Market bulls found support at the right time and pulled another rabbit out of their hat. It's good to have friends in high places, as the Fed's POMO money continues to flow, including another $6+ billion today for the purchase of Treasuries (which tends to find its way into equities). Last Wednesday, I suggested that the extreme weakness might have been a selling climax, and it turns out that is was – at least for the short term.
In the face of mixed economic news (including horrid numbers on new home sales today), continued unrest in oil-producing regions, combat operations in Libya (on top of ongoing war in Afghanistan and Iraq, let's not forget), plus of course the catastrophe in Japan, the SPY nonetheless managed to find support at the 100-day moving average. Such global turmoil typically would not be supportive of a bull market, but bulls and their friends continue to find reasons to stay invested. This is a bullish behavior, particularly given how far the market has rallied over the past two years since the March 2009 V-bottom.
The turmoil has resulted in a flight to quality into long-term Treasury bonds, which have surged since mid-February. Once the equity markets prove that the bulls aren't going away and the speculative players return, we should see capital flow from Treasuries back into equities.
Looking at the SPY chart, the eery similarity between the technical pattern since mid-February and the November pattern broke down when the 50-day moving average failed to induce a bounce. In November, the third test of the 50-day led to a bounce on December 1, but this time the third test failed, and the bottom fell out.
However, the pattern is now looking very much like it did last August. The biggest difference between the two timeframes is that the 100-day moving average was resistance in August but is now serving as support, which should be a more favorable setup. Although the 50-day moving average is now former-support-turned-resistance, you can see that it provided no resistance at all during the early-September rally from that similar August pattern. We'll see what the next few days bring.
Last Wednesday, the SPY was struggling to hold support at its 100-day moving average, with Technology (IYW) leading the decline and Basic Materials (IYM) and Energy (IYE) doing their best to stem the tide. As I said last week, strength in the Energy sector can't save the market alone – Technology (IYW) needed to reverse quickly. And it did, helping the market bounce with leadership from Basic Materials (IYM) and Energy (IYE), as well as Industrial (IYJ).
The TED spread (i.e., indicator of credit risk in the general economy, measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) is holding steady at 22.38, which is still low in its normal range, although a good bit higher than it was in the September to February timeframe when it was lounging comfortably around 15. Fear as measured by the market volatility index (VIX) had briefly spiked above 31 and closed last Wednesday at 29.40, but it has since come back down quickly, closing today near its low of the day at 19.17, which is slightly above its 50-day moving average.
I expect the market will continue to find a way to work its way higher.
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