Throwing out the economic backdrop and potential weakness in earnings/guidance the market may see in July, today looks very similar to Jan 3, 2012. While the market technically began a big move mid December 2011, the only things working the last two weeks of December were utilities and "dividend stuff" such as MLPs. All "risk on" type sectors stunk; charts in almost all sectors were awful. Then as if a switch turned on, on Jan 3, 2012 we came into a massive gap up and all the risk on sectors were en vogue – industrials, commodities (most), tech, etc. This was due to some combination of better than expected economic news (recall U.S. employment figures spiked briefly in the 150K+ area and ISMs improved) and central bank intervention (LTRO) after worrying about a European led recession in latter 2011.
So what do we face today? After almost all sectors have been technically demolished we have a (1) massive gap up as if (2) a switch has been turned on led by (3) industrials, commodities, tech etc. While the economic news has not turned we do have the intervention (fiscal/political) with more coming next week – ECB rate cuts and UK QE all assumed. US QE is also assumed if the next labor report (or two) are weak.
Would it make much sense in the backdrop of slowing earnings growth? Probably not – but the market ripped for months in early 2012 for reasons that later proved poor. (Yes, all of that move was eventually given back) Next week is holiday trading and there will be little liquidity so "they" can take this market wherever they want. But the week after that we'll begin earnings season and have the weekly employment and ISM data out of the way. Today will definitely be a "Follow Through Day" as well.
So can things change on a dime like that? We saw it happen at the turn of the year. Yesterday at this time the market was about to break through support and potentially head below 1300. One massive short squeeze post 2:30 PM and one major gap up and "all is well in the world" again. Easy as that? Good question.
Last week's (yes it was ONLY last week although it seems ages ago with this headline driven market) high was S&P 1363 which was the 61.8% retrace of the entire selloff. The 100 day moving average also happens to be right next to that level at 1359. Clearing those levels soon, along with the FTD day will definitely be something to draw in a lot of the technical trading types. Perhaps the best tell would be if next week we received bad economic news on either/or ISMs/employment and the market still rallied. If so then it would look a lot like January 2012 all over again.
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/holdings/blog