Monday, February 7, 2011

Back to the Grind Up

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Last week was a particularly debilitating one for the bearishly inclined.  Using old school technical analysis, the close below a key moving average - and on lows of the week - a week ago Friday should have thrown some caution into the wind.  The 20 day moving average was my line in the sand - any close below that level would have been the first such event since November 2010.  However, those who have been observing the market closely since 2009 realize almost every Monday starts with a morning gap up of 0.2-0.4%.  And the first day of the month has been a party of excess.  So while the S&P 500 finally broke key support on the Egypt news, bears were faced with the 1, 2 punch of a Monday morning gap up and a "always up" first day of the month combo the following day.  They were somewhat predictably punched out.



By Tuesday afternoon the discussion had taken a complete 180, and the technical analysis had turned from broken support levels to new yearly highs.  Closing on the week's lows meant nothing, as with just about any historical measure the bears once used - sentiment, overbought measures, consecutive days without a break of support, divergences - any of it, completely meaningless in the new paradigm market.

While the small caps (via Russell 2000) continue to lag, transports diverge, and emerging markets remain troubled as the fight to combat The Bernank's inflation continues, broader U.S. markets continue back on their grind up.  Interestingly, the year END target for most strategists coming into 2011 was 1400, and we're already at 1310.  That is only 6.8% away, and one must wonder how it will play out considering there are 10 more "first days of the month" (and each by definition must now lead to gains of 0.5 to 1.5%) what is left for all the other days of the year.  Then again, the S&P 500 is on a pace for 45%+ gains, so why settle for 1400 when 1800 will do?

10 year bonds did break out of a range, crossing over 3.5% for the first time in a long time - but until this gets over 4% I don't expect the market to worry much.  The 2 key levers of the globe, as I mentioned months ago, are rice and crude oil.  The former is breaking out which shall put more pressure on the 3B of the world who use it as a staple foodstuff, whereas the latter seems pretty constrained around $90.   If rice continues its move, I'd expect more aggressive measures out of Asian central banks and governments (price controls, stockpiling) in the months ahead.

With the first week of the month being the only one market participants seem to put any weight on economic news, the calender this week will be more or less meaningless.  The only exciting event is Wednesday's showdown between Bernanke and Ron Paul, but that is solely for entertainment purposes.  Other than that, it's just back to the grind up in the unshortable market.

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