Very interesting day on Wall St. for multiple reasons. Today has to be a disappointment for the bulls. Alcoa was rocking the futures all last night, the dollar was screaming lower, jobless claims came in arguably bullish and the market finished up only 75 bps, Alcoa almost reversed its entire gain and finished up a measly percent, high yield credit did not participate, and financials were lucky to finish positive.
Back to high yield, I said a few days ago the best thing for bears was that equity markets would push up possibly making a new high and high yield not participate. That is exactly what has happened. Since Monday's close, the S&P is up 25 points in three days and high yield credit is wider by 1 basis point. Maybe it is a blip but that should be a warning sign for equity buyers.
The market to me feels like it is torquing. Getting wound up with pressure building. Remember when we broke the trendline from July? Well the last two days the market has been coming up underneath hitting that same trendline. Such a occurrence should not be expected but is not rare either. So far, the market has been unable to bust up above it. Another bigger trendline is starting to come into play. That is the trendline down from the entire bear market, from the October 2007 high. That trendline is still up at about 1100. Than you have the 88 week moving average that will hit 1067 tomorrow. Most media outlets do not talk about this moving average but some Wall St. guys swear by it. So right now we are sandwiched beneath the trendline from July that we broke below and the market has been bouncing off of from underneath, the trendline below us which goes all the way to the March bottom, hitting up against the 88 day moving average, and the 1080 high from late September. Add that to the dollar which briefly broke below the September low today that has been getting pummelled and is now getting the attention of everyone and the Euro which did not set a new high today and you have a toxic mix.
So something is going to give. I really don't know which way the give is going to be. I lean bearish (maybe because I am biased) simply because of the market reaction to Alcoa, high yields non participation, and the market is somewhat overextended. I would be surprised if it is tomorrow. The market can still wiggle tomorrow with giving its next move away. I would expect early next week. Time will tell.
One theory, I am just going to throw it out as maybe a 20% probability. The most crowded trade right now is to hate the dollar. Sentiment is as extreme as when the markets were at their March lows. Latvia is making serious news again over in Europe. Yesterday the Swedish Krona got crushed along with the Latvia currency (i could explain it all and why Sweden is involved but don't have time). Could it be over the weekend things don't go well in Latvia, the risk to the Euro goes up and hence starts to fall which reverses the whole dollar trade?? The risk of Latvia spilling over into Europe and the rest of the world is not high but it is not zero either. So far, investors are ignoring it. Just a hypothesis I am throwing out there. Not something I would bet on but the markets feel like something is about to give.