Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Friday was a very volatile but in the end positive turn of events for markets as the much watched 50 day moving average on the S&P 500 was finally breached after multiple rejections. Further the downward channel the index has been in since May 22 has been escaped, and instead of another “doji” day, indexes finished near or at their highs. We also saw a bullish MACD crossover as seen in the lower pane below. This is being followed by yet ANOTHER gap up today, in a series of them since the late June bottom. At least this one has some sense in terms of momentum to it versus all the others. There is a host of congestion in the 1630-1650 area so bulls would like to see that cleared, along with the uptrend line connecting the bottoms of 2013 (in purple). One would expect some resistance at that uptrend line on first attempt. Bears appear lost again but a break of Friday’s lows as a first step and the 1600 level some time down the road brings them back into play.
Along with positive theme, we have leadership out of the small caps – the Russell 2000 not only led the market Friday it has a much cleaner breakout and is already at a year high with the clearance of 1000. Also a MACD bullish cross last week. Unlike the S&P 500 you can clearly see the lack of overhead supply to create congestion… i.e. “blue skys”.
The breakout in bond yields on the 10 year held over that key multi year 2.4% level and in fact sprinted higher Friday. That caused the initial selloff the entire gap up in the morning but the “shock” of these higher yields seems now absorbed in the market. At least at these levels. It is not so much the level but the rate of change that has caused some indigestion in the market. At some higher level these rates will once again cause consternation as this of course impacts borrowing rates, most importantly in the mortgage market.
To that end housing was the one area that had a rough Friday. Of course this is all relative – first there are a ton of cash buyers in the current U.S. market, and second it is not like we are talking about the return of 6%+ mortgages; things have just gone from once in a lifetime low rates to extremely low mortgage rates. It will be interesting to see the Fed’s reaction to this – they seemed none to happy with the initial spike as seen by rolling out nearly 10 members in the week after the FOMC announcement to “correct the market’s assumptions”.
Oil continued its breakout Friday despite the “resolution” in Egypt – this is also usually a risk on signal.
The dollar also has a strong week under the guise the U.S. central bank will be the first to blink as opposed to increasingly dovish banks in Japan and U.K./Europe.
As for sector performance, last week was another rough one for utilities as that sector now has competition in the yield space from U.S. Treasuries. Other groups were mixed but we are seeing nascent breakouts in industrials, financials (esp regional banks), and consumer discretionary. That is a positive mix.
Bernanke speaks Wednesday along with the release of the FOMC minutes, but it sure would be nice to get away from the months of focus on central banks. To that end, earnings season begins this week and hopefully moves some focus away from QE QE QE QE QE QE QE.
The major economic reports last week were a mixed bag but with the technical breakouts traders are looking through that data. This week the economic data is of the secondary importance type.
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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/index.php/the-fund/holdings
