Bernanke must be scratching his bald head given the Bronx Cheer markets are sending Thursday. But it’s not just his speech that's affecting markets, it’s also what’s going on in China, Europe and Emerging Markets.
All market sectors save the higher dollar (UUP) collapsed after Bernanke’s speech Wednesday and then gave up the ghost Thursday. Bonds (TLT), all stock sectors, and indexes (SPY, DIA, IWM and so forth) hit the skids with heavy selling. This may mean the entire rally from November was just an artificial Fed-driven event. As former Quantum Fund Chief Investment Officer, Stan Drunkenmiller stated recently:
“Now, it's a possibility, but I would rather say that the market is rigged and people are chasing these assets, without growth necessarily backing confidence.”
Economic data Thursday was mixed: Jobless Claims soured to 354K vs 340K expected, and prior, revised to 336K; PMI Mfg Flash was okay at 52.2 vs 52.7 expected, and prior, 51.9; Existing Home Sales improved to 5.18 M vs 5 M expected, and prior, 4.97 M; Philly Fed Survey improved enough to indicate more tapering (?), 12.5 vs -1 expected, and prior, -5.2); and, Leading Indicators missed coming in at 0.1% vs 0.2% expected, and prior, 0.8%. A frustrated Bill Gross of PIMCO tweeted referring to economist Milton Friedman:
China’s PMI Flash seriously disappointed at 48.3 vs 49.1 estimated. This caused European shares to drop over 2% (PMI there was still sub-50 at 48.9) and Emerging Markets to fall even more. A developing story from China features a credit event with copper as financing ceases, creating a serious problem as noted in this story.We’re only invested by 15% from 30% in our lead portfolio. For now we stay on the sidelines.
Volume per the WSJ was high and breadth was so negative as to be 10//90. Are markets oversold? Yes short-term as the NYMO (McClellan Oscillator) will show.
The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.
The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.
The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.
SPY 5 MINUTE
Did you know there’s a large POMO Thursday? And, did you know Friday is quadwitching? Do you care?
The table is set for a counter-trend rally Friday given these events.
But, as with any oversold or overbought condition, markets can remain that way for longer than you expect—just look at gold as an example.
Let’s see what happens.