Spy off 4.6%, mcclellan dropping off a cliff, but Russell 2000 off 3.6%?
I'm having a little difficult time interpreting the current market situation so I'd appreciate if somebody smarter than me could chime in and provide their feedback. I believe that current price action on the S&P indicates that there's a sell off in the large caps and my ES target is ~1550. At the same time, the NYSE McClellan oscillator has been falling (now off a cliff ) since even before S&P peaked on May 22nd. My takeaway from that is that the big boys were in the process of taking some chips off the table before that date in anticipation of a pullback. However, the Russell 2000 is still holding up better than nasdaq-100 and S&P. Normally, I'd expect the small caps to lead the decline in a serious pullback so the current situation leads me to believe that big money is just reallocating and we will be on the way back sooner than later. On the other hand, the orderly rise in VIX is more worrisome to me than the big unsustainable spikes we had in the few months prior so this could be a tell that a more serious decline this time is in order. Also supporting this scenario is the fact that we're now seeing a large drop in basic materials, commodities, transports and energy sectors which I think are giving us a clue about the macroeconomic near future and company earnings. If demand is down, profits could be down, dragging the market.
Of course this is just my opinion and I could be way off, so I'd like to ask you what you make of this and what are your expectations on what the market in general is trying to do.
Sounds about right to me. The 60yr Gann cycle would support yet higher after a significant pullback first but there are still sufficient loose debt bombs out there to spanner that. Of course the main catch is that with all the CB/WS/Gov activities we haven't had a valid price mechanism for so long that most information is out of the window anyway. Once bond yields start lifting with acceleration then all bets are off.
Rising bond yields could be net positive for the stock market in the mid to long term as it could indicate an increased appetite for risk - the proceeds from bond sales may be channeled to buy shares. The fed's QE efforts since the beginning have not resulted in hyperinflation (deflation first is more likely judging by ballooning balance sheets and muted lending by banks that would increase the money supply) predicted by doomsayers and so the people who were on the wrong side and missed out on the rally could be getting in soon. However, I'm more interested here in the short term divergence I commented on in my first post and what it means for the market in the short term in terms of price targets.
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