Last Monday, a day that saw the markets rally strongly, we noted:
“As bearish as we’d like to be, the bottom line is there are a ton of bullish signals in the market at the moment. Until we see some reversals we’re not going to stand in the way of this rally. The reason is simple, it seems obvious to get short at 1,200 on SPX, and the obvious trade is never the right one.”
Anyone who didn’t listen and got short at 1,200 is hurting right now, that’s if they’re even still short. Chances are that those same people who got short at 1,200 got squeezed and helped push the market higher throughout the week.
So what’s the obvious trade now? To us it would still seem that most are approaching the market with a short bias. After all, at 1,224, the S&P500 will enter this week of trading at its highest level since late July. Say that out loud to yourself and analyze your natural trading reaction to that statement; Ours is, “gee, given the way the markets been the last two months, you’ve gotta get short.” We’d be surprised if this isn’t the prevailing notion amongst many other market participants as well. But digger a little deeper into the technicals and it is clear… if you’ve bought dips the last two weeks, you have been rewarded greatly.
Yet buying dips however, is still not the obvious trade in our opinion. While we are net bearish and believe this rally will eventually come to a halt, the markets made a key technical breakout last week which suggests the path of least resistance in the short term is higher. What would change our minds? Signs of the dollar and VIX reversing from recent downtrends, and/or the Dax, copper, and Dow Transports reversing from recent uptrends. The one headwind that remains to the market in our opinion is the same headwind that prevented it from hitting new highs back in May, the lagging performance of the financial sector (XLF).
On a weekly closing basis, XLF has been range bound between $11.50-$13.00 since the first week in August. The fact it hasn’t been able to break out to the upside with SPX is a red flag at the moment. Until it can sustain a close above the $13.00 level SPX is going to have a hard time dealing with resistance in the 1,250-1,260 range. With a slew of banks set to report earnings this week after JPM’s poor showing last week, watch XLF closely. If XLF heads back down towards the bottom of its recent range, it could bode ill for the markets.
Empire State manufacturing index for October will be reported today, as well as September’s industrial production and capacity utilization. Citigroup (C), Charles Schwab (SCHW), Gannett (GCI), Halliburton (HAL), Stanley Black & Decker (SWK), VMware (VMW), and Wells Fargo (WFC) are slated to report earnings.
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