THOUGHTS ON A SHORT-TERM PULLBACK AND DECIPERING THE MARKETS TRUE CHARACTER
There were a number of factors that were of short-term concern during Friday's trading session:
1. I have pointed to the S&P chart showing the reaction to the intended trajectory point of the market being similar currently to the October time period. The correlation did have us experiencing a higher close on Friday. What the market did instead was put in a fairly significant gap reversal. I have found that when correlation patterns deviate in this manner then the potential for a failure of the pattern is great. Of course, it's not guaranteed to happen. Nevertheless, it is a warning sign that odds are in favor of a breakdown in the correlation and your guard should be up.
2. The behavior in bonds while not being the perfect leading indicator for the equity market is a fairly reliable one. The move back into the ultimate safety asset of long-term US Treasuries on Friday was significant. It caused me to exit my long yields position in TMV. The move seems to be a precursor towards downside volatility in the coming week.
3. Commodities joined along in the reversal, with the CRB Index bouncing off of a significant resistance level on Friday. Weakness in commodities is another indicator I like to look at to confirm market strength or weakness. It is following along here. A short-term negative.
4. This falls under the commodity category but is worthy enough to mention on its own: gold and silver. The metals seem to be in the mood to turn around or at best consolidate sideways for sometime. This also confirms a short-term top for the equities, as the metals have been tagging along with the equity market since the October bottom.
5. The rally in the Euro has been suspect the entire week. On Friday it confirmed the fact that it is, in fact, an imposter. The reversal that took place ahead of another important week of European economic policy tangling is the biggest problem of all for the market here. If the Euro couldn't retake 1.35 on global central bank, coordinated, economic intervention week, what is it waiting for exactly? If it knew the answer I would think it would be front running the solution. The king of the European savior trade is equally as confused to the result of the Euro mess as everybody else it seems.
6. The European indices look like they are ready for a breather. The extent of their respite is entirely dependent on what the Euro does or does not do in the coming week.
At best, the markets are due for a consolidation here, with a potential resumption of the uptrend taking place during the week of the 12th. Keep in mind that the second half of December is seasonally one of the strongest periods of the year. I would be surprised if the market didn't shake the tree a little bit before zooming back up.
One other thing I should mention. I have found that markets have character traits that tend to repeat over windows of time. These character traits, of course, change month after month or year after year. It is like an actor who takes on different movie roles several times a year. The good ones can go from playing the bad guy to the good guy with ease and conviction. The market changes its character, taking on new roles, several times a year as well.
The current character of the market is very last minute, I wanna call it. Those are the best words I can find to describe it really. How many times have we seen the outsized volatility and an expression of the true intention of the market take place during the last hour or even half hour of trading over the past few months? In November, the market looked like it was going to close the month heavily in the negative. Instead during the final few days of the month is almost made it into the green after looking like it was going to one of the worst months of 2011.
The behavior at the end of each month has been very similar to the behavior at the end of each trading day. A sudden rush either up or down that brings a new definition to the word "volatility". I wouldn't at all be surprised if the market condensed its best behavior into a very small time frame again in December. What may look like a mediocre end to the year may end up becoming a bonanza as we close things out. Keep that in mind as the month progresses. It's a last minute market, afterall.
I'll have more in my weekly chart review on Sunday. Have a good one.
