Ten reasons the rally is over

1. For the time being, the equity market is going to have to contend with more chatter of the Fed’s exit strategy.

2. The market also faces a new reality. While employment stabilizing (maybe) is a good thing, it means the era of declining unit labour costs and margin expansion is behind us.

3. Market leadership is beginning to fade as seen by the receding advance-decline line on the big board.

4. Market complacency is a worry with the VIX index back down to 21.25. The good news is that insurance against a correction is priced about as low as it can go. Protection is cheap.

5. The WSJ (page C1) reports that not only have individual investors been selling into this last leg of the rally (then again, the S&P 500 has really done nothing for over six weeks), but pension funds have been rebalancing too.

6. Volume has declined markedly and has surpassed 4.7 billion shares on the NYSE just once in the past three weeks.

7. With the correlation between a weak greenback and a positive stock market above 90% over the past eight months (versus zero over the past 30 years), a countertrend rally in the U.S. dollar would likely coincide with sputtering equity prices.

8. The Dow transports/utilities ratio has turned in a classic triple-top and this is a signpost to get defensive.

9. The latest Investors Intelligence poll shows the bull camp at 50%; the bear share at a mere 16.7%. In other words, there are three bulls for every bear. This is negative from a contrary perspective (another sign of complacency).

10. Corporate bond yields have stopped narrowing over the past three months and have actually recently shown modest signs of an upward bias.

Source: The Pragmatic Capitalist

A thoughtful quote considering the last nine months of bullmarket

"One of the allures of this business is that sometimes the greatest ignoramus can do very well. That is unfortunate because it creates the impression that you don’t necessarily need any professionalism to do well, and that is a great trap."

Michael Steinhardt

Economic data vs. stock market return (S&P500)

Källa: Jon Jonsson

Words of wisdom from Société Générale

Link

Market recap

US stocks rise modestly, even as the dollar rebounds and the day’s data disappoint, but none of the markets moved very much, although there were some potentially significant signposts that appeared during the day.

Industrial production, producer prices reports rise, but not as much as expected, illustrating a lack of demand and pricing power. That could also be seen in earnings out of Home Depot and Target. Home Depot raised its year forecast, but it was still below both Street views and last year’s results, and while Target managed to boost both earnings and sales, it was cautious about the holidays.

It all paints a picture of an economy that’s just really nowhere right now, not expanding, not contracting. Just waiting for some kind of seed crystal to come along and get things growing.

Crude, gold, Treasurys all post slight gains.

Conquered by the bulls?

Will the market continue it´s current bull run? By taking a look at S&P500 and DJIA is certainly seems possible. But for how long?

Comparison omxs30 -90/-00

US Money Supply & Demand

Relative to the growth of bank credit, the growth of broad short-term money as measured in MZM is outsized (shown in the first chart above). The limit of the Fed's ability to monetize various debt instruments already in existence is the value of the dollar relative to the purchasing power of the other major fiat currencies. This explains the depreciation of the dollar. What then are the effects of the monetization of the dollar? One effect, relevant to any investor or speculator, is the surge in gold prices. This is due to people wanting to trade dollars for something more value preserving. Historically, gold is THE investment in this area as it is believed to withstand inflation and act as a safe haven during times of financial uncertainty.

As one might expect the velocity of money, which is the ratio of money supply to the aggregate demand for money (GNP), is very low. This is helping the Fed to keep inflation selectively low, because although there is a lot of money relative to bank credit demand, that increased money is not doing much chasing of goods. It seems to be flowing once again into financial assets, causing speculation and acquisition of the means of future production. The cost of this is yet to be seen...

Weekend humour

USD

USD has been heavily weakened against the SEK during this year. However we may now begin to see a reaction in the different way. A strong support has formed and the current formtion has striking resemblance with a previous , inverted, formation which led to a strong negative reaction.

Recommendation

If USD/SEK breaks throug MA50 go long. Keep in mind though that fundamentally, USA struggles {with major budget deficits and very high levels of unemployment which they are trying to solve by printing money}.

S&P500

S&P500 is one of the most important indices and therefore,
strong movements has high impact on financial markets all over the world. As we can see in the chart above there has been a bullish trend since this summer. By using Raff regression, investors can more easily assess the trend and determine whether the market is overbought or oversold for this period.

The index has formed a weaker trend and momentum in decreasing. Stochastics are going down from high levels and since october highs a double top has formed, usually signalling a market reversal.

Recommendation

Go short or stay liquid if you are actively trading your portfolio. If you're in it for the long run at least buy some hedging och set stop losses for individual stocks. Money management is key even for fundamentalist! A good exit should be around MA50 or when momentum stops decreasing and/or moves upwards but as always, stay alert and be observant of market signs.