This past week the market had every reason and excuse to go down. Data seems to show the economy may be slowing, China is also coming in for a soft landing, more leaks springing in Europe. The Fed seems to be in a quandary, wanting to do something but unable or unwilling to make a move.
The constant use of lip service is bold but weakens as time goes by. Earnings season has been generally goodbut companies are being a bit more guarded about the future. No surprise there of course but the tone that I’m hearing is mostly one of optimism over the longer term. That should bring hope to those looking for a sustainable recovery.
Markets are sniffing out this optimism and continue to repel all that is bad. How long can that continue? Taking profits, why not? The market is up double digits for the year, is there any better time?
Regardless of what you think or want to believe you just have to marvel at the performance. What is particularly useful is the lower correlation, I talked about recently as did my colleagues Jill Malandrino and Phil McDonnellat OptionsProfits. Lower correlation makes for a better environment for stock pickers.
We have seen some stocks thrive, others dive and even some that have gone nowhere. As a technician trading charts this is the best environment for me to trade in because reaction to news and events won’t always swing names for an unrelated reason. Of course, the price paid for that is in low volatility and as we see on the chart the VIX shows high complacency, and it has been trending down.
That’s fine to have low volatility even as ‘johnny-come-latelys’ put money to work. As a trend follower it is all about going with the flow if I can identify one. Certainly in 2012 that flow has been bullish.
As we head into what many consider a weak time for stocks (sell in May and go away – new month starts this week), there is a strong underlying bid to this market. Dip buyers have been active, look no further than the recent dip in the SPX to 1360 (see chart). What’s in store?
Certainly if that behavior continues (and there still is quite a bit of money on the sidelines) the old highs for 2012 could be surpassed. In fact, the SPX is only 1% away and the Dow Industrials have already achieved it. The Nasdaq and Russell 2K are lagging a bit but are within 2% of new yearly highs.
Sector rotation has been the theme and I continue to believe that to be the case as money flows to equities. Bonds actually may not be the best investment but I believe it is premature to think they are heading into a bear market. In my experience I have found bonds to falter when inflation hits the scene and that just isn’t the case at the core.
While we have heard some from the Fed worried about interest rates being to low the inflation monster has not come into play. Want proof? Just take a look at gold. Paradoxically, it appears deflation is the fight of the Fed (or at least Bernanke) as the market struggles with potentially unstable (lower) prices.
The Fed this past week reiterated its support for accommodating a growth platform which if successful would encourage job creation. We are yet to see that occur to a great extent.
Bob Lang is the Senior Market Strategist for options trading newsletter Explosive Options