Morning Thoughts May 22

  • Great move on very thin volumes –  closed at absolute highs, vlms 24% below Fri (and 12% below norm) – VWAP a support all day .  Rotation to risk evident (SPX Cyclical/Defensive ratio +1.8%….best one day rally since Jan 18th) – CYC index rallied 2.4%.  VIX fell over 12%.
  • Simply an overdue rally – As of Friday’s close, SPX RSI was lowest for 2012 (and 2nd lowest since 2008 levels), McClellan chart showed most oversold level since Aug 2011, Dow had 12 down days in 13 (not seen in over 20years) and NDX had 9 straight down days…. SPX recoups 1,300…YTD retracement of 1,297 held – NDX recouped 2,500, Russell back above 200day – Nice move on €uro as closed above 1.28 (and commodities benefited as DXY closed at lows).
  • More from the technical side we had an outside day yesterday and the open gap in stocks was not filled…at least not on the S&P 500.
  • The ‘easiest’ trade is now over after yesterday’s bounce and we now must look up for resistance levels.
  • I laid out my SPX resistance levels yesterday…here they are again;
  • 1320
    and 1370ish
  • I will treat each one of them as a target and if hit reevaluate.
  • I remain long SPY for bucket 2 since last Thursday afternoon and about 92% cash.
  • After yesterday’s rally I will now expect any up gap in the morning to be filled as buyers will likely like to snap up prices a little bit cheaper.
  • I am looking to see if folks are buying dips here into month end as they could easily start chasing any rally given most funds are under water for the month of May.

  • Note that the 2-10 year spread in U.S. Treasuries is narrowing still as inflation expectations are coming down…i.e the curve is flattening and that does not bode well for financials.  See the chart here


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