Last Wednesday’s decision was described across the media as fantastic, wonderful, great and the resulting activity by traders seen as exuberant if not downright euphoric. There were smiles all around. Whatever the Fed did probably was a good thing, for now. We’ll get into the longer term implications of their chemotherapy type action where the cure might be worse than the disease on another day. But as far as stock markets are concerned, you might be happy about what Big Ben is doing for the economy but the stock market is not allowed to be happy about it.
Why? Because there are only two iron laws in life. First of all, Tom Hanks told us there is no crying in baseball and there is no such thing as happiness in the stock market. Oh, you can be happy all the way to the bank but once you get happy with a position, you better be taking it to the bank. That’s the point.
By late Thursday, intraday put/call ratios were trading as low at .48 but holding in the .60 handle. The media claims there is a lot of disbelief in this rally, but if that’s the case, options players have become incredibly euphoric. They didn’t have that far to go, really. One of the issues with this entire bounce is the fact it started with p/c ratios in the .80 handle, no where near the fear levels of last November. So if we are not late stage in this progression, do p/c levels have to get into the .30’s to top it out?
Just about everything we follow with the possible exception of the NDX hit important resistance levels by Friday morning. Even the SOX hit a near triple high in this sequence 79 trading days off the bottom. You can also make a case it completed a small 5 wave progression. One thing is clear; the evening star on the SOX is a credible one. The low on the last bullish bar up on the 18th is 218.92. The close on Friday was 218.71 so the close to end the week is lower than the last buying bar and Friday’s close wasn’t even the low. That low is 216.08 so it does appear that in the very least that buyers have lost control of the sector that has been leading this market up prior to the banks getting involved on the 10th.
I’ll take the Sunday night news event concerning the toxic assets as another sign of a building euphoria. I don’t know that Geithner gets a mulligan off his Feb. 9th fiasco, but we have been down this road before. Come to think of it, the last time we were down this road with the Treasury Secretary, the markets were at important resistance as well.
The big change last week was the breakdown of the U.S. dollar. What that means is we are no longer at risk for a spiraling deflationary depression. As I’ve told you many times here and elsewhere, the dollar needed to jump the 90 handle to open that much larger can of worms. It seems with the speed of the decline, we are working on a new problem of much different implications. We don’t know how far the dollar has to drop, if it will drop to become an inflation or hyperinflationary concern. We do know the lows of 2008 didn’t feel very good. The dollar closed the week at the 38% retracement of the move up so any break here can open the floodgates. If I let my mind wander and hypothesize about the possibilities, if the bottom gets taken out at any time this year, it would open the door to a move down to the magic 61.80 level which would be about 15% lower than the current bottom. I tend to think if the dollar ever gets to those levels, we’d have a whiff of hyperinflation. The other thing we should have learned last year from a technical basis is just because the dollar hit two wide range bars last week does it mean it can’t drop further. It can crash although I’m not predicting that. But coming into the new week, it’s at important support.
Given the fact the futures market spiked in overnight action we have a situation where there are cross currents coming into the week. We are still at euphoria coming into an important resistance area. The SOX looks like it wants to go lower in the near term even though it has higher targets for this pattern off the low. On the other hand we have the banking index which as set a higher high on the daily chart after hitting an important low for the first time since last summer. What I’ll be looking for to start the week is whether the SOX does not confirm action in the banking sector. If that happens I’ll start to look for signs that the rally truly is expiring. Until then, we still have a test of resistance working.
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