While last week the S&P 500 had the largest week-over-week loss so far in 2012 (pathetically little), we have yet to see a strong reversal day that would shout much louder about an impending mean reversion move lower. Such a reversal day or series of days almost always occurs at intermediate-term tops and should take the form of a visually clear candle, such as a bearish engulfing candle, a shooting star or something similar.
So far, however, as overbought as stocks are, we remain in a decisive uptrend — even the most recent uptrend dating back to late November 2011 is intact and next support levels are at 1,375 and 1,340. On the upside, 1,420 and 1,440-ish are potential target zones.
The U.S. Fed’s balance sheet seen relative to the European Central Bank has stayed fairly flat so far in 2012. The balance sheet of the ECB, however, has inflated by around 10% and explains much of the move in equities, which then led to investors having to chase stocks higher. Simply put, the recent rally in risk assets has been a government-sponsored move coupled with some marginal improvement in the U.S. economy and levered with great hope of another perma-bull 20-year upside run in stock prices.
The dollar remains in a longer-term downtrend thanks to the deficit and the printing press. On a 12-month look-back, the dollar has shown improvements but has to prove it can sustain the rally off the early 2011 lows. Last week’s weakness has not heavily affected the near-term uptrend, but the index must regain the 80 mark to be taken more seriously, and hence potentially serve as bigger headwinds for stocks.
A quick look at early-cyclical semiconductors, specifically at Intel (NASDAQ:INTC). The stock remains at a huge spot of resistance near $28, which has served as resistance all the way back to 2005.
On the daily chart of INTC we see the orderly albeit very steep ascent off the August 2011 lows. To us, the stock fully depicts much of the 2012 rally and as such is a key stock and sector (semiconductors) to watch for potential reversal/correction signals.
This week on Friday we have the confluence of week, month and quarter end on Wall Street. For many funds who have missed the latest ground stomping rally, that might or might not mean gobbling up a few more shares in the early part of the week while the second half of the week might already serve as a profit-taking zone for some. It’s called T+3.
In terms of volatility — and yes, we are aware of the various influence potentially keeping the VIX artificially low — the current sub-15 print seems loonier than Daffy Duck. The last two volatility spikes on the VIX chart below more or less correspond with the end of QE1 and QE2.