Marketview: Positive Perception of a Mixed Week

• Posted by DynamicHedge
• on December 8th, 2012

 A choppy trading week reflecting mixed signals from the market.  The big news at the beginning of the week was manufacturing activity contracted in November after two months of expansion.  Then, we had Nonfarm payrolls at the end of the week catch almost everyone off guard with a big surprise to the upside — most expected the report to be a mulligan due to Sandy-related weakness.  Former market leader $AAPL has gone completely AWOL and judging by market chatter this week traders are not stepping away from the name.  Overall, it was very unusual trading activity for a Nonfarm Payrolls week.

Our directional indicator MAMOx is now indicating a bullish skew after turning bearish in mid-October.  This means that risk assets are objectively in favor and probabilities point to higher prices for the broad market.  There is still a meaningful (just less) probability that we head lower.  If we fail to make new highs and start breaking down I will have no problem admitting I was wrong and jump into the bear camp for the foreseeable future.  If we continue higher and break above recent highs we will be soon testing all-time highs.  This will break the sideways markets of the last 12-years and potentially lead to much higher prices in the long-term.  Don’t be surprised by either scenario.

I realize that pointing out the higher probability bullish scenario and the concept of new all-time highs surely fire up the bears, but consider this: in early 2008 most market participants thought the credit crisis would be nothing more than a blip on the way to higher prices (shoutout to Ben Stein).  Sure, I know you saw it coming all the way, but the vast majority were caught flat footed.  Four years later the majority of people are still waiting for the next shoe to drop.  No one wants to get fooled a second time, so they’re sitting this one out.  Do you think the public is right this time?  Think of it another way, do you think the investing public’s prudence will be rewarded?

Industrials, financials, and energy led the market in what was essentially a flat week.  Materials, technology, and consumer discretionary lagged.  Financials are on the verge of breaking out of a long-term range.  $XLF above $16.50 would be very healthy for the market overall.  The poster child for garbage financial stocks, $BAC, has already broken out and should be a leader going forward.

I anticipate volatility will continue in the coming weeks.  As long as it doesn’t go off the charts (consistent daily $SPX ranges above 23 points) I will feel the market will continue to auction higher.  Keep a close eye on breadth.

Winners: $C, $BAC, $JPM, $CSCO, $INTC, $HPQ, $DELL, $SBUX

Losers: $FCX, $AAPL, $GOOG, $LOW, $HD, $GILD, $BAX

 

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