Stalemate

Markets can be excused for lacking any conviction this week. After a rally that has been based mostly on 'less bad' news, technicals have dominated fundamentals so far this year. The positioning and overly bearish narrative that preceded the rally was a fat pitch for contrarian bulls, in hindsight. The result has been a surprisingly positive backdrop for stocks in the first third of the year that has defied the consensus of a hard landing.

Earnings reports are now rolling through, revealing the Swiss Cheese nature of this highly uneven economy. And the choppy reactions so far speak to the huge divergence in corporate business models. One company beats and another misses. One company guides lower and another raises. And some, like FRC this morning, 'miss' spectacularly and refuse to take investor questions on the conference call. Off with their heads!

First Republic Bank

You can be excused for being confused, given the widely divergent outlooks from various talking heads on Bloomberg. And from talking bloggers too!

Optimistic 'over the valley' scenarios, based on a shallow recession and lower discount rates, have been winning the face-off against the hard landers recently. But growing evidence of decelerating economic fundamentals in the U.S. is a sobering reality check for the bulls. Bonds are 'pricing in' a weighted average of the two views, and have recently stabilized after a rough couple of years. Stocks only look attractive if you assume that continues. The resulting impasse has also driven money off the sidelines into mega-cap stocks that exemplify investor preference for quality and low economic sensitivity. But the cyclical components - small banks especially - are still getting trashed from the effect of an upside-down yield curve and growing economic softness.

I don't know what you think, but a macro-driven investment strategy seems futile to me. The result has been a self-hedging market at the index level, with a sideways bias. And the relentless crushing of index volatility has driven speculators into the daily options market. Day trading is back. Reflecting this, there is now a single-day VIX index to play that short-term game. Macro swing trading is a dying art. And now I know what last year's Meme Stock players are doing to kill time!

I have been on record looking for this type of trading environment for the year choppy and upward biased. That doesn't mean I like the 'market'. Sluggish fundamentals are a double-edged sword for risk assets. Lower discount rates and a lack of alternatives are behind the rise in the S&P but the narrowness is frustrating for those of us who want to reinvest surplus cash. Banks, Small Caps, and a whole host of Basic Cyclicals are uninvestable until the Fed is back in stimulus mode. That outcome seems like it's being pushed out further due to the glacial pace of the recessionary forces at work.

So now that I have given up on trying to call the market, I can relax and enjoy the impending golf/bike/beach seasons. The smart money is holding the same good companies at reasonable valuations they always have. It is irrelevant what the 'market' is doing. But stalemates often break one way or the other. Like a surfer waiting out a lull in the wave pattern, I'm just biding my time for the next set to break the current stalemate for a bit of fun.

Risk Model: 3/5 - Risk On

Now that the RSI has reached the overbought levels above 70 we can see another potential top and shallow pullback forming. We have seen a series of failed attempts to hold on to the higher end of the trading range this year so you can expect a similar pattern to occur. But I do notice that the CMF (money flow) has been generally positive so far this year, thus supporting the case for an upward bias. Any pull-back to the now rising 200 dma should be bought for a short-term trade. A post-Fed rate hike rally in early May would seem a good bet if we get a pull-back soon.

That being said, the weaker seasonality of May through October will soon loom large as a caution to the longer-term view. The threat of a U.S. debt ceiling skirmish later this summer. can't be ignored. The second chart below shows what that looked like back in August 2011. Ouch!

XUI - TSX 60 ETF

Debt Ceiling Shock - 2011