I think we need a fear rotation index. As I mentioned a few nights ago,Europe comes and goes with worries over contagion, today they dissipated with the heavily subsidized bond buying by the ECB in the days running up to the Portuguese auction, ad China and Japan providing a backstop to keep their currencies low and keep trade with Europe flowing and the contagion fears seemed to dissipate today. That may change tomorrow with Spain, but this seems to be more like a 2 week cycle of fear on, fear off.
Municipal bonds and Pensions are now in rotation and for good reason. Take a look at the MUB chart below (S&P National Municipal Bond Fund).
Note how 3C trades in near perfect synchronicity with price for well over a year, then in October, there's a huge change of character with a massive negative divergence that if followed by a massive sell-off about a month later (the divergence was the top).
I expect the cycle of fear will continue to rotate between Europe, the US bond/pensions situation, financials, real estate and foreclosure rulings. When Pimco came out and said they're relatively bullish on municipals, that to me means they've got some to sell you.
Last week I told you about the late 2010 inflow of funds to domestic equity funds, that seems to have been revised to a non event in one case and a minimal event in the second. This after 7 months or so of consecutive retail outflows of cash from domestic equity funds. There's very little retail in the market, this is one reason you see so much churning as HFT firms pass shares back and forth trying to make any pennies they can. The first weekly flow of funds for 2011 is an astounding $4.2 Billion in outflows, the most since October. So much for the Fed's statement in the December 14th minutes that the loss of homeowner value has been made up by gains in the market, that may be an arguable case if there were actually anyone in the market. I gave an example of this the day the minutes came out and even if we weren't seeing outflows from equity funds, the numbers simply don't jive. Then there's the insider sales that have trended on the sell-side for just as long. So we don't just have retail getting out of the market, insiders do too. This market is almost like being in the twilight zone, except we know who's responsible for it's levitation-they released the minutes practically admitting as much.
Last night I mentioned it would be important to watch the price volume relationship today as last night there wasn't a single dominant relationship, but a co-dominant relationship, both were price up, one was volume down, the other volume up. Today we see exactly the same, except the co-dominance is even stronger tonight which leads me to think that we may be entering an overbought condition with two days and the second increasing.
Earnings will still be the main catalyst, however, should we see decent earnings sell-off, you know we've hit that overbought level.
Speaking of earnings, there were no plays that I saw for tonight or premarket, but I'll be looking again tomorrow for after market and Friday premarket.
As for a quick look at the market, as of now Asia is trading higher on calmed fears over Europe, however the US averages are putting in some interesting charts...
And here's the kicker, keep in mind that ascending wedge which is bearish, today the SPY closed with a hanging man breakout. If this proves to be a false breakout, I'd expect that the market will decline fast and the Q's will retrace the entire wedge within a day or two. Just some things to keep an eye on.
Last up-if you are in any of the C&D trades I listed today around 12:30 or so, you may want to stay in touch to maximize the exit as many of the trades have done well and you don't want to give up those profits as they can disappear very fast.
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