than that on a closing price basis. I’ve thrown a secondary indicator at the bottom of the chart called MACD – as you can see there have been 4 bullish crossovers (black line crossing above red) of this indicator during the rally, with 3 of the 4 (blue arrows) foreshadowing the bulk of the upward move. The 4th, in mid April, was a false positive – marked in red. (recall there were a lot of other issues in the market at that time such as defensive sectors leading for 2 months, the lack of small cap participation etc) Most of the time during this rally when MACD has been in a bearish position (black line below red) the market has flopped around, which is where we are at now on that indicator. Of course that can be changed very quickly with a 25-35 pt rally. So for now we have seen the index bounce off its 50 day and coming up to touch its 20 day; familiar territory for the year.
In terms of sector movements, the two groups that did well last week were consumer staples and consumer discretionary (mislabeled as ‘cyclicals’). Generally these are not two sectors that move together. Weakness in technology and materials.
Last week we had the 3 major economic reports of the month (the two ISMs and employment). While manufacturing seems to have taken a turn for the worse the other 2 reports are the same old “meh” data. Aside from those few reports the only thing that seems to matter is the daily volleyball about when QE is going to be reduced and the action in Japan.
On that matter we saw extreme volatility in the currency markets late last week – the yen popped as much as 3% intraday Thursday – that would be equivalent of a very staid stock moving 20-25% in hours. It caused the flush Thursday which eventually marked a short term (or potentially longer) bottom. The Nikkei also fell some 20% so the media types now have their so called “bear market” which is a plain stupid label for a market in such a strong uptrend. This index rallied almost 5% overnight.
So from here bulls want to see volatility reduce and go back to the type of action in the late April, early May period which was a drip drop daily move up. The yen falling and Nikkei resuming its rally would also be their friends. Bears have little room to work with here as the end of day push in the S&P 500 late Friday has it testing the downtrend line in blue. You can see from the S&P 500 chart above when those downtrend lines from the minor corrections are broken it usually leads to bulls being happy.
There are some economic reports this week, next, and the next – but Fed meetings and minutes seem to be the whole concern of this market as everything is about central banks, here and abroad. The rest is just details.
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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
