It's difficult to comprehend the tape sometimes, especially when you try to square it with the overall news. The bottom line is bulls have placed their bets that the eurozone will be fixed and weaker U.S. GDP both will be met by a heavy dose of QE. Everything else doesn't matter. Bulls don't believe the Germans, despite Bundesbank's comments to the contrary; will block bond buying by Draghi and the ECB. The key phrase in the linked WSJ article was, "If there is no ECB bond buying next week stocks will collapse". This is followed Wednesday by the Fed, which may give QE3 hints or news to confirm this late week rally. If the trend is real, the news must confirm it. So, it's "stand and deliver" time for central banks.
Neal Barofsky, the former inspector general for TARP, continues to shout from the roof-tops what a failure it was. Of course, for a day like Friday, his comments were ignored. The operator of the largest global hedge fund, Ray Dalio (Bridgewater) issued a serious warning to all who might listen. Bank of America analysts also have a bearish view of QE, high equity market outflows and that QE3 would not be a success.
Earnings overall, especially on the revenue side, have been weak. There is no argument about this generally. Guidance by many companies has been reduced for the third quarter. GDP data in the U.S. was 1.5% down from a revised 2%. To call this a recovery is to reinvent the term. Consumer Sentiment at 72.3 is as weak as we've seen this year.
The stunning gamble bulls made Friday was with Amazon (AMZN) where earnings and revenue missed. The company guided the third quarter to a loss but the stock soared on the belief that the company's heavy investment in distribution will pay off for Christmas. That's a helluva bet with the stock trading at 270x trailing earnings.
The dollar (UUP) continued to fall; gold (GLD) was modestly higher ("risk on"); bonds (IEF) were higher in yield ("risk on"); and, commodities (DBC) overall were higher.
Stocks rallied sharply once again putting an exclamation point to "QE algo rally" especially after Bloomberg reported that Draghi would meet with the Bundesbank's President Jens Weidmann to iron out their differences. Bulls must think Draghi has the upper hand. Treasury Secretary Geithner will join in on Monday. (All the king's horses and all the king's men will "try" to put this together again.)
Other than this, words fail me. Volume on the rally was impressive and breadth per the WSJ was positive.
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The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.
The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.
The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge." Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.
It's time for the powers that be to stand and deliver -- Draghi and the eurozone this coming week along with the Fed on Wednesday.
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