Is it Any Different This Time Around (breakout edition)?

By: Elliot Turner

Yesterday the S&P 500 closed at new move closing highs and above its month-long upper range, however it has yet to make new move intraday highs. That begs the question as to whether this is a meaningful break to the upside or another false move that will push price back into the established range. This time around, several significant differences are worth highlighting–some serve as confirmation, some serve as non-confirmation, while others are simply divergences of recent trends and relationships that deserve attention.

The reawakening of small cap stocks–yesterday the Russell 2000 finally broke above its November highs–helps provide fuel to the close above the recent trading range.

The breakout in the retail sector, transports and REITS all serve to confirm this latest move higher. Fundamentally speaking, strength in these sectors indicate that consumer demand may be gaining some steam. With the American consumer an integral component of GDP, and the recent recession a demand-side slump, it is essential to see indications of improving U.S. consumer demand.

However, the breakdown in crude is indicative of lackluster consumption and production in the economy and may be indicative of further weakness in end demand. I have used a chart of the DBO–rather than the USO–as it has not been weakened by contango to the same extent as the USO.

A major divergence is the recent strength in the U.S. Dollar. This can be interpreted in several different ways. On the one hand, it is indicative of an improving macroeconomy and helps bolster American’s buying power. The problem is that the Fed continues to pursue aggressive monetary policy in order to fight deflation and strength in the dollar indicates that deflation may remain a present and persistent threat.

All in all, we have mixed signals aplenty. It will take time for this situation to sort itself out (hence the range of late). While the trade into the New Year typically comes with a bullish bias (even last year in the worst year for equities in generations, we saw a rally that lasted briefly past into 2009) so price may push higher; however, the lack of conviction in volume and the presence of significant divergences makes me a cautious, patient and slow intraday and swing trader. Ultimately these above charts point to the fact that trading remains stock-specific. We must remain patient and await a more concrete resolution of the recent choppiness before aggressively pursuing trades.