Marketview: Explosive End to the Year

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There was a little bit of a preview of the week ahead on Sunday night when the futures markets put in a massive overnight range ($ES_F down to 1755).  By the time the cash markets opened 20 handles off the lows, market participants seemed content to bide time and complain about how terrible and unlikely the Fed taper would be.  Wednesday, the Fed announced that it would scale back asset purchases by $10 billion. The policy shift was tame and clearly left the door for more response in the future.  According to the market reaction this is exactly the right ratio of reduce and reassure.

The speed and ferocity of the rally that followed was a massive surprise. Both logically and statistically, the market was setup for at least a mild taper announcement selloff. That’s exactly why it rallied. End of story. This is what the market does over and over again. We can logically explain it, but the fact is that too many got caught leaning on the sell side with too little conviction.

Lead Change

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The housing market is a significant input to the US economy, and many have cited the deceleration in housing as a possible knock on equities. What has happened is that just as housing has cooled manufacturing heating up. This is the magic of a bull market. Bear markets usually focus on one or two issues at most and if the story starts to wane the thesis dies. Bull markets keep finding new ways to go higher. Maddeningly higher.

Blue Sky Feeling

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Since Wednesday I’ve heard varying renditions of, “I can’t see anything right now that would knock the market off track”. Ordinarily, this type of rhetoric would be ringing alarm bells of a market topping. It certainly is cause for pause, but I’m not certain it warrants a knee-jerk reaction. You’re timeframe might be different, and this might just be another brick in the wall of your topping thesis. For everyone taking the market day-by-day consider that we just reset overbought conditions and rallied off a decently oversold lever, there is no resistance above, and strong seasonality is a tailwind. Price has entered blue sky territory in a very decisive manner. Respect that. Right now, it’s pure supply and demand and quite impossible to say when the greed will turn into fear. For everyone out there enjoying that blue sky feeling, take some in for me.

Breadth and Rotation

Still lots of room to the upside in breadth before we consider things overbought again.

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Strong sectors were industrials, financials, and technology. Weakness came from consumer staples, utilities, and energy.

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Year end Inventory

This might be the last post of the year before I go away for some skiing and family time. This year turned out to be my biggest ever both personally and professionally. My family grew with the addition of my amazing new daughter. She is an absolute gift and spending our first Christmas together as a family is going to be awesome. At the beginning of last year,  I said that 2013 was about stepping away from the trading desk and getting into some interesting projects. One tangible result that I hope will improve the lives of everyone reading this is a product called Market Memory. I’m incredibly proud of it and look forward to launching in 2014. I sincerely wish you all the best over the holidays and a happy, healthy, and prosperous New Year.

 


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