Today definitely marked a distribution day, as all the major indexes closed lower on increased and above average volume. In fact, as you can see in this chart, the Cubes gapped up at the open and proceeded to sell off for the rest of the day, closing near the low. As mentioned in yesterday’s posting, inflation fears and inflation (and the resulting rising interest rates) are the major financial issues. Get used to hearing it, inflation, inflation, inflation. It’s showing up everywhere you look except the backassward government inflation indexes, one of which is due out tomorrow. In any event, back to the chart, it’s always possible that today could have just been a shakeout in the handle area of various bases forming handles or a check-back to the breakout point on some recent breakouts, for example the Cubes, which you see down near the recent gap and the 50-day moving average. Still, this marks the third week in a row of some influence or another: holding breath before employment report, a holiday-shortened week, the start of the earnings period, and now options expiration week. In my view, it’s best to keep the powder dry right now. PS: Coming up on poor seasonals: (“sell in May and go away”).
The cubes appear to be forming a handle about 5% off their 52-week high. This coming on low volume and after a prior advance that ended on January 26th (see left side of chart). This could resolve itself either way, and because this week is an options expiration week short options players have an interest in holding things tight until this month’s options are wiped out after Friday’s close. The market sure is holding its breath today volume wise, that’s for sure. I was kind of expecting some volume and a relief rally after the holiday week/weekend and no major event (Iraq, Japanese hostages, bombings, etc.). A catalyst will likely come in the form of earnings news sparking a rally, earnings news failing to spark a rally (which would be more telling), or inflation news trashing the whole china shop (CPI Wednesday). Of course catalysts can always pop out of nowhere, too!
So did we kick off a new leg up or was it just a snapback and short-covering rally that developed from the oversold conditions of a few weeks ago? Some small-cap and sector indexes have already broken to new 52-week highs and the major indexes are getting pretty close, but the volume seems a little light, but that is at least partially explained by the fact that last week was a holiday-type week and the week before everyone was holding their breath ahead of the employment report. This will be the first week for volume (and the market itself) to show itself. It’s also the week that the earnings floodgates open. An interesting question is raised by the mixed reactions we got to last week’s retail sales reports, which printed big-time numbers, but prompted selling on the news (i.e., selling on good news can be a warning sign). We will see. Also will be looking to see if divergences develop if/when we test new highs on the major indexes or if we get any distribution days. And watching YHOO to see what happens after is massive breakaway gap from it’s 3-month base.
Things may come to those who wait, but only the things left by those who hustle.
In the words of Bill Gross, manager of the largest bond funds in America:
“Paul Simon may have been able to articulate 50 ways to leave your lover, but Fed officials have many fewer ways to let the air out of asset valuation bubbles — notably in interest rate risk and credit risk — created by purposeful reflationary policies. And, unlike the case with the stock market bubble at the end of the 1990s, the Fed can’t just hope for an immaculate correction. This is the biggest challenge presently confronting the Fed: the exit strategy from a 1% Fed funds rate, when it is no longer prudent.”
Below is my two cents on this. There’s a longer article to write, but not today!
Blowout earnings report to kick off earnings season with a big bang. Throw in boost to guidence and you’ve got an after-hours launch out of its base (see Option “A” from yesterday’s post).