Bizarre Market Action

 | Dec 08, 2013 | 7:00 PM EST
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Friday's market action was weird when it came to individual stocks. Before I go over some of the statistics from thhat session, let me just point out why I say "weird." If Friday's employment number is an improvement -- and clearly it is -- then why were the defensive names hot? Why were retailers and other economically sensitive names behaving so poorly?

More specifically, why should General Mills (GM) pop 2.5% while the SPDR S&P Retail (XRT) falls 0.5%? Yes, we did see earnings-triggered pullbacks from Ulta Salon (ULTA), Five Below (FIVE) and some other retailers. But that still raises the question: If employment has picked up in November, then why has retail been in such a bad state? There just seemed to be no logic to Friday's action in that respect. Even the cyclical stocks lagged while the cereal stocks found love.

On a statistical level, Friday's action was not much to write home about -- and the clearest example of this came in breadth. On Monday the S&P 500 was down only about 5 points as net breadth came in at a negative 1350. On Friday, the S&P rallied 20 points and net breadth added 1360. This has resulted in a now-obvious divergence in breadth vs. price on the S&P. You can see this divergence over the last six weeks in the red box below: As the S&P has risen, breadth has gone down or sideways. Even so, the current action represents the first time this year that it has failed to keep pace and diverged to this extent.

Over the last several weeks we've seen a contraction in the number of stocks making new highs, and an expansion in new lows. All this time the S&P has chopped around. On Nov. 15, the S&P closed at 1798, whereas today it stands at 1805. So we've seen a net gain of 7 points in three weeks. That would be fine if new highs were rising and new lows were contracting -- but that is not the case.

This is even more curious: Typically when we get this type of choppy action -- that is, when the market goes nowhere and/or individual stocks go down -- sentiment typically falls off from overly bullish to a more moderate stance. Yet, as we saw last week, the Investors Intelligence readings are the most bullish since 2011 and least bearish since 1987. Consensus Inc.'s bulls are now at 78%, the highest level in years.

The best scenario, in my view, would be a market decline sometime this week. That would cause all the talking heads to see the head-and-shoulders pattern on the S&P, which could force a short-term move in sentiment and thus set up the market for a decent oversold year-end rally.

If we don't get that setup, chances are the market will climb in exhausted fashion, with continued divergences, and ride the underside of this uptrend line.


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