Another head shaking week in the books. Just as we saw on the last day of June, right when U.S. markets seemed poised to fall off a cliff a European surprise created a massive morning gap up "and go". In fact there were two such events back to back, Thursday and Friday as a combination of panicked shorts and underinvested longs scrambled to get out of the way of implied bazookas headed their way. The S&P 500 had fallen out of the bottom end of its two month channel with a triple combo of serious losses Mon-Wed, and while some oversold bounce was expected in a neutral setting, we are in a headline driven market and technicals certainly don't mean quite as much when a phrase from a central banker can send markets up 2% in a blink of an eye.
Not only did we see the S&P 500 recapture the channel but the furious two day rally has pushed the index to July highs, and back to the 'upper third' of its ascending channel represented by the two orange boundaries below. Certainly not what a technician would expected as of Wednesday night but in a world of intervention things change on a dime. Also remaining is a series of higher highs and higher lows (by a few hairs). The violence of the moves both up and down remain, very similar to second half 2011. Not seen in the chart above are the 2 gaps created Thursday and Friday morning, and one wonders what "disappointment" down the pike will cause those to fill. There also remains the not so small matter of the June 5th/June 6th gap but as we are much farther away from that now than Wednesday it will be a discussion for another time.
While the bond market and U.S. dollar retreated during this phase of "risk on" they both remain in bullish chart patterns. Perhaps the market can rally with a strong dollar (if the Europeans take steps to weaken their currency even more aggressively than the U.S. in this global "race to the bottom"), but the consistent bid in the bond market flies in the face of such equity performance. But we are in a Greenspan 'conundrum' where equity markets persist even as bond markets argue.
Speaking to equities, there was some move to 'pro-cyclical' areas in knee jerk reaction – these groups almost always get some hot money when risk is "on" but areas such as transports and semiconductors should be precursor to any sustained move based on reality rather than money flooding. To that end, semiconductors seem to be in a bit better shape than transports, the latter of which just last Wednesday looked horrid, and even after this vicious move up are in a "meh" condition.
The week is heavy with central banker talk with the Fed deciding "something" Wednesday, and the ECB deciding "something" Thursday. Impossible to figure out what is going to happen or how the market will react to "somethings", but the market certainly has heightened expectations. It seems a bit easier to figure out that the ECB will act as we are hearing leaks of things as LTRO #3, a combination of rescue fund purchase of primary sovereign debt combined with ECB purchases of secondary debt, and/or another rate cut. The big bazooka would be a banking license for the European rescue fund, which would then allow it to be a front man for the ECB to vacuum up tons of bad debt throughout the region i.e. TARP by another name. As for the Fed it seems difficult to see a full QE with markets jumping like this but if Bernanke wants to act in concert with Draghi now rather than laying the groundwork at Jackson Hole for a September reveal this would be the time.
Of course we have economic data coming in this week hot and heavy as well, with the Friday jobs report at the center of the action. Both ISM reports will be released as well, so there should be a massive amount of intraday and premarket moves as headlines grab attention. The higher the market goes the more prone for one of these data points to disappoint. As an observer it will be absolutely fascinating to see how "juiced" they can make these markets in the weeks ahead in the face of a very different earnings backdrop versus 2009, 2010, or 2011.
Tuesday – Chicago PMI: consensus decrease to 52.5 from 52.9
Tuesday overnight – Chinese and European PMIs
Wednesday – ADP employment: consensus decrease to 120K from 176K
Wednesday – ISM Manufacturing: consensus increase to 50.1 from last month's shocking contraction of 49.7
Friday – Employment: consensus 100K up from last month's 80K, 8.2% rate flat with previous month
Friday – ISM Non Manufacturing: consensus decrease to 52.0 from last month's 52.1
At this point if you feel like a pretzel, you are not the only one.
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