Monday, February 18, 2013

Morning Market Analysis

Let's begin with my current thesis of the market.  While there are bullish economic arguments to be made (housing is rebounding, manufacturing is recovering), the negative effects of the sequester and payroll tax hikes are too large to overcome and will slow growth in the first half of the year.  We're already seeing the effects of the payroll tax hike hit the sales of retailers like Wal-Mart.  There is also little good news coming from the international arena, save for China.

The real cause for the rally is a new round of liquidity from massive 2012 dividend payments is hitting the equities market -- a source of money that will dry up by the end of the third quarter if not sooner.  Finally, market breadth indicates we're already very overbought at these levels. 

The daily SPY chart (bottom chart) shows that the rally continues unabated.  All the EMAs are still rising and the CMF indicates a positive volume inflow.  However, the MACD has given a sell signal, indicating potential weakness.  The 60 minute chart (top chart) adds to the concerns about the strength of the rally.  After prices broke through the 151.25/151.5 level they rallied to the 152.5 level twice only to fall back.  The move from 151.25 5o 152.5 is less than 1%, so the lack of continued upward momentum is a bit concerning.

The DIA's 60 minute chart (top chart) shows prices moving sideways with support coming from both 138 and 139 and resistance coming from 140.  The daily chart (lower chart) shows prices broke their uptrend at the beginning of February and have been trading sideways ever since.  Also note the MACD has given a sell signal.

The IWMs -- which I use as a proxy for risk based capital investment -- are still going strong.  The 60 minute chart (top chart) shows that since the February 7 the market has been in a higher high, higher low pattern, a fact that is confirmed by the daily chart (lower chart), where we see a strong, upward movement in prices and rising EMA picture.

The QQQs have an apple problem.   Because of Apple's recent fall, the 60 minute QQQ chart (top chart) and daily chart (bottom chart) show this index has had little to no effect on the overall market rally we've been seeing.

With the exception of the IWMs, all the other major averages rallies appear to be stalling.  The DIAs have been in a tight range on their 60 minute chart while the SPYs 60 minute chart may have printed a double top over the last week.  The QQQs have yet to make a meaningful rally.  However, the IWMs continue to move higher.  Overall, the sum picture of all the averages is one of a weakening market.