Markets at a Crossroads

Is there any more hated rally than this one? Oh, I’m sure they are all hated because most tend to miss the boat, the biggest part of the move. It is when the crowd is giddy and they go ‘all in’ that the markets will ensure a correction is to be had. 

That is normally at the end of a run, sentiment is wildly bullish, call buying is rampant and the late-comers end up holding the bag. This time around? Maybe so, but there is a HUGE wall of worry up there. How do I know this? 

While there has not been much give back from the surge this month the support continues to pick up. Friday was a great indication – markets were down sharply yet breadth was good, volatility held in check and certain sectors were strong (banks, financials and tech).

As I wrote about last week the earnings picture has been mixed (as expected). Some great stories and guidance from the likes of IBM, Apple, Caterpillar, McDonalds and Stanley Black/Decker, while some disappointments from Google, Cliffs Natural, Riverbed and Potash. 

This coming week is the heaviest action yet, we should see some more good/bad/ugly before it’s over. The recent GDP shows some steady growth but clearly we need to see more upside. But given the alternatives (Europe, S America), where else other than China are you going to find some growth?

There is no question the market character has changed from just a few months ago. I’ve mentioned previously about the imploding correlation. We have seen some market rotation these last several weeks – money flowing from one group to another. 

That can be bullish (if nobody believes it). In any event, the trend seems to be pointing higher but perhaps after a slight pause. There is a positive chart development – an impending ‘golden cross’ of the SPX 500. 

That can be a support level eyed closely by institutional investors (chart below). The VIX shows some complacency here so nothing would surprise me. With two days left in the month and some big economic data due this week (and Chinese markets back after a week off) expect some good shuffling.