Marketview: Liquidity Needs

Posted by DynamicHedge
on December 7th, 2013

The trend remains intact, but pressing longs this late in the game is for true sportsman only. I tip my hat to the lion tamers out there.

Holiday Sentiment

Amazon tested a new advertising strategy over the long weekend (okay, not new). On the eve of cyber-Monday, they aired a story about potentially using drones to deliver packages. The combination of 60 Minutes’ demographic and the emotional valence of delivery-by-robot sparked one of the biggest free advertisements of the year. Drone debates lasted for days. Domino’s and plenty of scrappy startups have tried the drone meme. Amazon nailed it. Look for more smart companies to unveil “controversial plans” at opportune times. It works.

The consensus was that holiday shopping was light. Black Friday was supposedly lackluster, but it sure felt as if people were in the mood to spend. Personally, I was expecting a stronger showing. It will be interesting to see how the rest of the Christmas season turns out. The most recent Consumer Sentiment survey says that people are back to feeling good. Just not too good.

Liquidity

We mentioned that a market without a solid catalyst will eventually roam the ranges looking for liquidity. On Monday, the market failed to trade higher so the path of least resistance (looking for liquidity) was lower. This was day two of a five day march lower. On Wednesday and Thursday, sellers failed to make new swing lows, so the path of least resistance was higher. The VIX spiked and ranges widened out, making it very easy to get sucked in and whipsawed along the way.

Jobs and Taper

The employment report surprised by adding 203,000 jobs dropping the unemployment rate to a recovery low 7.0%. The report could not have thread the needle more perfectly. It was high enough to produce a sentiment boosting headline and low enough to stave off an undiscounted December taper. And we wonder why people love conspiracies.

Breadth

Lackluster but still elevated. Breadth is not expanding to the upside but is holding in the upper end of the range. What is the bottom line? Fewer stocks are making new highs with the index, but many are still in their upper range (see below). Breadth is neither confirming underlying strength or flashing an imminent warning sign. This is one of those times when the deeper you read into the numbers and patterns the more dangerous it is.

Rotation

Market Meme

Government dysfunction is still sighted as the leading risk factor for markets. But since when hasn’t it been?

My favorite quote this week comes from POLITICO’s Ben White and Darren Samuelsohn:

“Washington has tried very hard this year to crush the economy with debt ceiling fights, clumsy budget cuts, a government shutdown and complete legislative gridlock. It does not appear to be working…”

2014 will be a good year if this becomes a market meme.

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