Last week the US market showed some signs of cracking its bullish momentum. The SP500 and NASDAQ fell out of their positive bullish consolidations (pennant patterns everyone is talking about) and broke back down into the August and October trading range. More bullishly, meanwhile, the DJ30 was actually holding above that trading range and continuing its pattern, also holding above the 50 day Exponential Moving Average (EMA), a line generally watched by large institutions. Looking at the SP600 (small cap stocks), it is pretty much doing the same thing. It is holding above the 50 day EMA and still has its pattern going.
We have a bifurcation in the market. The problem I keep coming back to is the serious decline in the NASDAQ. It should be a leader at this time of the year, and especially in any bull market. Also, the financials (XLF) continue to suffer under the weight from the EU deal or a lack of confidence in the most recent deal. No one really believes that any of the deals that have been struck will amount to relief. Higher bond yields in Europe support this.
Spanish bonds last week were trading higher than Italy’s bonds. Why? The ECB is buying Italy’s bonds. It is not buying Spanish ones yet; it cannot afford to. It hopes if it heads off Italy that Spain will follow, but that is not the case. The spread between the French and German bonds was up 200BP last week also. There are other problems with Europe. Germany does not want to approve any of these bailouts. It is going back to the hard line, saying that it is illegal for the ECB to perform this kind of bailout. That casts doubt upon any “deal”. If there is a “new deal”, will anyone really believe it?
So I ask myself, what will be the catalyst for the market to move higher? Are US retail sales going to be enough to do it?