So what does this kind of indecision mean? First and foremost, it means that every major asset class is waiting for some kind of catalyst that will provide the reason for moving higher or lower. What this catalyst will end up being is hard to say at this point. My gut tells me that an unexpected announcement by the FOMC could be the most likely scenario, but the Federal Reserve appears to have gone out of its way to telegraph its next move, thus reducing the likelihood of such a development. As with most catalyzing moves, they're difficult to predict with any accuracy.
Second, an indecisive market is one in which investors have little perceived clarity on what lies ahead for the market. As a result, market participants become more inclined to scale back positions and reduce risk. If you've been listening to many of the respected market commentators of late, you will notice that their perspectives have shifted from one of bullish conviction to bullish caution (The traders on the desk of CNBC's Fast Money have been espousing this view for a couple of weeks now. In particular, I think Guy Adami's perspectives are spot on.). Collectively, they are suggesting that the prudent thing to be doing in this environment is to begin paring down winning positions as a result of the equity market's sharp move higher. And while I'm somewhat hesitant to agree with most commentators, I believe this is a prudent strategy that should be considered. If/when the market senses that this opacity is lifting, odds are that things will move quickly in one direction or the other. Given the scale of the current rally and the location of technical resistance above the market, the risk/reward of being long equity at this time does not seem all that attractive to me.
With the backup in Treasury rates that was seen last week and the rather robust bids that were seen today, I thought that it might be worthwhile to take a look at the technical picture for the long-end of the Treasury curve. Since the Fed has said that they plan to focus the majority of its efforts at this end of the curve, knowing where potential support/resistance levels lie should be pretty useful since they are only able to influence long term rates rather than control them outright as they do on the short end. Below is the weekly chart of the 30-year Treasury bond yield.
As you can see, long rates are in a precarious place right now, bouncing between the 38.2% and 50.0% retracement of the 2009 - early 2010 rally. The presence of a chart gap underneath current prices suggests that last week's yield spike went a bit too far too fast. As a result, I wouldn't be surprised to see yields fall throughout the rest of the week in an effort to repair this technical damage. Where yields go from there is hard to tell at this point. However, if the resiliency of the U.S. Dollar Index continues to hold up, this would prove to be a fairly significant tailwind for Treasury prices and lower yields.
A quick word about gold's performance today. Part of me looks as the gold market's inability to stay down during the session as a sign that prices simply must move higher. However, the report from the Financial Times regarding South Korea's consideration of gold as an alternative currency should have brought more buyers into the marketplace. The fact that the yellow metal finished unchanged is a fairly bearish development given this piece of fundamental news. As with most other markets, this is a sign of confusion and indecision in gold, which is not something that's been in place for several weeks now. At the very least, I view today's price action as a sign that the recent rally has reached a stopping point. Whether or not a dip of some sort is coming (as I believe is the case) remains to be seen, but it seems clear that sellers are at least as prevalent as buyers at this point. And with the U.S. Dollar showing some backbone, it stands to reason that gold would be hard-pressed to continue its march higher for now.
Aside from the release of the Federal Reserve's Beige Book on Wednesday, the economic calendar is fairly light this week. We'll get some housing market data tomorrow as well as jobless claims and Philly Fed Index data on Thursday. While important data points, they're not likely to be game changers. As a result, earnings reports should prove to be the focus of investor scrutiny for the balance of the week. If the reports from Apple and IBM are any indication of what's to come, it seems that share prices may have been a little bit ahead of reality since these companies are seeing fairly sharp after-hours selling this evening. And this is after reports that were largely ahead of expectation (Yes, IBM has some issues with respect to contract signings.). This is yet another sign that the equity markets are priced to perfection and primed for some sort of correction. Let's face it, if you beat your revenue estimates by a whopping $1 billion dollars (as was the case with Apple) and investors are still inclined to sell your shares, it's hard to believe that any sort of fundamental development will support share prices. I've been beating this drum for a while, I know, but I simply cannot get on board with buying a market that has been up 7 of the past 8 weeks (in the case of the S&P 500). A pullback is coming. It's just a matter of time.
Until tomorrow.....
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