Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Last Thursday after a sharp 3 day rally one could wonder if this was just another “V shaped” bounce in the beginning stages. While that is still (always) on the table, another slew of Fed speakers Friday failed to drive markets up even further. The jawboning since a week ago has been intense, probably the most orchestrated symphony I can remember as they try to “walk back” the market’s hawkish view of Bernanke’s comments. However almost all the gains last week came in the premarket, not during the ‘jawboning’ part of the day. In fact there were almost no net gains Tue-Thur during the normal session hours – it was 3 gap ups…. some call it “gap and nap” action.
Technically the S&P 500 remains in this descending channel; a false breakout happened in the day ahead and of Bernanke’s press conference but by 3 PM that Wednesday a slew of selling had hit. Then a gap down Thursday and selling through the following Monday followed by the quick upside reversal. Now it is a bit of a no man’s land as the index is below the 50 day moving average and the now downward sloping 20 day moving average. (the 20 has crossed below the 50 for those who belief that has significance) We also do not yet have a bullish crossover on the daily MACD – and as noted last week the weekly MACD has turned bearish for the first time this year. Of course the bulls always have the threat of the V shaped move up which is the new rule, not the exception – since 2009. Also this is now a 6+ week correction – by far the longest in a year. This is a holiday week with a half day Wednesday and Thursday off and generally those have a positive skew.
10 year Treasury yields remain above the key 2.4% level. If they stay there that will be something new, and in theory should depress P/E multiples slightly as part of the bull’s argument is the lower the yield on bonds (stocks competition) the higher the P/E. We shall see… but keep in mind much of this move since November has been multiple expansion not earnings growth.
In terms of sector strength, most of the SPDR sector ETFs are in a “challenged” position. One sub-sector, regional banks, is acting very healthy as rising yields combined with a low cost of capital thanks to the Fed leads to fatter profit margins for old fashioned banking.
Sector strength last week was interesting as consumer discretionary (mislabeled as ‘cyclicals’ by stockcharts.com), utilities and financials led. Utilities were very oversold and as 10 year yields came off the 2.6%+ level back to the sub 2.5% area a reversion to mean trade came through. Remember higher bond yields are competition for dividend stocks. Commodities remain a difficult area.
As an aside if you have not been paying attention to China, their index has now given up ALL of the gains from 2009.
On the economic front we have a busy schedule despite the holiday – today at 10 AM is the ISM Manufacturing; recall last month was a drop below the expansion line of 50 to 49. Expectations are for a rebound to 50.5. Wednesday we have ISM Non Manufacturing, which posted a solid 53.7 last month (expectations 54.5) along with ADP employment in the premarket (expectations 165K). Friday is the monthly jobs data with expectations of 161,000 jobs added + 7.5% unemployment rate. With Bernanke’s comments that QE could be tapered near a 7.0% unemployment rate this number will get more focus I presume.
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/index.php/the-fund/holdings
