Everyone and their mother has figured out the market is most likely due for a pullback this week. We get it. The real uncertainty lies in the one and only, Ben Bernanke. He has a large political incentive to keep the wind in the sails of this market by reinstating the vagueness of QE3’s end with his testimony Tues. This is the potentially large bullish catalyst for equities this week.
The most important thing to remember is that this long-term bull trend is strong and all juiced up on QE3. This means there is still a slight chance Ben could help this secular bull get the fix it needs to pull a flat to slightly green week. Never underestimate Washington drama.
Speaking of Washington, this market has not yet priced in sequester results which could also be a huge market mover in either direction this week. I believe this pricing in has not happened yet because of how numb the markets are from the Fiscal Cliff drama in Nov/Dec. The market is waiting for more information to make its move simply because it’s smarter now. It realizes market overreaction is unwarranted until more news hits the tape. The deadline this Friday makes this pricing in inevitable so be ready for the move.
However, for the most part, this week is littered with bearish landmines. For one, technically, this market is looking very weak since most major indices broke their short-term trend channels last Weds (I’m sure you’ve all seen a thousand charts of that by now). Add to that the low volume bounce on Friday, the ominous trend of the EUR/USD and the long-term chart of the S&P, and you have “short-term correction” written all over it.
Chart of the EUR/USD, which historically has been an early indicator of market direction:
The long term chart of the S&P:
Fundamentally, bearish risk for global equities comes from this Italian stallion:
Since there are few economic indicators due for release domestically this week, the Italian election results could affect the U.S. markets negatively if European bond yields jump. Any opportunity for fear to creep into this market will only strengthen this building upcoming correction, whether it’s this week or in the next few weeks to come.
It’s also been mentioned in a million articles, but I don’t believe that just because 99% of newsletters are bullish that it’s automatically a reason to be bearish….but VIX has been below 13 for a large part of February…and complacency is not the market’s friend.
Overall, this week will be key in determining market momentum and should be exciting to watch. Traders will have to be nimble to survive. Protective positions are a must. If your portfolio is net long, I suggest picking up a few March 16 calls on VIX.