Test 1-2-3 was the echo heard around the market last week as it toys below the cluster of “R” in the 1150’s. Hey, didn’t we just do the same routine for a week below SPX1130?. So, what’s the difference this time around ? Likely, just fatigue for some sectors that outperformed with some rotation going on, last time it was more of the market just catching it’s breath.
In the middle of September, the same rhetoric you are hearing in blogland this weekend was present in respect to high beta momo names (AAPL, PCLN NFLX BIDU etc). …At that time, we noted.. ..“..They are more likely being accumulated on slight dips for broader market highs to come. As discussed earlier in the week about high beta action and steels as a toppy` possibility sign is gaining noise as the week concluded. We still dont think this is the case..". So, it wasn't a top as the market went on to hit SPX 1157 with most associated names running to new highs as well.
Also at that time a lot of attention was on the sentiment readings being overly optimistic/bullish to which was noted….."Just like overbought technical RSI readings can stay overbought for longer than expected without market cratering, these readings should prove to do the same now for the short term. So, this bearish scenario didnt play out either as these Sentiment gauges are the same today as 2 weeks ago and you don't here a whisper about it now. As far as some trading education, we can all use these 2 factors for reading the market in the future when up against negative... 'it's time for a reversal talk`... sentiment!. What does it means to the market now?. We are probably in a ‘fatigue’ state for the market with high beta leading the way after nearly kissing the Oct 07 trendline Thursday morning. While the broad market has kept steady since with another try at 1150 on Friday, high beta names were diverging since SPX1157 to friday's close…(BIDU ~6% off highs, AAPL ~3%, NFLX ~13%, PCLN ~7% ). The `top sign` possibility noted on Thursday has hit these high beta stocks, but its most likely nothing more than 'profit taking' after big gains in September with rotation into the underperforming September sector in financials as we head into earnings the past 2 days.
September 7th/8th, we highlighted focus will turn away from the TSY and onto the Euro-USD. "..Most recently, we’ve concentrated on the 10yr TSY/$TNX for market direction, now the focus turns to the Euro". The short term major support was 1.268-1.27/ SPX was at 1105. The ECB followed up with a buying program of peripheral’s debt the next day….“Once this ‘comforting’ act was done, you knew the Euro was not going to slide further today and the US markets would be able to stabilize…” Soon the market was at 1130 levels / Euro over 1.30 and the FOMC ‘accommodation’ statement hit…“End result was the Euro exploding through resistance with USD under pressure”. US Macro data this week should re-inforce a weaker USD/ higher Euro ahead.
The point of some back filling history of September here is that despite the precious metals taking off, the concern here has been that many commodity linked stocks/ groups were not participating in this ramp off the Euro and decline of USD. But, late last week, we had some developments that it’s probably time to become ‘bullish' and shortly look to get long some commodity-linked stocks. A dip on a bouncing USD would be the ideal. We had the solars getting attention as part of the energy trade, Crude getting above the recent range and finally CLF and a few others in this group showing life Friday, despite the energy trade working. The strength in China PMI confirmed the HSBC PMI and the underlying stocks may finally get on the weak USD bandwagon as expectation of any meaningful USD rebound diminish with QE2 on it’s way raising inflation expectations, thus demand for commods’. As pointed out earlier this month the focus has turned to inflation data, once again the market shrugged off the data (September ISM), which saw a sharp decline in factory orders and overall was quite weak in all components and the market still hung in despite evidence off more slowing ahead.
As pointed out the possible shift in sentiment due to Macro data would cause a sway from double dip speak as September rolled in....."If data continues to improve into weeks close (retail..NFP#)..watch out Bears!. The flat tape today makes people skeptical of the move, this is besides the overall daily skepticism that the market can’t hold onto anything as profit takers appear. These negative sentiments today may just have positive implications this time for the market and thus more upside from here. Market needs a couple days above SPX1065 for this to be 'Bull's home-court advantage..". The market will again look elsewhere in October for direction. Keep in mind, the past 5 months have all been down ~5-8%, up ~5-8+ % months. Hopefully this back and forth streak ends, just as 'September' being a historically negative month did.
So, despite this ‘toppy’ feeling due to the runners of Q3 action late in the week, the thought is we are entering a rotation more than anything while the runners will find footing on their own. A rotation should provide enough stimuli for the market to break the Oct '07 trendline eventually. As far as earnings season, the expectations have been lowered after all the pre-announcements in Tech, (which is probably priced in now), which may lead to some nice upside surprise plays.