From Tony Pallotta of MacroStory
Comparing The 2007 Topping Pattern To Now (Updated)
Remember one simple truth, 91.8% of ES Futures daily volume is attributed to day traders and computer algorithms. And since not one single person within that group uses macro data for their intraday trades then it is safe to say the market in the short term has little to do with pricing in macro economic data. Remember how the SPX peaked two months before the great recession actually began. That is not forward looking.
Market participants are already analyzing today's afternoon rally as a sign that this market is resilient, that the economy is still headed for a soft patch and that the bull is alive and well.
I beg to differ but instead would rather highlight two important aspects of this market I suspect is dictating price.
Shorts are scared and longs are delusional. Bernanke not only taught investors to buy every single dip he even has them convinced the removal of the Bernanke put (i.e. QE) has no downside risk to the market. The move the past two weeks was foreseen by no one and hurt a lot of shorts while making longs feel smart yet again. Even a lot of macro bears were capitulating on the economic data the past two weeks. That is until today.
The next and probably most important aspect of this market I suspect is psychology. It's not technicals even in the face of some bearish patterns created today like island reversals. Nor is it macro data although the transitory weakness argument just got a whole lot more difficult to defend.
A number of times I have compared the current topping pattern to that of the 2007 pattern. The reason I suspect they are similar is for psychology during such times does not change. Longs don't want to surrender their money making machines. Shorts are eager to price in economic weakness and the argument about soft landing or recession grow louder.
The magical Point E may now be in for the current market. The similarities are striking of the move to point E in both 07 and 11. A similar move also occurred in the treasury market as highlighted here. That wild move higher shakes a lot of shorts out of their position, pulls in the last remaining dollars from the longs before finally ripping lower leaving few on the train.
During these Point E's the macro data is confusing as well. For example the NFP reports (and ADP) right before the great recession showed a positive reversal in job growth. I am sure the debate of soft patch or recession were just as loud then as now.
So if in fact Point E is in (the current chart is not updated with today's price but trust me it was lower) expect a pullback, one last sucking sound of doubt move higher and then hell breaking loose. Which by the way would be a lovely set up for the Bernanke Put round 3.
Lastly I suspect one additional thing keeping a bid in the market is the hope of a debt ceiling deal possibly as early as this coming weekend. How that is bullish is beyond me for it will result in the government agreeing to reduce up to $4 trillion in fiscal stimulus from the economy and easily could put the US back into recession. Other than a bounce and removal of doubt as if there should be any on this matter there is nothing positive about a debt ceiling deal.