Market Thought... cracks or consolidation?

There are a few indicators that maybe suggesting "cracks" in the market. For instance, over the past couple of days CNBC has been touting the weakness in the transports, and Friday they were pointing to the weakness in the Russell 2000.  Both very valid, and there are others to look at as well.

A market leader throughout the current rally was CAT. Unfortunately Thursday appears to have been a break down day, and today there was follow through on the down side.

Throughout the rally, CAT did not breach the 14SMA once, until Thursday.

IMO, the market handled itself fairly well despite this leader breaking down. Which would suggest...

1. the market is lagging

2. there is a rotation supporting the market, and CAT will simply enter a trading range or will find support as it gets oversold and then continue to push higher. (more on this below)

Another point of weakness was an apparent negative SMA breach in the Semi index too.

The same suggestions as above apply. Although the semis are more important in leading market action. As of now, the semis seem to just want to chill around here, as they get oversold. Worse case, they pull back to the 50 SMA, then bounce. But I have a hard time seeing the mid 50 level not holding unless something crazy takes place geopolitically.

Another interesting point is the treasury yield. It hasn't broken from its interim negative position.  The yield is chilling just below 2%, and with a yield below 2%, the sentiment may favor a stalled market.

I think we will see a trading range for the yield north of 2% sooner-rather-than-later.

Simply focusing on the data points above, we would clearly see cracks in the market that would suggest the market finally sees the 3-5% pull back everyone (including me) has been waiting for.

Ahhhh, but the market is never so simple.  On the flip side, we are still seeing very good strength in the financials.

The financial look like they are making a straight line to their book values.  This makes sense since there is stability in the EU banks, improvement in US housing and MBS bonds have been firming up. The only thing that would have caused a hiccup is if the Greek CDS' were triggered, but they were not triggered or at best delayed.  (As an example, JPM and GS have about a 10-15% upward move before they see something in line to their projected book value.)

For the markets to have a serious pull back, without the financials moving downward, is unlikely. As such, the above should not be viewed as market cracks as these cracks are most likely individualized consolidations.  If individual sectors are taking turns consolidating, then this supports a stalled market or a market that is susceptible to a very shallow pullback.

Some over the weekend developments that may help set the tone next week are:

1. China's non-Manufacturing PMI was 48.4 vs 52.9 the month before. (Could be from the New Year festivities, but how the market decides to react to it will be seen on Monday.)

2. Head hurting chatter about Greece's debt restructuring negotiations. The main negotiator is confident they will see the +90% holders agree to the deal, while a day before his comments the tally was at 66%.  (If this changes the perception on the banks, this could affect a sector holding up the market, as indicated above.)