No need to get all hyped up

The great rotation trade out of bonds and into stocks may not be starting just yet.
Even though equity funds have seen net inflows in January, bond funds have benefited from fresh cash infusion as well. Numbers do not lie. Below are detailed breakdowns by ICI (mutual funds) and Lipper (mutual funds and ETFs combined). There were no outflows from bond funds at all. More interesting, it looks like domestic equity ETFs suffered serious setbacks in the middle of the month, which could be seen in Lipper's numbers.
I am afraid my earlier call on reallocation trade may be just a mirage. Only time will show if it actually materializes later this year.

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Is ES about to lose its best friend?

Those of you who follow market correlations closely, know that ES has done the heavy lifting this month without many of its usual friends like AUD, CAD, and NASDAQ. But DAX has continued to dance along and has been instrumental in this latest leg of the rally. After all, Europe is now fixed. Right? Right?

If DAX chart breaks down, I have a possible target below. Will ES follow?

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Let's Play This Note Next

Do you know how to read music?

I am looking for SPY, QQQ, DIA, and SMH to play "Concert A" in the next measure.

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AAPL and MSFT - The Parallels

There are a lot of similarities between AAPL today and MSFT in 2000 - at their respective peaks. Both became the largest publicly traded companies by market cap. Both were the leaders of their market segment and tech in general. Both could do no wrong just before they stopped innovating and collapsed under their own weight. Both had enormous cash position they did not know what to do with. Both greatly affected the stock indexes they were a part of.

There are some differences between 2000 and now though. In 2000 Nasdaq was in stratosphere. Also MSFT top coincided with the dot-com bust.

So let's look at how similar the charts are. I plotted them over SPX to show how ignorant the whole market was/is to the topping development in these undisputed market leaders at first, only to follow them lower later.

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It Takes Two To Tango

ES and CAD have been dancing together since the beginning of June. CAD is now totally disconnected and is declining further today on BOC rate decision. I do not know who is right and who is wrong here, but this break in correlation will not continue for too long, I bet.

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No pullback, no problem?

I am not going to advocate shorts here, but continuous parabolic ascent with no pullbacks is not healthy, and usually results in a sharp decline. Why? The higher the market goes without offering the shorts to cover lower, the more of a chance the market will fall when those same shorts are stopped out at higher levels. Does it make sense? It surely does. Look at the volume - it is anemic and nonexistent on these latest advances higher to 5-yr record levels and all-time highs on some indices. What does that tell you? Not many new longs are being initiated, but just short-covering gasps for air is what drives the parabolic move. As the shorts get exhausted, capitulate, and step aside, there will be no one to buy when the longs finally decide to sell. This phenomenon creates sharp declines and even mini flash crashes (I am not calling for one here), and is due to pockets of air when all bids are pulled. Be very careful if you are a new trader, this is not the time to go long at all. Being flat is a position too, I am not advocating shorts here. Let the market cool off a bit.

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SPX - Bear Scenario

A little imagination, spreadsheet magic, and a deep respect for history made me arrive at this possible bear scenario.

Just two months ago I thought the wheels would come off the wagon. And here we are pushing 1,500 on SPX. 

So now that it looks like new all-time highs are just around the corner, I do not want to completely rule out this stunning resemblance to 1970s.

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Plan For Next Week

I usually study weekly charts on weekend. But hockey (NHL shortened season) starts this weekend, so screw the weekly charts. Just kidding... Let's zoom in instead and look at 4hr chart of ES. I continue to think that market is overextended and is due for a pullback. I know, I have said this three trading sessions in a row, nonetheless that is my outlook and I am sticking with it. I like the open gap area as a target.

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SOX Is At Resistance

PHLX Semiconductor Index held its 200 wsma and rallied strong along with the whole market. But it is now in resistance zone and at trendline. A pause and a small pullback here would be healthy. This coincides with my view that overall market will also pull back a little.

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Relax, It's Just A Pullback

We are getting ready to pull back a little. Do not overreact, it's just a pullback in a strong uptrend. Zoom out and relax. New highs are ahead.

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Google - What's Next?

GOOG needs to get back up there and take out its all-time high, or all bets are off and I show you what could happen next.

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Market Thoughts On January 15, 2013

Just because S&P 500 ended the day flat does not mean nothing is happening. Two very important developments are worth discussing.

Dow Jones Transportation Average (DJT) closed at an all-time high today. Dow Theorists are jubilant and preparing for an enormous rally still to come, and probably rightly so. I am a big believer in the theory and have a chart (below) to share with you. When Transports confirm, and especially lead, it is almost always a strong bullish signal for Dow Jones Industrial Average. This said, a pullback is not out of the question, and I would not be surprised to see one right here, as it is never a straight move in one direction - DJT is up 800 points in just 60 calendar days. But be very cautious and nimble on the short side - it will be just a pullback in a bull market which will still go to new all-time highs.

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Another major development today was the retail sector. I discussed in my earlier post on December 29th (read here) why so many players, who got spooked by obscure MasterCard study right after Christmas, overreacted and sold at the bottom of the pullback in XRT. December retail sales, reported today, exceeded expectations and proved that American consumers still found the way to continue spending like drunken sailors. I am also questioning all the post fiscal cliff worries about slower retail sales going forward based on the payroll tax increase (or more correctly a return to normal), which will mean less take-home pay for consumers to spend. They will find the way to absorb the average paycheck cut of $20 a week with no negative effect on their spending, I bet.
So XRT went up 2% today. I think the reason for the strong move could be the fact that no major discounting was done by retailers this holiday season due to well-controlled inventory, and since the top line looks like it came in just fine (based on today's report), 4Q2012 bottom line may look much better than feared.
Below is the chart of XRT over SPY. Look at how important the retail sector has been in this bull market. Six times a diverging higher low in XRT has helped to mark a bottom on SPY pullbacks.

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Waiting For These Tech Giants To Bounce

Stock market felt the weight of AAPL and IBM today.
I discussed here before why these two giants are the most important indicators of this bull market. They have the heaviest weighting in their main respective indices - NDX and DJI.
I put together a comparison chart that shows how the current scenario may be a repeat of 2010. Both stocks are not trading well and have some unfinished business below their current levels. QQQ (NDX) and DIA (DJI) are going to wait for them to test those levels, and may go a bit lower in the meantime. Once this short-term bearish action is completed, AAPL and IBM will reverse, stop weighing on the overall market, and let it go higher, much higher.

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Mattress Money Is On The Move

On December 23rd, I first expressed my view (read here) of possible "mattress money" exodus, which could propel the stocks to new all-time highs. I continued with my observation (read here) on this development on January 4th. The news about reallocation trade is now being trumpeted all over the media, so this will be the last time I will speak on the issue.

Just one week after many institutional players suddenly woke up (courtesy of FOMC Dec. 11-12 meeting minutes) and realized that they may need to sell some of their US Treasury holdings, we find out about major (historical) retail investor fund flows into equity mutual funds and stock ETFs.

Many market watchers will tell you that retail investors always buy at the top. But the fact that retail investors are also joined by institutional investors in this reallocation trade (out of bonds into stocks) may mean that it will take some time to play out. Stay with this trade until it stops working. Use the chart below as your guide.

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Big f--ing deal!

No, I am not talking about Joe Biden, who helped to reach the fiscal cliff deal. I am talking about the NHL collective bargaining agreement between the team owners and the players' association that was reached earlier today.

I am a big hockey fan, so for the past three months (the regular season was supposed to begin in October) I was eagerly awaiting the result of negotiations. Traders need to take their mind off the market and have something relaxing to do in afterhours. Watching hockey is my way of relieving stress.

I want to congratulate those of my readers who follow, admire, or even play this amazing game. We do not have to worry about another possible lockout for the next ten years.

Is This Time For Real?

Many market players have been unsuccessfully calling (for a while) for bond and equity funds flows to start reversing. Yesterday's hawkish FOMC Minutes release may have caught most of the bond market "mattress money" asleep. I think that "reallocation trade" may have some legs if economic numbers continue to surprise on the upside. Be ready for NFP in the morning.

Correlation chart is backing up my view, at least for now.

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