The weakness in equities last week was no surprise to me - though the trigger of the adverse liquidity effect the Fed removing QE was. As I reviewed the charts on the weekend, it became apparent to me that this week coming up could turn out to be pivotal in the tug-of-war between the bulls and bears.
Right now, it's not clear to me whether the weakness last week will turn out to be a shallow correction or a much deeper one.
Cyclical stocks rolling over
As I documented last week (see Take some chips off the table) cyclically sensitive stocks are rolling over relative to the market. A review of some of the major sectors of the US stock market shows this to be the case. Consumer Discretionary stocks have violated an important relative uptrend against the market.
[Related -Tackling China's Debt Problem: Can Debt-Equity Conversions Help?]
Cyclically sensitive Industrials can only be charitably characterized as testing a relative uptrend line:
[Related -Will Job Growth Kill The Bear-Market Signal For Stocks?]
The equal-weighted NASDAQ 100 as a proxy for Technology stocks, which minimizes the effect of heavyweight Apple, has violated a relative support level after rolling over out of a relative uptrend. (Believe me, the relative chart of Tech with Apple is much, much worse.)
The homebuilders, which had been a source of leadership and relative strength, are rolling over relative to the market:
Emerging defensive leadership?
Meanwhile, defensive sectors are rising in relative performance and they appear to be emerging as market leaders. Consider, for example, Consumer Staples:
A key test for the bulls and bears
The way I read it, cyclically sensitive stocks are faltering. Defensive sectors are rallying but have not fully assume the mantle of market leadership. This week coming up is a key test for bulls and bears alike.
Can the bulls regain the mojo? Can the bears get a second wind?
While I am leaning slightly bearish because of negative technical conditions (see J.C. Parets' analysis on negative divergences and the signal from insider selling), I have to respect the upside potential posed by a couple of major market moving events this week.
First, there is the Italian election, where Silvio Berlusconi is attempting a comeback on an anti-euro platform (see this discussion by Joe Wiesenthal of Business Insider on the mechanics of Italian elections). A win by Berlusconi or a deadlocked government could really spook the markets.
The other is the looming sequestration cutbacks scheduled to take place on March 1. Based on the experience of the recent past, it seems that the markets have an ingrained Pavlovian response that there will be a last minute deal and remain relatively complacent about the outcome. I could go on and on about how to analyze the politics of sequestration, but I have no idea of the outcome.
I just know one thing for certain, we will have volatility.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.