Marketview: Absurdly Normal

onion-shutdown

 

Sentiment: Confidence?

The taboo of optimism has completely eroded. It appears that people are less afraid to admit that they are bullish on stocks than any time in the last four years. Even as the US government is reaching Euro-zone levels of political dysfunction with a potential default weeks away, the markets behave as if it were just a regular week. Why is this? The shutdown is a political gambit — one that would never be undertaken if stocks were 30% lower. In addition to that, most seasoned political observers have communicated the conclusion that the shutdown amounts to not much more than a branding stunt for the Republican party. So the primary perceived risk is missing a pullback and there is a strong consensus that the shutdown is merely political theater. What happens if the consensus is wrong and the situation devolves to Francis Underwood levels of ego brinkmanship? Things will get surreal in a hurry. Asset prices are the primary driver of sentiment. Sweeping reforms will be forgotten if asset prices dive.

Price exhaustion

Bull markets do not pause or collapse on bearish data. The peak is often made on the back of an ultra-bullish event like the non-taper announcement (also, remember the Bin Laden top?). How the market reacts to the news is many times more significant than the news itself and right now, everyone that got caught up in the bullish hype on the Fed announcement is a bit soggy on the trade. Even if we do get resolution to the upside, the market remains asymmetric with not a lot of room to run.

Skew

The MAMOx indicator flipped negative on Monday and confirmed on the weekly close.

MAMOx-october4-2013

Momentum and breadth have slowed, and objective indicators are signaling that the dominant skew in the market is now negative. Without trivializing the process, this just means it’s a decent time to lighten up on longs and hedge more aggressively. Remember, the market is an opportunity machine. You will get another shot at it.

Leading and Lagging

Healthcare stocks are back in the spotlight this week as the best performing sector in the S&P 500. Consumer discretionary, industrials, and basic materials are the strongest sectors overall. Financials, consumer staples, and utilities continue to underperform. Not surprising to see companies heavily reliant on defense and government spending hit very hard this week.

sector-rotation-october-4-2013

Winners: $ABBV, $BMY, $ABT, $MDT, $HAL, $SLB, $JPM, $BAC

Losers: $LMT, $RTN, $UTX, $GD, $ORCL, $EMC, $MCD, $WMT


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