Beginning of a New “V” Rally or Oversold Bounce?

Submitted by Mark Hanna

Courtesy of MarketMontage. View original post here.

Well this is always the question when we drop a few percent isn’t it?  Aside from the correction of late May which was of the 7% variety all other corrections in 2013 have been similar to the magnitude of this correction – about 2.5-3.5% from peak.  While there is some technical damage done, especially in the S&P 500, QE markets tend to act differently and a V shaped rally at any moment needs to be respected even if you think this is part of a larger topping process and perhaps a “right shoulder” of a “head and shoulders” top is soon forming.  There have been quite a few distribution days the past few weeks so the market is in somewhat of a prove it mode.  That said “the market” is showing different action in the NASDAQ v S&P 500, with Apple’s recent resurgence helping the former.

With the S&P 500 the 50 day moving average was broken last week, and slightly recaptured in the closing 15 minutes Friday.

Meanwhile the NASDAQ did not even come close to testing that level and is already back over the 20 day.

Obviously seeing the MACD cross back over bullish in the week(s) ahead would be a positive.

Sector performance last week favored materials which have been out of style most of the year due to the China slowdown worries.  With some better economic data the past few weeks, some believe China’s economy is bottoming and hence the rotation back into these type of names.

We can see this in the metals and mining ETF …

Also interesting is the move in the precious metals of late – they have been very bad performers in 2013 but the charts are starting to look constructive now.  One wonders if this is a commentary on “no tapering” soon for quantitative easing or with silver at least, part of the China economic resurgence idea.

Yields on 10 year treasuries spike to 2.9%+ late last week but came in Friday on bad housing data and with housing being one of the linchpin’s of the Fed’s “wealth effect” it sure seems difficult to see any form of aggressive tapering.  In a way the bond market has already done the work for the Fed by pushing these rates up so much the past 6 months.

While we’ve had a correction the past few weeks, volume has been anemic.  This is not surprising considering what month it is.  On the economic landscape, there are a lot of secondary type reports this week such as consumer sentiment and regional activity surveys such as Chicago PMI.  Next week we have the holiday and following that we have a hot and heavy economic schedule.

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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