Markets rallied on Friday following much stronger than expected employment and services reports.   Nonfarm payrolls are indicated to have increase by 243,000 in January, much better than the 135,000 analysts had anticipated and the largest month of job creation since the first quarter of 2011.   So what happened?   Well as alluded to earlier in the week, distortions resulting from seasonal adjustments are deemed to be culprit.   This factor was disclosed in the Bureau of Labor Statistics report, but the net effect made little difference to investors that welcomed the headline beat.   Overall, however, the report did imply that jobs losses were less than normal in January, attesting to the strengthening economy and the now streamlined operations of corporate America.   What is needed now is pure growth to keep this momentum strongly positive.

The activity on the day pushed markets to the highs of the week, breaking through last week’s highs and marking the 8th week in a row that a new recovery high has been achieved following the market decline in August.   Markets are now once again significantly overbought just one week after technical indicators provided sell signals as struggling market momentum suggested a pullback ahead.   This pullback has essentially been denied for the time-being as investors continue to buy on the dips.   Looking to the S&P 500, the 20-day moving average seems to be a significant level to contend with, acting as firm support last Monday.   The 50 and 200-day moving average remain significantly below present levels, continuing to suggest a retrace is looming as buying momentum becomes exhausted.   Using the S&P 500, 1350 continues to be a logical point of reference for a peak, just below the recession recovery peak of 1370.   Reaction to previous points of reference are customary as investors book profits from this advance.

As the market rallied, the VIX made a significant push lower, gapping down on the market open before plotting a reversal intraday.   The so called “fear gauge” is nearing its long-term average lows around 15.   The index traded as low as 16.10 on Friday.   The volatility index is approaching levels that may   look attractive to gain exposure however; It would need to consolidate further to show a bottom is in place.  

Activity in equity markets remains bullish, but a certain amount caution should continue to be maintained as a result of complacent market sentiment, extremely overbought conditions, and uncertain economic outcomes, including that pertaining to the seasonal adjustment factor that has artificially inflated some reports as of recent.

One such indicator gives good reason to be cautious.   The Baltic Dry Index has declined over 66% since mid-December and it keeps on falling on a daily basis.   This index is at the lowest level in over a decade and the rate of decline is exactly like the economic slowdown that began in 2008.   Current economic data is failing to detail the reason why this dramatic decline is occurring, but slowing economic conditions in Europe and slowing growth in China are expected to be culprit. Markets have been grinding higher on low volume for six weeks and are due for a breather.  Caution is to be used at these levels.  Remember expect the unexpected!

Markets posted strong gains to start the month of February as investors welcomed better than expected manufacturing data in China and Europe.  At the open the markets gapped up and slowly grinded higher the entire session leaving little of no opportunity for establishing new trades. The gain to start the month is typical for the first trading day in February as retail fund inflows pressure markets higher. Given the headline gains for January, the tendency of funds to chase performance as soon as new assets come in is very typical. This beginning of month boost typically lasts into the monthly employment report, which is due to be released on Friday. Wednesday saw the first glimpse of what this report may look like with the latest report from ADP. The report was slightly below expectations, the latest in a series of economic reports out of the US that are starting to show below consensus results. Friday’s employment report could potentially reveal anything as a result of the seasonal adjustments present.

With the strong returns to start the month, the activity on the day was almost enough to recoup the string of negative sessions that had plagued the market in the days leading into February.  Although key indices put up a valiant effort to break last week’s highs, the result failed to be achieved. Sell signals, according to momentum indicators, were provided by most of the major indices to start the week.   In order for these sell signals to be defeated, higher highs will become a requirement. Should the week close with last week’s highs unbroken, this will be the first week in the last 8 that a new high in the current upward trend has not been charted. Resistance levels to watch are 1333 on the S&P 500 and 12,842 on the Dow Industrials. If there is one index to become optimistic of the prospects for other benchmarks, it is the Russell 2000 which measures risk appetite. The small cap benchmark broke through to a new weekly high within the context of its current upward trend. The Russell 2000 has yet to record the same sell signals, according to momentum indicators, that other equity benchmarks have shown.

Equity markets remain in this zone of heavy resistance, so it is no wonder that markets have shown signs of struggle in recent sessions. The Dow Jones Industrial Average is nearing 52-week highs at 12,876 and the NYSE Composite, a broad gauge of equity issues, is hovering around the plunge lows following the declines of last March and June. The market is likely to react to these significant levels, either by consolidating or retracing, before the trend continues. Combine this influence with the negative seasonal tendency in February, gains in the short-term beyond the start of month bump may be hard to come by.

Sentiment on Wednesday, as gauged by the put-call ratio, ended bullish at 0.83. Complacency has certainly not faded and demand for portfolio hedges, via options, remains low, as evidenced by the depreciated state of the VIX at present, just a few points above last year’s average lows around 15. Markets remain vulnerable at these levels so use caution.

Tack another day on to the two day market decline streak, making this market pullback the first three-day consecutive pullback in over a month which has been very shallow.   Concerns over the debt problems in Europe continue to weigh on markets as a deal has yet to be reached on the Greek debt swap after weeks of negotiations.   Now, concern over Portugal is growing as borrowing costs soar, exceeding levels that would be deemed sustainable.   If it’s not a problem with Greece, then another Euro-zone country is set to take the hot seat.   Overall, headline risks resulting from the problems in Europe are not going away anytime soon, despite what equity benchmarks may say.

Looking to the chart of the S&P 500, the pullback on Monday managed to break through the tight rising channel that has been in place since mid-December.  As well, sell signals have become confirmed with respect to momentum indicators; stochastics crossed below 80, RSI has declined back below 70, and MACD has produced a bearish crossover.   Despite these short-term bearish attributes, the talk of the major news organizations was the pending bullish crossover of the 50-day moving average set to cross above the 200-day.   Analysts largely boasted this technical indicator, but few made light to the fact that this is a long-term momentum indicator that is not appropriate for short-term swings.   Had you set your sell order based on the bearish crossover back in August, you would have sold at a low and remained out of the market throughout the recent rally that has essentially recouped all of the losses that resulted from the August crash.   More important than the actually crossover itself is the direction that these major moving averages are headed.   The 50-day is certainly trending higher from the October bottom, however, the 200-day continues to trend lower as the breakout above this significant moving average is just so fresh that it fails to shift the trend.   This declining long-term moving average is enough to bring doubt to the long-term trend until the average points higher, just as the intermediate term average is doing now.

Looking to the intraday activity on the large-cap index, after breaking down below the rising channel, the benchmark declined almost precisely to a psychological point of support at 1300 before rebounding into the close.   The index finished substantially off of the lows, but the short-term sell signals have already been recorded.   The problem with support at 1300 is that it is nothing more than a nice round number with no points of reference to mark the level.   This suggests that the level may not confirm as a significant point of support to maintain the present strength in equity markets.   A break below 1300 would likely see a test of 1275 and possibly the 50/200-day moving average, now around 1257.

Market internals showed a risk-off day today, unlike Friday, which was clearly risk-on despite the decline in equity benchmarks.   The Russell 2000 significantly underperformed the market, breaking below Friday’s lows, and the Dow Transports also showed losses that outpaced both the S&P 500 and Dow Jones Industrial Average.   The clearly defined rising wedge pattern on the chart of the Transportation Average has almost reached a peak.   A breakdown below the pattern and a decline through 5200 would confirm a significant change of trend for the benchmark as well as for the market.  Watch the Transports closely because it’s a leader of the other indexes GAC follows. ( Nasdaq, Russell, Spx, Dow) for clues when this market changes its current trend.

A bit of a contradicting day on Friday as cyclical equities outperformed the market yet treasury note yields charted new record lows.   Financials and Materials gained while Utilities and Staples showed relatively large losses.   In addition, risk benchmarks gained as the Russell 2000 and Dow Jones Transportation Average tested resistance at a six month high.   However, almost dispelling the risk-on mentality of the market was the fact that five year treasury note yields broke to record lows as the fed pledged to keep rates low for year to come and investors embraced the safety that these assets possess.

A large number of investors are running back toward safe-haven assets, such as treasuries, another set of investors are running towards risk assets, such as the Russell 2000 or Dow Transports.  Large caps are coming under pressure and are showing early signs of rolling over.   The S&P 500 has been grinding higher for about a month within a very tight rising channel.   The bottom limit of that channel is now being tested.   In fact last week’s two sessions of declines were the first string of consecutive down days for the benchmark in over a month, reiterating the gradual shift in sentiment as investors restrain from further bullish bets until a correction plays out.   As points of support are taken out on the downside, selling pressures are likely to escalate. Recently, investors have flooded the bullish bets on the market, leaving bearish investors as the minority. Seasonally, the market tends to drift higher the month of January ,  but don’t be surprised to see a pullback begin anytime  as markets near the seasonally weak period in February as earnings season comes to an end.

On Thursday, markets gave back gains accumulated on Wednesday, attributed to the Fed’s easy money stance through to 2014.   Investors are starting to show signs of profit taking after equity benchmarks have become the most overbought since last May’s peak and sentiment indicators are indicating excessive bullishness in the market.   Market participant are beginning to question the recent strength amidst the lackluster earnings season, concerns of default in Greece, and the Fed essentially indicating economic struggles for years to come.   To date, just over half (55%) of corporate earnings have beat estimates, which have been ratcheted down in recent months due to economic concerns.   This is well off of the beat rate of around 70% witnessed in recent quarters, signaling that this is the most disappointing earnings season since the economic recovery began in 2009.   Couple that with the extreme overbought conditions that are indicative with a market peak, a correction appears justified.   Still one possible positive catalyst remains: the Fourth Quarter GDP report to be issued on Friday.   Expectations are optimistic and reaction to the number amongst equity markets is pretty much guaranteed.

The S&P 500, gave back all of the gains from Wednesday, marking somewhat of a reversal.   The level to hold is1300; a level that if broken would likely bring in more selling pressure.   Downside risks remain to significant moving averages, such as the 50 and 200-day, which continue to be approximately 60-points lower than present levels.   Recent leadership from the financial sector appears to have ended, underperforming the market for a second day following the Fed’s announcement.  Yet, the 50 and 200-day moving average look set to complete a bullish cross pattern, signifying improving intermediate-term prospects.   At this point a shallow correction is anticipated and the extent of the significance of the peak, which presumably will form below the May and July peaks above 1350, will have to be analyzed to determine if the lower significant high means a longer-term downtrend.

The pending pullback in the short-term may actually be triggered by the Fed’s accommodative monetary stance.   Recent weeks have show bond market participation in the equity market rally as assets flowed from bonds into equities.   With the fed’s commitment to keep rates low, investors have flocked back into bonds to take advantage of the near term rise in prices.   What will be key is if yields can hold above recent lows, at approximately 1.8% on the 10-year, as it would signal that commitment to equities remains and that a new bond market rally has not started.   Participation from the bond market will be key in order to keep the buying momentum in equities strong.  

Another important factor in order to determine the strength in equity markets is the strength in copper  as I mentioned in earlier emails.   Investors call it Dr. Copper due to its predicative qualities of market direction.   On Thursday Copper broke through a level of resistance indicated by its 200-day moving average.   The metal has been outperforming equity markets throughout January as seasonal tendencies lift the commodity.   Given the low interest rate environment, commodities look poised to outperform the market, as is seasonally typical, through to May.   A number of metal commodities are still significantly overbought, signaling that even commodities are prone to a correction at this point before moving higher which would correlate nicely with equities trading near resistance hence the pullback to come.

Markets pushed higher from early morning losses as the Fed indicated its intention to keep rates low through to the end of 2014.   The effects of this decision were felt across asset classes.

Bond prices traded higher, pushing yields lower in the process.   Yields had been trading higher over the last few days as money from the bond market was noted to be flowing from fixed income assets into equities

Commodities jumped on the announcement as the perception of easy money increased inflation expectations.   The ratio of the Treasury Inflation Protected ETF versus the 10-year Treasury ETF showed a significant rebound from early morning losses, piercing a declining trendline that had been in place for 9 months.   Increased inflation expectations is bullish for commodities, which are seasonally strong in the first quarter of the year.

The “easy money” benefit to commodities is obviously a detriment to the US Dollar, which relinquished strong morning gains.   The US Dollar Index has been finding support at its 50-day moving average over the last few sessions as the Euro strengthens, placing pressure on the domestic currency.   Speculation remains that Europe will have to enact more significant monetary easing measures than are already in place in order to stimulate the economy out of a potential recession.   This implies that the negative pressures on the Euro are likely to remain in place for some time, instilling strength into the dollar, as is seasonally typical during the first quarter of the year.

And finally, stocks rallied on the potential investment that would be derived by the extended period of low cost borrowing.   However, financials took a hit, relinquishing its outperforming position it had maintained against the market for the first few weeks of this year.   The financial sector will find their business constrained as a result of this rate commitment, meaning that financials will likely resume their underperforming role against market benchmarks, once again acting as a strain on equity indices.   Utilities are a beneficiary of this low interest rate environment due to the highly leveraged nature of their business.   As a result, the Utilities sector surged in afternoon trading, outperforming the market.   Utilities seasonally underperform in the first quarter, again following the inverse seasonal trend of interest rates.

So the events of today are doing a lot to both negate seasonal trends for some areas of the market, such as the financial and utilities sector, while strengthening it for others, such as materials and energy.   Still, markets have become so overbought that a correction of some sort seems inevitable.   The Relative Strength Index (RSI) for the S&P 500 Index has crossed above 70, a rare event that has typically marked a peak when such an occurrence is realized.   Tendencies during the month of February are negative to begin with, signaling that this may be the likely period that a correction plays out.   A pullback from this juncture would be healthy in order to determine the levels that investors feel at ease with maintaining.

Markets pushed higher from early morning losses as the Fed indicated its intention to keep rates low through to the end of 2014.   The effects of this decision were felt across asset classes.

Bond prices traded higher, pushing yields lower in the process.   Yields had been trading higher over the last few days as money from the bond market was noted to be flowing from fixed income assets into equities

Commodities jumped on the announcement as the perception of easy money increased inflation expectations.   The ratio of the Treasury Inflation Protected ETF versus the 10-year Treasury ETF showed a significant rebound from early morning losses, piercing a declining trendline that had been in place for 9 months.   Increased inflation expectations is bullish for commodities, which are seasonally strong in the first quarter of the year.

The “easy money” benefit to commodities is obviously a detriment to the US Dollar, which relinquished strong morning gains.   The US Dollar Index has been finding support at its 50-day moving average over the last few sessions as the Euro strengthens, placing pressure on the domestic currency.   Speculation remains that Europe will have to enact more significant monetary easing measures than are already in place in order to stimulate the economy out of a potential recession.   This implies that the negative pressures on the Euro are likely to remain in place for some time, instilling strength into the dollar, as is seasonally typical during the first quarter of the year.

And finally, stocks rallied on the potential investment that would be derived by the extended period of low cost borrowing.   However, financials took a hit, relinquishing its outperforming position it had maintained against the market for the first few weeks of this year.   The financial sector will find their business constrained as a result of this rate commitment, meaning that financials will likely resume their underperforming role against market benchmarks, once again acting as a strain on equity indices.   Utilities are a beneficiary of this low interest rate environment due to the highly leveraged nature of their business.   As a result, the Utilities sector surged in afternoon trading, outperforming the market.   Utilities seasonally underperform in the first quarter, again following the inverse seasonal trend of interest rates.

So the events of today are doing a lot to both negate seasonal trends for some areas of the market, such as the financial and utilities sector, while strengthening it for others, such as materials and energy.   Still, markets have become so overbought that a correction of some sort seems inevitable.   The Relative Strength Index (RSI) for the S&P 500 Index has crossed above 70, a rare event that has typically marked a peak when such an occurrence is realized.   Tendencies during the month of February are negative to begin with, signaling that this may be the likely period that a correction plays out.   A pullback from this juncture would be healthy in order to determine the levels that investors feel at ease with maintaining.

Markets traded marginally lower as jitters pertaining to the Greek debt situation resurfaced after Standard & Poors indicated that a further downgrade of the country to “selective default” was likely.   Negotiations with private creditors are ongoing as each side digs in their heals regarding the coupon rate to be paid on the swapped debt obligations.   It is becoming increasingly probable that a non-voluntary default situation in Greece will occur, triggering credit default swaps, which at this point are indicated to be highly collateralized, mitigating the effects of a more disorderly default situation.   The debt situation in Greece looks set to overhang the market for some time still.

Looking at the charts of the major equity benchmarks, equities have noticeably stalled around present levels over the past few days.   Candlesticks on the chart of the S&P 500 have the appearance of dojis, an indecisive candlestick pattern that shows the debate between bears and bulls at present levels.   For the past few days, this large cap index has found support around 1310, pulling back to around this level intraday and then trading to the flat-line by the close.   A catalyst looks to be required to dislodge the market from this bull/bear battle, whether it be to the upside or to the downside.   Catalysts over the remainder of the week are numerous, including the Fed’s announcement on Wednesday, progress on European debt talks, or the report on fourth quarter GDP to be released this Friday.   A break of support at 1310 would likely lead to a pullback to test the next level of support around 1275 with downside risks extending as far as the 50-day moving average around 1250.   Momentum indicators remain at the most overbought levels since last May; a pullback at this juncture would be healthy to regain market momentum.

Earnings from Apple that were released on Tuesday after the closing bell could also influence the market out of this short-term range.   Apple blew away expectations, topping even the highest estimates that analysts had imposed upon it.  

Commodities continue to be an interesting market to watch in order to determine the strength in the economy as well as in equities.   The CRB commodity index has been declining since May of last year.   However, recently an interesting pattern has become evident: a head-and-shoulders bottoming pattern.   The present neckline of this pattern around 315 coincides with the same level as the upper limit of the declining trend channel that has remained intact for many months.   The pattern projects an upside target to 335, or 6.3% higher from present levels.   On a seasonal basis, commodities gain strength in the first quarter as economic momentum ramps up into the spring.   Copper tends to be the beneficiary of this commodity push.   Copper is presently hitting against resistance at its 200-day moving average, a significant hurdle to overcome given the extent to which this commodity is now overbought.   Copper which is an industrial metal and leads the market is a great sign the markets will move higher however with copper at resistance along with equities which are grossly over bought as well a pullback were would be healthy to regain strength and push higher.   Caution remains high while the markets remain at these levels.

Markets in the US traded around the flat-line on Monday as investors showed little conviction to alter portfolio allocations prior to the two-day fed meeting that begins on Tuesday.   Investors/traders are largely anticipating some hint of QE3 as the committee meets for the first time this year.   The certainty of this event is up for much debate.   On the one hand, economic data has shown improvement as of recent and the Fed’s target for unemployment has been met much earlier than was previously forecasted.   However, it is becoming clear from recent price index data that deflation is gradually becoming evident, which the Fed may perceive as a threat to the present economic momentum.   Much will be considered and a lot more will be anticipated, but the final result may set the market up for failure given the complacent mentality of many investors.  

With the month of January nearing an end, I thought it might be a good idea to  pull up a monthly chart of the S&P 500 to see the longer term picture going forward.   The chart shows consecutive higher highs and higher lows from the March 2009 low, a bullish pattern for the market.    Despite the plunge back in August and doom & gloom speculations that have accompanied, the trend remains higher until the point in time when a lower significant high (or low) can be achieved.   Presently very few analysts are forecasting anything above last May’s peak around 1370, suggesting that investors may look to heavily liquidate positions should the equity benchmark push closer to this level.   The concern then becomes that a lower high may be fulfilled, which would create a pattern that resembles a head-and-shoulders top; a pattern than would imply downside potential to a range between 800 to 900, or over 30% lower from present levels.   The decreasing volume as of recent, showing waning conviction, provides merit to this bearish scenario.   This bearish possibility remains just that, “a possibility”, until confirmation of the next intermediate high is obtained.   The chart also shows one other bearish quality.   The 50-month moving average appears destined to cross below the 200-month average, an event that has not been seen for many decades.   This bearish omen is more of an interesting note rather than any tradable indicator due to the extreme lag in these moving averages compared to the price action.   The key take away from this chart is that markets are nearing an important juncture with much to prove as it pertains to the bullish case.   Upside conviction remains relatively absent and momentum indicators are not showing any significant strength either.   The longer-term path for the market could become clear fairly quickly over the next couple of months.