Marketview: Unfinished Business

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A week dominated by central bank plans, smart-sounding people trying to pronounce “Pyongyang”, and a nasty Nonfarm Payroll report. The Bank of Japan answered any lingering questions on their commitment to reflation by expanding QE and fast-tracking all planned 2014 bond purchases. North Korea turned up the rhetoric volume to ridiculous by promising to strike key US targets. The markets do not seem to be reacting off this news. Possibly because virtually no one in military intelligence believes North Korea has the capability to deliver a nuclear payload to a foreign target. Possibly because conflict can be good for markets. Finally, the nonfarm payrolls were a massive disappointment by any measure. From the bulls, we hear that markets may be emboldened by the fact that continuation rather than tapering of QE is more certain; from the bears, we hear this report will trigger something bigger.

The S&P backed off right around the previous 2007 intraday high. I consider new all-time high prints in the S&P 500 to be unfinished business for now. The Nonfarm Payroll report was the perfect excuse to sell an overbought market. Intermarket relationships have been percolating and waiting for a catalyst for the last couple weeks. “Chicken Equity” aka High Yield credit has been a great tell for risk appetite.  $HYG and $JNK failed to make a new high or made only nominal highs as the broader equity market pushed past the last band of resistance.  In the same time, utilities, healthcare, and consumer staples have outperformed the market while financials, industrials, and consumer discretionary have underperformed. These are relationships that have been underway for several weeks, not just run-of-the-mill rotation. Any of these factors taken alone do not mean much, but together they can tip the scales of psychology from “hold for more gains” to “take some money off the table”.

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The main event next week is the FOMC minutes on Wednesday. This should give some clue as to whether the Fed has our managed market under control and intends to keep the foot firmly pressed on the gas in light of a weaker jobs report.

Overall, we are still in a long-term bull market environment. In the medium-term, the market is signalling that it is no longer a long only market as we venture back to two-way trading. It is very normal to anticipate the market to engage in some price discovery to the downside after such a long run. Only when participants become thoroughly confused will the market get back to the unfinished business of blue sky trading.

Winners: $UNH, $ABT, $AMGN, $MRK, $EMR, $EXC, $MCD, $SPG

Losers: $APA, $DVN, $HAL, $XOM, $AMZN, $GOOG, $NSC, $FDX

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