Market Update For Week Ending December 21, 2012

By: Tony Pallotta | Fri, Dec 21, 2012
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Market Outlook

For the week ending December 21, 2012, the SPX was up 1.18%, the Russell small caps were up 2.76% and the COMP was up 1.53%.

The downtrend that began in October is in a confirmed short on the weekly chart on all indices with the exception of the Russell. The daily chart is flat and therefore this current move is viewed as a countertrend rally. A tradable long is at hand as long as daily support levels are held on a closing basis. Failure to hold such levels will confirm an end to the counter trend rally and will begin testing model support to trigger short on the daily chart.

Counter trend support levels next week are roughly SPX-1418, COMP-2998, RUT-826 and Dow-13,090

Market leader Apple (AAPL) remains in a confirmed downtrend on the weekly chart, while the daily chart is flat with a bearish bias. The monthly chart is currently failing support at 528 with next support at 475. Failure to hold 475 on a closing basis would confirm the March 2009 uptrend has ended on the monthly chart and set up a probable move to roughly 360.


Asset Class Correlations

For the week ending December 21, 2012, the EUR was up 0.11%, copper was down 3.20%, 30 year yield was up 5bp and the Aussie Dollar was down 1.31%. The two biggest asset class headwinds facing equity markets are copper which is very close to short on the daily chart and AUD which triggered short on the daily chart as of Friday's close.

The multi-month divergence with equity and the EUR, AUD, copper and 30 year yield remains. As a result equity may show greater relative weakness as part of any future asset class convergence. Therefore, using any of these asset classes as a directional indicator may likely produce false signals.

Copper versus S&P500 Chart

30-Year Yield versus S&P500 Chart

Euro versus S&P500 Chart


Sentiment

Market sentiment remains extremely complacent as indicated by the options market. Volatility as measured by the vix remains near historic levels that has signaled previous market corrections though up on the week. Implied volatility skew also shows complacency as demand for speculative, out of the money options is low, though it did begin to rise into the end of week recording 127.08 on Friday.

Implied volatility across SPY and IWM showed a sharp reversal from earlier in the week where IV on puts was much greater than calls. The week ended with a more neutral reading on both.

Implied Volatility Skew versus S&P500 Chart


Funds Flow

For the week ending December 12, 2012 $7.2 billion flowed out of domestic equity markets while $1.8 billion flowed in to both municipal and taxable bonds. A very sharp divergence exists over the past few months as domestic equity has seen a net drawdown while equity markets have moved higher.

Year to date, domestic equity funds have seen a net outflow of $127.3 billion while bonds funds have seen a net inflow of $295.2 billion.

Domestic Equity Mutual Funds Flow versus S&P500 Chart


Bottom Line

The equity market remains in a counter trend rally of the downtrend that began in October. But until daily support levels are violated on a closing basis, a tradable long appears at hand. But any long position should be small with very tight stops.

Based on the above divergence with the EUR, copper and Treasury yield, as well as funds flow, a sharp move lower is possible. But caution is warranted until the daily charts once again regain downside momentum and triggers short.

 


 

Tony Pallotta

Author: Tony Pallotta

Tony Pallotta
ReThink-Markets.com

ReThink Market Advisors is a market advisory firm for institutional and retail clients. We provide a non-biased, non-emotional view of where markets are going in the near term. Simply said, we are the mechanical component of your investment.

About The Big Picture: All technical levels and trends are based upon Rethink Market Advisor models, which are price and momentum based. They do not use trend lines nor other traditional momentum studies. To learn more about how the models work, please click here or visit http://rethink-markets.com/model-profile

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