TODAY’S MARKET WAS A LESSON IN “NOT SUPPOSED TO HAPPEN”
Today a myriad of events took place that plain and simply were not supposed to occur at this juncture of the uptrend. It's similar to when you are standing in the line at the bank and the guy in front of you puts on a ski mask. You know right away that a ski mask inside of a bank is not supposed to happen. There are no slopes nearby and you know that the man isn't there because he forgot his gloves.
Similar to a ski mask inside of a bank, the market can give clues that you are about to get robbed. Today the market gave a host of clues. Here they are:
1. The second leg of this uptrend that kicked off on October 21st was supposed to see a reduction in volatility. Instead we have seen an increase of volatility with the second leg. Today's retracement of a majority of the "We saved Europe" rally was not supposed to happen. Furthermore, an increase in volatility should not be occurring at these levels.
2. The Euro has fully retraced the "We saved Europe" rally. It is the Euro that has been leading both the advances and the declines in the market. The fact that is has fully retraced what happened last week is not a good sign for the bulls in the market. A full retracement of that rally was not supposed to happen.
3. A powerful move up in the long-dated US Treasuries occurred today. Such a powerful move down in long-term rates, at this juncture of the recovery, was not supposed to happen.
The S&P 500, the Euro and US Treasuries are the primary tells. All three of them together pulled a hat trick of not supposed to happen moves today.
If the S&P 500 was down as it was today while the Euro was only down slightly and bonds were more or less unchanged, I would not give the move as much credibility. The fact that all three of these asset classes experienced violent reversals today in unison is worrisome. It tells of yet another shift in the psychology of market participants taking place here.
I am not ready to say that the rally we experienced since October 4th was the devil posing as an angel just yet. I am, however, much more suspicious than I was late last week. My spidey senses are tingling.
Bulls: You need to see the market begin holding by Thursday at the latest. You do not want another 200 point plus down day on the Dow. The Euro needs to hold he 1.38 level. TLT should stay under 117.
Bears: Should the market begin running away to the downside here over the next few days, then the rally was likely a fraud. The harder it runs to the downside, the more chance that it is trying to run away from sellers that are either trapped on the long side or trying to get short. Further weakness in the Euro is a death blow for the bulls. Further weakness in financials will also prove difficult for bulls to overcome. If the S&P 500 breaks 1220, you have regained control of the market completely and fully.
Bottomline: A positive earnings season and an abundance of short sellers led to an October rally for the record books. With those two primary catalysts now gone, the market will have to find new catalysts to drive it forward. Early on, it is already showing signs that it will not be able to sustain given the continued uncertainty that is pouring out of Europe. The bulls need to regain traction here quickly if they want to see the year-end rally continue.
