A few weeks ago, I highlighted a Market Thought post that suggested a consolidation or cracks. Since then, the market continued to rally with brief corrections, while the specific sector consolidations took place.
The consolidation is frustrating because the oils, industrials and materials took bigger hits than I expected. But banks and technology were enough to hold things together.
Based on the current dynamic of this market, we have a weak cyclical sector but strong enough secular sectors to keep the market a float.
The market is now in a situation where it will see a correction or more of a churn.
Current dynamic:
1. The banks and technology are overbought, but the macro fundamentals for the banks are good enough where they should keep consolidating around book value, until visibility in normalized earnings is seen. (Unless a new reason materializes for banks to trade below book value again.)
2. Technology should continue to do relatively well until earnings give investors an excuse to sell-them-off.
Potential dynamic - continued push higher:
1. Banks hold firm.
2. Technology at best trends higher or sideways.
3. Oil, Materials and industrials come off their oversold conditions as investors realize how inexpensive these names are. China growth fears ease as they continue to show their flexibility to grow their economy.
Potential dynamic - real 5% correction:
1. Banks hold firm.
2. Technology sells the news on earnings.
3. Cyclical names stay flat to down.
Considering the relative strength within the US jobless and jobs data, and Chinese flexibility, I am inclined to continue to believe in my 'new numbers' post.
On a side note: Anyone who thinks Iran is currently priced into the price of oil was kinda proven wrong today. We got a hint of how much Iranian oil was cut off of the market, and oil spiked. That is a commodity trading with out an Iranian discount.
Good stuff Theo.
ReplyDeleteDan