Better Retail Sales and Consumer Sentiment data helped bulls push equity prices higher today. The dollar continued its climb while commodities (energy and gold) and bonds fell. The ongoing “dollar carry trade” seems at risk but that didn’t seem to bother bulls in the short-term.
Volume is hitting holiday-like lows which help bulls manage a positive day easily. Breadth was mostly positive.
If you have been short the stock market for the last month or so you have gone nowhere with your investments. If you have been long the stock market for this same period your results have been the same. If you have been in cash, you have done as well or better than most of those invested in either long or short positions.However, if you have been long gold you are really starting to hurt. As the dollar has hammered out a bottom and broke above both trend line support and trend line resistance, creating a minor dollar breakout, gold bugs have been hammered.
The recent high for the dollar was set today, at 76.74, up from the recent low of 74.21, set on November 26th. The dollar has retraced clear back to the lows set on September 11th. During the last seven days gold has dropped from a high of 1226, set on December 3rd to a recent low of 1111, set today … a painful 9.4% drop in only seven trading days. The only bright spot today was that gold closed above today’s low, though not much.
We continue to see defensive sector rotations. Those sectors which traditionally are strong during a bullish trend have performed poorly over the last two months and those sectors which are traditionally weak during bullish trends have reversed course and are now doing much better during the same two months – a clear indication of defensive rotation in equities.
John Murphy of StockCharts.com illustrates this rotation well. Check out his chart:
Although the stock market remains stuck in a short-term trading range, a more cautious tone has been revealed by sector rotations beneath the surface. Over the last month, for example, the two top market sectors have been utitilities and healthcare which are traditionally defensive groups. The two weakest sectors have been financials and energy. Chart 1 shows relative strength ratios of those four groups since the start of July plotted around the S&P 500 (flat black line).
Two of the things I always look for in sector work are absolute and relative strength. Absolute strength refers to a strong chart pattern. Relative strength refers to the group's performance versus the S&P 500. Charts 2 and 3 show strong absolute performance in the Utilities (XLU) and Health Care (XLV) SPDRS. Both charts show strong chart patterns. The XLV (Chart 3) has been hitting new-52-week highs. The XLU (Chart 2) has just broken out of a big basing pattern. What's especially noteworthy, however, is the recent upturn in their relative strength ratio (solid lines). Both ratios have recently broken down trendlines in place since March when the stock market bottomed. The last time the ratios turned up was the autumn of 2008 as the market was selling off. Investors usually turn to defensive stocks when they think the market is in danger of dropping or has rallied too far and is looking over-extended.
John Murphy, StockCharts.com
To give you an idea of the malaise recently seen in the stock market take a look at the S&P 500:
Notice the shaded area, where the S&P 500 has traded in a very narrow range for more than a month. While the bullish among you might say that this is clearly a bullish flag, suggesting that a breakout rally is short around the corner, there are just too many warning signs right now (like the defensive rotation discussed above and technical bearish divergences.)
What I think is happening is that the large intervention players (read Goldman Sachs, JP Morgan … the too-big-to-fail banks doing massive insider account trading this year) are milking the public for what it’s worth.
These large institutions have controlled 50% or more of the total NYSE volume this year. It is not much of a stretch to imagine them taking advantage of the individual investors and small money managers by pushing the futures market either up or down during the night and then trading equities in the opposite direction during the following day.
We have seen this kind of manipulation a lot during the last month, where the market moves strongly to the upside at the open and then sells off the rest of the day – or the market moves strongly to the downside at the open and then rallies for the rest of the day.
As this scenario is repeated again and again, these volume traders are effectively transferring more and more shares out of their hands into the hands of some other unsuspecting soul.
There may yet be a final push near the end of the year to mark as high a YTD figure as they can (to offset the terrible YTD results of 2008). But know that if it happens it is likely going to be a final manipulated rally that will likely collapse in the first month of the New Year.
There are just too many bearish divergences and evidence of defensive rotation to be comfortable fully embracing the bulls right now.
Be patient and cautious here. At what appears to be a topping pattern we will either see better entry on a pull back or the bulls will be forced to prove that this rally can indeed break out of the topping pattern and be sustained to the point that all these divergences begin to disappear.
That’s it for today’s little light volume exercise. Next week is another Fed meeting with an announcement Wednesday. Let’s see if they stick to their guns or give markets a holiday present. Then on Friday we get quadruple witching again as the Street shuts down for the holidays at least in terms of volume.
In between those events we’ll have other data to digest but those two events should take center stage.
Have a great weekend!
Friday's day trading result
