2012 Continues a Similar Pattern

With the exception of the very first trading day of the year, each and every session in 2012 has continued to take on an eerily similar pattern. As I mentioned on Tuesday, it appears that the new trend is for traders to simply go opposite the direction indicated at the opening bell, regardless of what the futures market had been doing prior. Next, the bears make some menacing moves for about an hour and stocks react by doing their best imitation of water falling off a cliff. But just about the time the closing bell rings in Europe, the dip-buying bulls arrive and the indices proceed to march steadily higher for the next five hours.

The first observation I’d like to make is that I find this new pattern to be quite interesting, primarily due to its longevity. Day after day, the same pattern presents itself as the bears look to take control only to be pushed aside by a steady stream of buying. And with the exception of one day this year, the market has proceeded to close near the high of the day – well, after the requisite sell programs are run in the last five minutes, that is.

Yet, at the same time, we should also recognize that while the intraday trend of the first eight days in 2012 has been remarkably similar, the overall market trend seen over the last sixteen days looks to be something that we haven’t witnessed in a very long time – a good old fashioned uptrend. Sure, there have been a couple big moves at the open and it is true that holiday periods tend to be quiet. But for the most part, our furry friends have been nowhere to be found for more than three weeks now.

The point, opaque as it may be thus far, is that the market’s character could be changing. I recognize that the big macro bears out there have not changed costumes. This crowd is steadfastly negative and not about to change their tune. The glass-is-completely-empty crowd focuses on the sovereign debt crisis and assumes that the quick bear market the indices experienced in the August-October period was only a warm-up act for what is to come. And I know of a handful of macro traders that are just now starting to put out their shorts in anticipation of the global smackdown they anticipate.

Even those who are willing to admit that the sky might not fall this quarter are sitting and waiting for things to return to what has been the norm for the past five months – i.e. an intensely volatile period tied to any and all news out of Europe (true or otherwise). But anyone watching the game closely will also have to admit that although the news flow out of Europe hasn’t stopped, the violence has.

After the recent prolonged period of market misery, it is indeed nice to see a market that doesn’t move 3% – 4% each day. It is nice that stocks are no longer reacting to each new idea floated about what to do next in Europe. And it is nice to see that green plus sign return to account statements.

However, the steady, almost boring, uptrend is likely making anyone holding long positions a little nervous these days. Everyone in the game recognizes that stocks are overbought and that there is resistance overhead. And I’m guessing that everyone remembers all too well that the bears like to make a scene when they reenter the game.

So, has the bear trend truly ended or are traders merely waiting on the first wave of earnings? Is the market climbing a wall of worry or are the bears merely biding their time? Are the mutual funds snapping up values not seen in a while or is this just another “breakout fakeout?” Is Europe on the road to stability or is the recent pullback in rates just temporary? Is this a bull, a bear, or something in between?

Frankly, I don’t know the answer to any of the questions posed. However, I am experienced enough to know that fighting the last war isn’t usually profitable. Please don’t misunderstand; I am NOT saying that “it’s all better now” and that the bulls are in charge. But I am open minded enough to recognize that things are a bit different than they were and that the game could actually be changing. Again, we shall see.

Turning to this morning… European markets and U.S. futures initially celebrated another better-than-expected bond auction in Italy. However, disappointing earnings from JPMorgan Chase have triggered some selling as futures now point to a lower open on Wall Street.

On the Economic front… The government reported that Import Prices for the month of December fell by -0.1%, which was below the consensus for an increase of +0.1%. Export prices fell by -0.5%, which was below last month’s level of +0.1%.

Next, the U.S. Trade Deficit expanded to $47.8 billion in November, which was greater than the consensus estimate for a deficit of $44.7 billion. The October reading was revised to $43.27 billion from $43.47 billion.

In addition, we will get a look at Univ. of Michigan Sentiment at 9:55 am eastern.

David Moenning
Editor:  The Daily Decision