Coming into today I said I was looking for follow thru and no one is going to argue that we didn’t get that today. Indexes around the world exploded higher, as the market certainly seemed to like whatever Washington did the other day (do you have no clue what actually happened just like me?). There were a lot of bullish technical events that occurred that lead me to believe we’re poised to test last years highs any day now, but there are some caveats to be cautious about.
- Volatility implodes — The VIX continues to tank, sliding nearly 20% for the second day in a row, but is it too low now?
- Lack of participation from retail — Yes XLY was higher today, but some key names actually closed lower on the day
- XLF closes near 2 year high — If the market is going to continue to follow the banks, then we should see 1,475 on the S&P500 very soon
Last night I said if the VIX could base out around 18 (where it was coming into today) then that would set the market up for a potentially bearish back drop a few weeks from now. Obviously that didn’t happen, as the VIX took 2 days to give up the gains it took all of December for it to make. Low volatility typically coincides with higher stock prices so bulls will enjoy a VIX that stays south of 16. However, volatility works both ways, so with the huge drop in the VIX I’m not expecting violent rallies like today. A more likely scenario is for a slow and steady move higher to take hold until the market has the opportunity to start digesting quarter 4 earnings reports.
One thing I found odd today was the fact that retail names like M, JWN, ANF, LTD, LULU, & UA closed red today. My first reaction is that the market must not think the holiday shopping season was too positive, especially in regards to M& JWN. As a result, today’s enthusiasm was a good chance for funds to sell into the liquidity ahead of key results where the market will learn exactly what went down during the all important holiday season. I’ll be watching these names to see if they can quickly make up today’s losses, otherwise a retest of recent lows looks to be in order.
Aside from technology (XLK), XLF (the banks) were the best performing sector in the market today. If the banks are the leader that they have appeared to be for the last couple of months (while tech and consumer discretionary have traded sideways), then we should see SPX testing 1,475 any day now. XLF, XLK, & XLY were the three best performing sectors in 2012 but only XLF broke out to near 2 year highs. This is a a very early sign that the bank trade is still alive and well during 2013 and likely to continue until something gets in its way, like maybe resistance in the $17-$17.20 range.
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