Marketview: Ripening Consensus

• Posted by DynamicHedge
• on October 26th, 2013

 

The market appeared slow and out of step on Monday as it addressed a Tuesday jobs report. Nothing wrong with a Tuesday report, but it felt a little like black-tie-formal first thing in the morning. We wear top hats on jobs report Friday, thank you very much.

The jobs report was soft, but the market didn’t care because it means more QE. Record fines levied against $JPM and the CEO seems to be as secure as ever. Carl Icahn put on a clinic in the market. First, $NFLX blew out numbers, and Carl sells into strength. The stock reversed on overwhelming profit taking. Then, he issued a very public challenge to Tim Cook to buyback a record amount of share of $AAPL. To complete the hat-trick shares of $IEP Icahn Enterprises, LP got back above $100.

Obama called for a “tech surge” to fix healthcare.gov. Anyone who has worked in software development knows that they have a serious problem on their hands that additional headcount cannot fix.

Amnesia

Two weeks ago the dominant theme of the market was the risk of the US Government defaulting on its debt obligations. Now the meme is margin debt at all-time highs. This is a monumental swing in focus proves that the half-life of a crisis is virtually nil. The amnesia pattern is quantitatively evident if you have the right tools to do the analysis. I ran scenario analysis of the $SPY after oversold conditions a couple weeks back and the most dominant result was a moonshot for 20 days. “Why’d we sell the market again?”

Take a look at cumulative breadth hitting an all-time high:

Consensus

MOAR QE!  We’re hearing lots of smart people talk about the diminishing probability of a big drawdown. Mostly becuase QE will not end until at least March 2014. Nothing makes people feel good like higher prices. The widespread perception of a QE “floor” in the market increases tail risk, but there’s no telling how far the trend will extend before risk is realized. It doesn’t quite feel like blow-off top territory yet, but we’re getting close. The cross-currents are that speculation is the stock market heating up, but the Twitter IPO will come to market at very conservative levels. Risk is not quite ubiquitous but it’s getting very close.

Global Demand

$CAT guided lower on reduced demand for mining equipment. $BA is boosting production of 787s to keep up with demand. Which datapoint you find validity in probably speaks volumes on your overall view of the market.

Speaking of global, one big variable is how the world continues to digest the Snowden leaks. This week, Germany summoned the US ambassador to answer questions related to the NSA spying on Merkel’s cell phone.

Trend

The trend is undeniably to the upside. The only thing the market cares about is QE, so the reaction to next weeks FOMC rate decision will be key.

Here are the SPDR sectors:

Here’s the $SPX monthly, weekly, and daily timeframes. Which timeframe you watch depends on your style, but at this point they are all trending higher:

Rotation

This week we saw strength in industrials, consumer discretionary, and utilities. Energy, financials, and healthcare were all weak. Overall the market is still led higher by basic materials, industrials, and energy.

Winners: $AMZN, $AAPL, $FCX, $DD, $BA, $HON, $RTN, $LMT

Losers: $JPM, $C, $COF, $BAC, $CAT, $HAL, $OXY, $SLB

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