TRADESTRONG MANAGEMENT

Sunday, October 9, 2011

Good News Bulls

11/07/2011

$VIX

ESZ 60 Min

ESZ 135 Min

ES continued to trade within it’s 4 day up-channel, which had lifted off on Turnaround Tuesday, with a 45 point rally in 45 minutes. Although the market dramatically sold off just after the New York lunch hour today, the market held the lower trend-line of the channel and a confluence of important levels (50EMA - 60 min. and the weekly pivot) @1145.00 (ESZ). Nevertheless the market did close lower, leaving a bear hook reversal on the daily chart; certainly a negative development for the bulls after having received positive news this morning from the BLS.

Declining issues led advancing issues on both the NYSE and the NASDAQ by 4 to 1 and new lows led new highs 51 to 21 on the 2 exchanges. Relatively low volume and a lack of leadership has been characteristic of this week’s nascent rally, and large specs accordingly seized the opportunity to get slightly shorter. The closely watched $VIX closed steady, but held it’s major up-trend line, and closed above it’s 50EMA , while the NQZ traded above it’s 50EMA, but closed below it, as did the FDAX.

Time is running out for the bulls to mount a serious offensive in the form of a follow-through-day, as the market has not demonstrated strong leadership from any of it’s major indices, and the pool of weak shorts, yet to pay up, is quickly drying up. The past week’s short covering rally was due in part, to the fact that all the bad news concerning Europe had been fully priced into the market. However, it now feels that all the good news has been fully discounted by the market, and all that is left is the actual collapse of the banking system.

Nevertheless, if the market were to rally, the next area of resistance is ~1180.00 -1184.00 and if the market were able to breach that level, it could melt up to 1220.00, however such a scenario seems unrealistic. The governments and central banks in Europe continue to pour money into the financial system in order to forestall the European Banking crisis, which no doubt, fuels inflationary expectations, which includes equity prices. This reaction probably contributed to last week’s global equity rally, but will certainly not be able to sustain any kind of a meaningful rally. Re-emerging negative headlines out of Europe, is more likely to occur, and a failure from these levels would have very bearish implications. Near term targets are 1130.00, 1115.00, 1100.00, intermediate term target of 1050.00 basis the SPX, and longer term targets of 980, and eventually, below the March 2009 low of 666.

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January Rally In “Effect” But Not Firing On All Cylinders

The market was able to take advantage of annual New Year optimism and break out to the upside. For the week the DJIA gained 1.2%, the NASDAQ rose 2.7%, and the S&P 500 tacked on 1.6%, thanks largely to big gains on the first trading day of the year, and the perceived seasonality of the “January Effect.”

Equity-only put-call ratios remain on buy signals. Market breadth has been positive, but not strong, and the volatility indices ($VIX and $VXO) have been in bullish downtrends for some time, as those trends persist.

The markets began the new year where they left off with somewhat better domestic economic news, tempered by S&P's threat to downgrade the sovereign ratings of leading euro zone nations, especially France. Europe’s problems continue to weigh heavily on domestic markets and have curtailed greater risk appetite in our market. There were more reminders of weakness in Italy and Spain, as yields on the 10-year debt of both nations remained elevated and credit spreads widened with German debt.

Investor sentiment remains high. According to Bespoke, ”With a strong finish to 2011 and now a strong start to 2012, individual investors are starting to turn bullish again. According to the weekly sentiment survey from the American Association of Individual Investors (AAII), bullish sentiment is now at 48.88%, which is the highest level since early February. Bearish sentiment dropped to 17.16% which is the lowest level since December 2010.” While not at disturbingly high bullish levels or extraordinarily low bearish levels, sentiment does seem to be frothy.

It is important to note there were also rumors that the White House was planning a large-scale mortgage refinance plan, which was later denied. These rumors of a massive mortgage refinancing fiscal stimulus fueled the surge in the ES (intra-day) yesterday and the decline after the close. This morning, a beat on both the payrolls number and household survey of the Employment Situation facilitated a quick rise to 1282.25, followed by a quick failure and a subsequent drop to 1268.00. Notably, this leaves two failed rally attempts and a double-top with the major interim high from October 27, 2011. Long candlestick tails (wicks) on big news is a contrarian signal, and the bulls' failure to push through and close above this level may foster a short term correction.

Of course, the biggest bearish divergences and the cause for the greatest concerns for the health of the current rally come from Europe. The euro hit a 16 month low against the dollar (EUR/USD), the lowest close since 09/10/2010 and most certainly is creating a drag on the U.S. markets. European credit spreads continue to widen, and the FESX continues to make lower highs and has been unable to trade above it’s 200 DEMA, since failing from from that level on 10/27/2011.