At the end of January and into the first week of February, we penned a handful of articles which focused on the question of whether or not the stock market was facing a new crisis or merely a garden variety pullback.
Since the market has been dealt more than its fair share of crises over the past six years, traders have become pretty good at putting on and taking off a "crisis trade." In a true crisis, traders have learned that they want to be short the S&P 500 and long bonds, gold, premium (think VIX), and the greenback.
So, in light of the fact that the "crisis trade" leaves a fairly large footprint, doing inter-market analysis (i.e. looking at all the charts of the "crisis trade") is a great way for investors to determine whether or not a true crisis is commencing.
In this case, we clearly had a falling stock market that certainly reminded buy-and-hold investors of the bad old days of the credit, debt, and Europe crises. However, the rest of the markers involved with a real crisis simply weren't there. Sure, rates were falling, gold was rising, and the dollar was seeing some support. However, none of those charts jumped off the page and screamed, "Head for the hills!"
Then to make matters worse for those seeing the glass as half empty, just about the time prices in the stock market had clearly broken down (an obvious signal that the end was nigh, we were told) the rebound occurred. And six days later, the S&P finds itself a mere 1.5 percent away from its all-time high.
Therefore, it is safe to say that there is no true crisis at hand. Well, okay, not yet at least.
As such, it is probably time to take a listen to what the bulls have to say for themselves right about now.
Bullish Factors Exist
While stocks have quickly become overbought after the +4.4 percent surge seen over the past six sessions, and a period of backing and filling would be logical right about now, our heroes in horns tell us that there are a handful of bullish factors (8 to be exact) to consider at the present time.
So, since I've got a plane to catch, let's count them down, shall we?
#8. The Bad News Was Ignored
Remember those big, bad jobs reports that stunk up the joint on a headline basis? Our furry friends in the bear camp assured us that this would be the death of the bull market. #GrowthSlowing was the battle cry.
However, traders went ahead and did a little reading past the headlines. And do you know what they found? Certainly not evidence of economic death and destruction, that's for sure. The bottom line here is that the bad news from the jobs report and other punk data has been largely ignored.
#7. Overbought Became Oversold
Coming into January, there was a lot of talk about the market being overbought, over-believed, over-owned, and overvalued. Thus, the scare tactics used by the bears worked pretty well in that environment. In short, with traders complacent, it didn't take much to get a dance to the downside started.
So, the overbought condition quickly turned into an oversold condition. And unless you have a really weak market environment on your hands, this is usually a good thing. So far, so good on that score.
#6. Extreme Sentiment Readings Are Gone
The nearly 6 percent correction in stock prices did a nice job of wiping out the extreme readings that were evident on every single sentiment indicator to be found. Complacency was quickly replaced by fear as the talk turned to currencies no one could spell and the words 'emerging markets' and 'crisis' began to be used together with increasing frequency.
But, it is important to recognize that with fear comes better pricing. And anyone waiting for a pullback to put money to work in 2014 was presented with a dandy of an opportunity at the beginning of February.
#5. Crisis? What Crisis?
Although such things have a funny way of coming back to bite you in the butt if ignore them completely, the so-called crisis in the emerging markets has so far turned out to be a dud.
Sure, the outflows from places like Argentina, Turkey, India, China, and Russia are ongoing. However, politicians and the central bankers of the world have learned a thing or two about wielding a "Bazooka" in the face of a currency or debt problem. And while the threat of a "Bazooka" firing may not last, so far at least, talking the talk regarding unlimited central bank intervention has been effective.
#4. Earnings Weren't Too Bad
While there was a great deal of trepidation at the beginning of earnings season, the bottom line is that Q4 earnings season metrics have been largely upbeat. And according to FactSet, Q1 earnings for the S&P are expected to actually accelerate. FactSet says the Q1 EPS growth rate for the S&P should be 9.4 percent, which is up nicely from the 4.9 percent rate seen a year ago.
#3. Blame It On The Weather
The concept of #GrowthSlowing has been a big bearish theme lately. However, point number one is that while the data on the state of the economy hasn't been great, it hasn't been horrific either. And then point number two is that there is a darn good reason the data has come in punk as severe winter weather has been gripping much of the country since before Christmas.
Thus, the bulls can "blame it on the weather" in the hope that the data will improve in the coming months.
#2. The Children Have Learned to Get Along
Another bullet point pointed to frequently by the bear camp is the anticipated battle over the debt ceiling. The nattering nabobs of negativity contend that Washington is now completely dysfunctional and that it is only a matter of time before the children masquerading as elected officials will start in again and drag the economy down with them.
However, this just in ... "House Approves Clean Debt Limit Increase." According to the wires, House lawmakers on Tuesday evening voted to extend the U.S. borrowing limit through March 15, 2015 and the legislation is free of any conditions or amendments. So, another potential bearish catalyst appears to have bitten the dust.
#1. No Surprises!
While no one really expected Janet Yellen to throw a monkey wrench into the Fed's work or steer the message off course, there was a fair amount of fear that Ms. Yellen might let something slip in her first Monetary Policy testimony on Capitol Hill Tuesday.
Instead, the new Fed Chair reinforced the central bank's plan to continue tapering the QE bond-buying program while also striking the anticipated dovish tone.
The real key here is that there were no surprises from Ms. Yellen yesterday. And this appears to have taken some worry out of stock prices.
Where To From Here?
After a quick jaunt from the recent fear and algo-induced depths, stocks have recovered rather nicely. The major indices are no longer oversold. Emotion is back in check. And there does not appear to be a crisis at hand. Therefore, the bulls have been able to put on quite a display over the past six sessions.
The question now, of course, is can the joyride to the upside continue? After the requisite period of backing and filling, and perhaps a retest to fill that annoying gap on the chart, the odds would seem to suggest that the bulls might find a way to retain possession of the ball. But, as always, it is much more important to stay in line with what the market IS doing as opposed to trying to GUESS what might happen next.
Publishing Note: I am traveling for the next week and will publish morning commentaries only as time permits.
Turning to This Morning...
Yesterday's big blast served as a wake up call to the bears as technical levels were overcome to the upside as fast as they had been breached to the downside. Such is life in this changing market environment. Things are fairly quiet this morning. There are comments from the BOE, positive industrial production data from across the pond, and Germany upped their GDP estimate for the year by a tenth. Here at home, futures are slightly below fair value at the present time. Once again there is little in the way of data releases in the U.S. today and traders may be looking for a pause in the upside action.
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
- Japan: +0.55%
- Hong Kong: +1.47%
- Shanghai: +0.30%
- London: +0.07%
- Germany: +0.65%
- France: +0.34%
- Italy: +0.39%
- Spain: +0.45%
Crude Oil Futures: +$0.62 to $100.86
Gold: +$0.01 at $1289.90
Dollar: higher against the yen and euro, lower vs. pound
10-Year Bond Yield: Currently trading at 2.737%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -1.15
- Dow Jones Industrial Average: -7
- NASDAQ Composite: -0.57
Thought For The Day... True knowledge exists in knowing that you know nothing. -- Socrates
Positions in stocks mentioned: none