Sector Detector: Market should be primed to move

Not much has happened for the past few weeks as the market simply churned around SPY 118, seemingly biding time awaiting the election results and FOMC announcement about QE2. (As you know by now, QE2 refers to the second Quantitative Easing initiative, i.e., printing of money to buy back Treasuries from the primary dealers to keep interest rates low and pump cash into the system.)

Well, the market got resolution on both today, and after the usual false starts in both directions, it settled up only slightly on the day, and right up against strong resistance at SPY 120.

With the Fed printing money and pumping it into the system at least through next June, and with the cash clearly finding its way into equities, the bulls have seen little reason to sell while the bears have been observing from the sidelines. But there also has been little in the way of buying as the market continues to consolidate its gains since September 1 and waits for the next catalyst. 

The question is, did today’s news really give a definitive answer and catalyst for a year-end rally? The Republicans won back the house, but the Democrats still hold the Senate (and of course the White House). This might mean that less will “get done,” but perhaps the market will look favorably upon that. Also, QE2 was fully expected. It’s likely that all of this was already baked into the current market prices. In any case, I am expecting a significant market move one way or the other from here soon.

A few weeks ago, I first discussed my observation that the market might be setting up exactly the way it did back in April. "Period A" from mid-January through late April produced a very similar price pattern and MACD setup over the course of slightly more than 3 months to what we have seen since early August ("Period B"), which is now approaching 3 full months. After a sustained bullish run coming off a bottom at SPY 105, both periods came to a multi-week price consolidation zone with a lengthy period of overbought MACD. The current MACD is now crossing over bearishly much like it did in late April, and the current technical pattern, including the 20-40 moving averages, looks chillingly like it did then.

The second chart shows a minor bullish breakout from what appeared to be a neutral “symmetrical wedge,” which could either breakout bullishly or breakdown bearishly. The 20-day moving average has been providing strong support since September 23, but today closed with a bearish “hanging man” candlestick. We’ll see if the rest of the week confirms the bearish indicator.  

The charts have been consistently flashing signs of an imminent trend change, but the bulls won’t let it happen, and every apparent start to a correction is quickly bought and turned into yet another head-fake. Although the charts are indicating that the next significant move will be down, I'm not predicting that it will fall so far as it did the last time. But I think a retest of resistance-turned-support at SPY 115 is overdue and necessary to provide the footing for a continuation of the rally.

After dropping to as low as 17.90 recently, the VIX is now fluctuating between 19 and 21 (note that 21 used to be the bottom of its range of 21-28). Today it closed at 19.56 after closing Tuesday at 21.57. Also, the TED spread (i.e., indicator of credit risk measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) is still comfortably at the low end of its range, reflecting a lack of fear. It closed today at 16.83. Both indicators remain low, and complacency (or a lack of fear) still carries the day.

Also, the major indices of course remain well above their 50 and 200-day moving averages, with the 10-day actually providing consistent support. And, of course, corporate cash continues to be put to work with the acquisitions of strong, well-positioned, undervalued companies.

Latest rankings:  Sabrient’s SectorCast-ETF fundamentals-based quantitative rankings has been in a holding pattern with a neutral to slightly conservative bias. Analyst uncertainty in forward projections among sectors has been the main culprit.

I don’t have access to the current scores today, but they have not changed much as of late. Let’s wait and see what Friday’s SectorCast scoring gives us in the wake of this week’s news events.

Disclosure: Author has no positions in stocks or ETFs mentioned.