Sage Weekly Letter

Santa arrived not a moment too soon for equity investors last week – The week began with a rocky start as financials came under heavy pressure on Monday with $GS dipping as low as $87 and the much watched $BAC fell below the magical $5 mark. However, both names closed well off of their lows on Monday and never looked back. BAC rallied nearly 14% from Monday’s low to Friday’s close:

 

While BAC staged an impressive turnaround from the depths of the sub-$5 abyss, some of the strongest mega-cap financial names such as $PNC and $WFC are in full-fledged chart breakouts:

 

 

 

The FinViz S&P 500 weekly Heatmap gives the best illustration of last week’s action, which was fairly broad based led by energy ($OIH $XLE) and financials ($XLF):

 

Technology ($QQQ) was a noticeable laggard after Oracle’s ($ORCL) disappointing earnings report – The Russell 2000 ($IWM $RUT) was also a notable laggard late in the week as the other indices such as $DIA and $SPY surged higher:

 

A very weak “breakout” from the symmetrical triangle which lacked the volume that one would normally like to see to help confirm the strength of the move. However, Thursday’s gap higher above the downtrend line does satisfy one of DeMark’s “trendline breakout qualifiers”.

As I was looking over various charts of the sector ETFs such $IYT, $XLI, etc. I noticed that many of them are either at or very close to major resistance levels. Moreover, many of these sectors are forming potential inverse head & shoulders formations as my friend and excellent technician J.C. Parets has pointed out. The Dow Transports ($TRAN) are right on the cusp of breaking through the “neckline” and a major support/resistance zone between 5030-5070:

 

Another potentially bullish development took place in the S&P 500 on Friday – A close above both the 200-day moving average and an important downtrend line:

 

Looking through all of these charts and many others, one could begin to formulate a highly bullish case for the US equities market. However, one must also question the last two days of trading which took place on very low volume and had the overall look & feel of algos painting the tape to inflict max-pain on poorly positioned shorts. Finally, it should also be noted that the trendline breakout in the $SPX not only occurred on fumes (LOW volume) but it also failed to meet any of DeMark’s qualifiers for a trendline breakout.

So it appears that the US equities market is set for some sort of resolution in the final week of the year, which will either come in the form of a breakout which could carry the SPX as high as 1300, or yet another failed breakout which could send the SPX back down to the 1200-1220 range as disappointed bulls suffer from a Christmas hangover and are forced to puke up their shares. I, for one, question whether this vicious market is once again lulling market participants into a feeling of complacency just in time for the volatility to pick back up again in the new year.

I will leave you with two charts to ponder, the first one is the $VXV (S&P 500 3-month volatility index) which on Thursday reached levels it hasn’t seen since early August before all the fun got started, the second chart shows the tremendous recent disconnect in the correlation between the S&P 500 and $EURUSD – I began to point out this weakening relationship in November, perhaps this divergence between the world’s largest equity index and the world’s largest currency cross has now reached an extreme point:

 

 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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