Marketview: Crosscurrents

The dominant market event this week was the FOMC announcement.  After a huge rally in anticipation of Bernanke and Co making it rain on the market, the announcement of the expansion of operation twist was regarded as a disappointment.  Nowhere was the disappointment more acutely felt than commodities and commodity related stocks.  If you find yourself at a loss for where the markets are headed next, you’re not alone.  There are major fundamental and technical crosscurrents at play.

The last time the economy was materially weakening, back in 2011, the Fed stepped in to provide massive liquidity.  QE2 allowed the market to dodge a bullet and led to a multi-month rally.  The economy is facing similar softening, but this time without the massive liquidity. Make no mistake, the Fed is still in the game of buying assets, just not at the pace that most would like.  Simply put, it’s a big unknown whether the market can rally hard without aggressive stimulus.

Technically speaking, the world didn’t turn to dust following the Greek elections and there are a lot of bearish positions left to unwind.  On the other hand, the market feels perched exactly where it was before the “holy shit the world is ending” summer corrections of 2010 and 2011.  Market participants seem conditioned to accept the long hot summer as a time for volatility and uncertainty.  From a quantitative perspective our MAMO indicator is still skewing  negative but the more sensitive version, MAMOX (which includes high yield credit and some other inputs), has turned bullish.  The MAMOX is sometimes early but should never be ignored.

I’ve been watching the Shanghai Composite ($SSEC) closely as well and will look for further tells.  At the moment it seems to be signalling that we are in for at least another test lower.  These types of relationships are important to monitor for when they are working and when they’re decoupling.  I’ll be watching for both alternatives next week.

Winners: $EBAY, $BMY, $MRK, $NSC, $FDX, $MSFT, $LMT, $RTN

Losers: $FCX, $SLB, $HAL, $WMB, $APC, $ACN, $MCD, $CAT

The market is slowing for the summer and there are plenty of mixed signals.  The crosscurrents of data means that uncertainty remains high and volatility should continue, especially in the short-term.  The long-term trend remains up (which people seem to hate for some reason).  If you’re feeling bullish, don’t chase.  Wait until the MAMO or some other long-term indicator to turn higher.  Why?  Because if the market starts to run it will run for a long time, there’s no need to rush in.  There are some real catalysts for the volatility/downside next week which include the European Council meeting on Thursday-Friday.  I’ll be paying close attention to how the market trades around that event.






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