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Sunday, January 22, 2012

Market Thought... cautious

From my last Market Thought post 'conflicted', we saw the market push with slightly higher, while the 10yr yield has pushed higher.

The attempt to breach from the SMA should let the yield test 2.1-2.2. (Maybe 2.3, but I do not know if the market has enough juice for that just yet.)

The rise in yield corroborate the lower volatility we saw Friday.  But the decline in volatility is entering a patterned area of complacency. Combining the overbought condition across the board, and the subtlety of weakness from the industrials (which led this rally) and oil on Friday, the equity market maybe setting up for a consolidation next week.

If we are to assume the current market action is an extension of the March 2009 rally, then we are at the top-end of the "cautious" mark, with some wiggle room for the Vix to decline further.

The subtleties are present, but the obvious earnings positives and nice yield rise should keep the market afloat until a catalyst is present that tells the big boys enough is enough.

A the most obvious catalyst to a consolidation is the FOMC Meeting announcement. Maybe we see a blowout top when the Fed indicates the economy has strengthened, then an intraday reversal which would trigger the market consolidation.

At the moment I am not sure to the severity of the market consolidation. Maybe between around 1260-1280, but I am fairly confident the SP500 will not break its 360SMA (near 1240).

Regardless to the above assessment, this past week showed the market correlations are being broken. Stocks with positive stories will trade based on their stories.

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