Will the New Breakout Hold? « Market Montage

Friday was an interesting session in that the S&P 500 broke out to new highs but did not go off to the races as it normally does once a range is broken.  Once the "new high" stop losses of bears were triggered in the first 30 minutes, the markets essentially went sideways the entire rest of the day.  Much as in the first half of January after the Jan 2 spike, stocks had consolidated in a two week range late Jan-early Feb.  The main difference was unlike that prior period the daily volatility was much more intense of late, which is usually a warning sign or at least cautionary.  However, for now, that caution was unwarranted as the break out of this volatile range was to the upside.  

What we can see from the chart below is the S&P 500 continues in an upward channel and until that changes, it has been foolish to bet against the market.   The market is no longer short term overbought having worked off that condition with this two week correction sideways.   With that said as this channel extends ever upward we can see a nice cross reference in the mis 1490s area.  This is the bottom of the channel AND last week's lows.  So a break of that area would be something to note when and if.  If not, we're in store for the 7th straight up week in a row.

Some sentiment extremes (ok, almost all of them) are off the charts – more on that later.  New highs also seem to be slowing versus the last peak and last week we saw more strength out of defensive areas than offensive areas.

The NASDAQ – which has been the laggard during this move – is finally making a move towards the highs of September, which the S&P and Russell2K long ago passed.   Any build on last week's late momentum of Apple from very oversold levels would help.

China is closed this week for their Lunar New Year and I believe Japan is closed most of the week as well – these have been leading markets along with the U.S. while Europe takes a bit of a break of late, as Italy/Spain provide some fireworks (already forgotten).  That said this is the type of mild correction, back to the 20 day moving average, that bulls would want … as long as the ensuing rebound creates a new higher high of course.

On to some of the sentiment/fund flow measures – there are MANY out there and all say the same thing, everyone is on the same side of the boat.  Even the bulls now wish for a 3% pullback to redeploy funds at more friendly prices.  But the market has yet to comply.  Here is one such sentiment/fund flow combo measure via Bank of America:

Also in that post is a major divergence in the economic surprise indicator – a chart that is usually very important to markets.  The market is all about expectations – even if results stink, as long as they beat expectations you usually have a good result in markets.  And vice versa.  Well we are starting to see a vice versa as a ton of good news has been digested into the market.  Economic "surprises" are becoming harder to find – but THUS far the market does not care.

Speaking of, the main economic report this week is January retail sales to be reported Wednesday.  Expectations are LOW due to the payroll tax hike that went into effect Jan 1.   The consensus is for retail sales to increase 0.1%, and to increase 0.2% ex autos.  Most likely any "surprises" out of Europe will be the main driver of econ, along with how the market absorbs what will now most surely be some form of sequester.

One other note – outside of that 2% tax hike, we're seeing a nice gasoline "tax" hike!

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