Market Breadth

We’ll know more next week Wednesday when the Fed meeting concludes with a language parsing contest. In the meantime, stock market volatility is increasing as we’re experiencing alternating triple digit days now.

This was one helluva week. Nevertheless current markets are still hooked on QE.

This is no time to be complacent.  Massive economic problems are erupting all over the globe, but most people seem to believe that everything is going to be just fine.  In fact, a whole bunch of recent polls and surveys show that the American people are starting to feel much better about how the U.S. economy is performing.  Unfortunately, the false prosperity that we are currently enjoying is not going to last much longer. Unfortunately, the majority appear to be purposely ignoring the economic horror that is breaking out all over the globe.

Sell in May and go away will be on every investor’s mind after Friday’s week performance. It’s always been when you sell that’s been the measure for this maxim to be effective. If so the high for SPY would have been May 21^st at $167.17. Then there’s the reappearance of the Hindenburg Omen but that’s for another day’s discussion.

The market’s performance Thursday and Friday are misleading since there is so much destruction in many sectors globally. But the media depends on selling what’s going on with the DJIA. It’s just window dressing for the tourists frankly.

Aside from light volume there’s no argument with the tape. It’s quite positive but much overbought. Earnings news is beginning to wane leaving less for bulls to respond to. Many previous reliable technical indicators are succumbing to all the money printing. Looking at those markets where QE is not taking place perhaps reveals the real market conditions.

The Bernanke Chicago speech became little more than a side show Friday. He did say the Fed was keeping a watchful eye on yield risk-taking given ZIRP. He’s a little late to that observation methinks.

Intra-market breadth is deteriorating, suggesting fewer and fewer stocks are actually contributing to the current rally in global equities... It seems that all that can break us from this current index-driven 'melt-up' is hot or frigid data that confirms the economy is breaking out of its languid range (though it appears credit is starting to make that decision earlier than stocks).

S&P futures volume was the lowest (ex-holidays) since October today and the intraday range was in stocks was practically its lowest all year. However, that did nothing to hamper the inexorable rise of stocks - though today was different. FX carry markets (JPY-based) were not supportive (especially AUD) as the main theme of the equity markets today appeared to be rotation - from defensives to aggressives. Correlations across asset classes were quite high as Treasury yields continued to push higher post-NFP (30Y +15bps holding at 2.99% since then). The credit fade from Friday gave way as HY especially snapped tighter in spreads catching up to stocks. Draghi's comments snapped EUR lower which provided the USD strength (but AUD also helped with its weakness). Gold ended unchanged as oil prices tested up to multi-month highs (Brent Vigilantes) before fading back a little.

“… current policies come with a cost even as they act to magically float asset prices higher…, a bond and equity investor can choose to play with historically high risk to principal or quit the game and earn nothing."  Bill Gross, PIMCO

Despite CAT explaining to the world that things are nothing like as good as they have said in the past and that their ability to forecast is gone given monetary policy hindrance (paraphrasing), the stock oscillated from pre-open gains to a big drop out of the gate, to a squeeze higher gapping as shorts covered to end the day up 2.75%. We explain this because it perfectly summarizes the market today. Overnight JPY weakness supported risk assets, Italy's Napolitano helped, and into the open we were comfortably green; but the moment the bell wrung the sellers appeared and pushed the S&P down (coincidentally) to last Monday's crash lows. Once Europe closed, the bulls got the green light and stocks surged on light volume running stops above overnight highs; stocks leaked back off their highs though ended comfortably green - a mere 20 S&P points off the intraday lows! While all this tom-foolery was occurring, Treasury yields plunged from their overnight highs and flatlined 1-2bps lower (ignoring equity's after noon exuberance). Commodities were similarly unimpressed as gold and silver held overnight strength but flatlined in the US afternoon as stocks popped. FX was in charge of the rally today as AUDJPY ruled pre-European close and EURUSD ruled the afternoon. VIX compression as protection was unwound helped support risk, but high-yield credit slammed lower into the close.

This week’s charts span the gamut from market breadth to investor sentiment to an indicator that measures how well the Fed is doing at inflating the markets.

With stocks short-term oversold it certainly wasn’t much of a surprise that options expiration Friday could manipulate volume and performance. Da Boyz in the options pits (mostly electronic now) were hunting down strike prices to exercise existing options as they can. It’s a technical event with an outcome that surely can mislead Main Street.

This week saw the largest plunge in US macro data in 11 weeks pushing us back towards the lowest levels since August. Fundamentals (macro and also micro- earnings) did have some impact - with stocks having their worst week in 5 months (but the S&P managed to bounce off its 50DMA) and despite carnage in its largest components, the Dow gained 10 points (of which -150 points were from IBM, GE, and MCD). Today saw a small recovery bounce amid low volumes driven by JPY weakness (testing back up toward 100 post G-20 silliness) and VIX compression as macro overlays were lifted and positions reduced. Gold gained on the day but silver lagged ending the week -5.5% and -11% respectively, with the USD gaining 0.77% on the week (as JPY weakened almost 400 pips off its Monday night highs). Treasuries traded in a 4-6bps range all week (and flow was quiet) but the long-end ended lower in yield by 2-4bps.

US equity indices are in their own little world of glee today. Treasuries, credit, FX markets, swaps, commodities are not playing along. So what is going on? These two charts may help to explain...