Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Last week was certainly among the most interesting of the year. A long awaited “pullback” in the larger cap indexes finally occurred although calling it that a bit generous. The S&P 500 did not even fall a full 3% from peak; the NASDAQ showed similar although a slightly larger drop just over 3%.
Meanwhile the Russell 2000 was the most interesting of the bunch; it had been undergoing an “under the surface” correction throughout February and then finally broke out of its monthly range of 810 – 830 late last month. Unlike the other indexes it actually fell down to (and through) its 50 day moving average before staging a dramatic three day rally in the latter part of last week.
This can be looked at, in one of two ways – (a) the correction already took place in February/early March “under the surface” or (b) the market has been led by fewer and fewer names, other than the snapback, ‘oversold’ rally late last week in the R2K. Depends where you sit of course.
Of course all this rally action comes on pathetic volume – Thursday’s volume on some of the senior indexes were the lowest of the year. But in the end (especially in the new era of 2009-2012+) all that matters is price; it just remains befuddling how selloffs come on volume, and rallies on ether. For those who do follow the William O’Neill/IBD framework I will note multiple distribution days have come to fruition – I believe there have been three, and yes they can occur (and often occur) in upward trending markets. So that is another ‘caution’ signal – although anyone preaching caution on any front is definitely the boy who cries wolf in 2012.
So was that “all”? If so, my call Tuesday of the breakdown in indexes as a change in character will be an egg in face moment; one anyone with any form of caution this year has had many episodes of. There is still the potential this action was a shot across the bow but we’ll know better in a few weeks. Indeed maybe this week as we quickly approach highs from 2 weeks ago. If there is another stall at those levels we have the potential of a ‘double top’ pattern (bearish). If the indexes slice right through old highs than you just have another sign of the incredible teflon market.
Two markets to make note of – transports and gold. Transports continue to show relative weakness – some blame oil, but for some “Dow Theorists” this continues to be an issue.
As for gold, we have some very compelling action. One can see the massive drop off on the day Bernanke did not curry favor with the speculative class by offering immediate QE3 prospects (in line with dollar strength) – but as we saw last Wednesday, all it took was a 2% drop in the major indexes and news of new forms of quantitative easing were leaked to the press. Precious metals righted themselves, with especially decent action Friday (while the dollar was sent to the dunk tank). If gold continues to strengthen from here it might be very telling.
Speaking of, we have a FOMC meeting this week. While no action is expected, the talk of “sterilized QE” has gone from nowhere to be found to topic of the day in a matter half a week. Showing once again the central banks really dominate any and all conversation. And for good reason – as Ed Yardeni shows in his blog “don’t fight the Fed” is working. If Operation Twist is to be immediately followed by Operation Sterilize maybe 2012 is going to be one of those epic years…. some now calling for a 40% return.
In other spheres, Greece hopefully has been kicked down the road for 6-12-18 months, if for no other reason than people have Greek fatigue. So perhaps the market begins to look at Portugal or perhaps we focus on the mess that are many European economies instead. China is a tricky one as we now are faced with the same issue we often face in the U.S. economic data – is bad data now good? Each time China comes in with weaker than expected data the past 3-4 weeks we now hear cheers…because it means more talk of easing. Inflation figures came in quite dramatically late last week in China, which might be the best news yet for those who demand stimulus/easing from every government and central bank on Earth. 
(Brazil cut rates 75 bps last week, India cut bank reserve requirements – it’s global baby)
In terms of economic data, it really slows down in weeks we don’t have (prepare for acronyms!) PMIs, ISMs, and NFP data. Tuesday brings retail sales which should “surprise” again as the very warm winter seems to bring out mall shoppers. Under the surface many economic reports the past 2-3 months have benefited greatly from the seasonal effects, that simply have not come in at normal levels due to weather. If that is adding to a mirage or not – we’ll know in a quarter or two. The FOMC announcement will be Tuesday afternoon, followed by now almost ignored PPI and CPI data – ignored since Ben won’t raise rates even if inflation jumped 2-3 fold. Any spikes in inflation will be called ‘transitory’ and blamed on oil. So no worries there. Philly Fed and NY Empire Thursday might get the market’s attention for a few minutes, as might consumer confidence Friday.
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
