(Marco Bonelli) Will a 180 degrees turn in headlines and market developments lead to a 180 degrees turn in sentiment?
Yesterday, a stronger Dollar (after massive Japanese currency interventions) and rising doubt about the effectiveness of the European rescue package (kind of surprising that it took so long) already set the ground. A weaker October Chicago PMI added a bit more to the downside and today, weak Chinese and European economic data and Greece, letting the people decide if they want to stay in the European Currency Union or go on their own, doesn't really help to soothe concerns and lower the uncertainty.
Despite an extraordinary overbought level in the market (for instance, 94% of all SPX stocks traded above their 50day MA and 100% of the SPX financials traded above their 50day MA), sentiment became even more positive as traders and investors embraced a more optimistic fundamental outlook. Maybe yesterday and today is just an act of cleaning up the technical chart picture (in addition to the overbought conditions, all major and many sector indexes traded close to multiple major technical resistance levels), maybe it is a retreat to a more realistic but still positive outlook or maybe it is the start of another leg down that will find the markets revisit the lows from early October...
Fundamental data and the FOMC and ECB Meetings will be key in determining the next market direction this week and the weeks ahead. If sentiment doesn't drop from exuberantly optimistic market outlook and economic data remain mixed to weak, the downside risk could be substantial.
Just one last interesting fact: "Large increases in the value of bonds have boosted the three-decade return on Treasuries to above shares for the first time in 150 years. On average, long-term government bonds have gained an annual 11.5% since 1981, exceeding the 10.8% in the S&P 500" (headline from Seekingalpha.com but reported in various other news publications).
As winter already showed its ugly side on the East Coast last weekend, it looks like investors might need to dress a bit warmer than expected.
Trade well.
(Marco Bonelli is the Managing Director of International for CL King & Associates in New York. The opinions expressed are his own)
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