Thirty-five trading days into the new year, the S&P 500 (NYSE:SPY) stands just about where it started.
But to say that nothing has happened in the market so far this year would certainly be misleading. In case you haven't been paying close attention, in just a couple of weeks the S&P experienced its first pullback of more than five percent in nearly a year and then recovered the entire drop.
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So, with the S&P within a whisker of its all-time high, the natural question at this stage of the game would seem to be: What the heck is going on here?
Set Up For A Pullback
Investors came into 2014 with a severe case of complacency. The bull stampede was obvious to anyone looking at a chart and just about everybody in the game could reel off the bullish factors evident in the market. As such, every sentiment reading in our arsenal of indicators/models was screaming for attention and one of our long-term sentiment indicators had flashed a sell signal back in November.
See also: 8 Bullish Factors To Consider
And yet, despite the fact that stocks were overbought, over-believed, and becoming a bit overvalued, the year-end rally took place right on cue. So, with the S&P finishing the year at a fresh all-time high, many analysts were looking for the bulls to continue to romp in 2014, though afair amount of Wall Street gurus did go on record as saying that a meaningful correction was likely to occur at some point during the year. But even those relative pessimists said that 2014 would ultimately wind up producing decent gains for stock market investors.
The bottom line is that as 2014 began, stocks were set up for a pullback. All that was needed was a catalyst.
The Little Crisis That Couldn't
Although many in the bear camp were focused on the punk economic data that had started to crop up, our furry friends finally found a catalyst to cause some selling: a budding crisis in the emerging markets.
It turns out that money had been streaming out of places like Argentina, Turkey (NYSE:TUR), Russia (NYSE:RSX), etc. for some time and the continuous outflows were beginning to create problems for the currencies of these countries, most of which you couldn't pronounce, let alone spell properly.
As is often the case on Wall Street, things don't matter until they do. And the currencies of the emerging markets (NYSE:EEM) suddenly mattered - a lot. There was talk of a 1998-style crisis. There was talk of default. And there was an awful lot of selling going on in just about every risk asset.
Cue the "Bazooka"
However, the so-called crisis ended before it really got started. The central bankers of the emerging market countries took a page out of the Bernanke/Draghi play book and quickly trotted out their "bazookas."
In case the crisis measures of central bankers isn't something you keep up on, the idea here is for the central bank in question to threaten unlimited intervention in order to quell the problems in the country's currency. In central banker parlance, this is called the "bazooka."
Boom, just like that, the crisis was over. And the funny part is that the central bankers didn't even have to fire their big guns. Nope, they just had to remind the hedge fund managers and big bankers who were shorting everything under the sun, that they did indeed have a weapon.
Therefore, one day into February, the crisis was over and the rebound was on. However, a great many investors with a bearish bent began to refocus their attention on the U.S. economic data, which had been coming in weak across the board.
Blame It On the Weather (Everybody Else Is!)
One of the big bearish themes so far in 2014 has been the weaker-than-expected economic data. The thinking is that the economy may be hitting yet another speed bump at precisely the time that the Fed is starting to back away from their stimulus plans. And if this thesis plays out as projected, the bears contend that the resulting action in the stock market could be ugly.
But so far at least, the bulls have been able to refute the thesis by blaming the bad data on the weather.
Turning to the near-term, perhaps the biggest theme of the past week was the continued inability of weaker-than-expected economic data to cause any real fear in the market. For example, while the Philly Fed report was a disaster (the index fell into negative territory for the first time in eight months), the report did say that the weakness was mostly attributable to the cold, the snow, the wind, and the freezing rain. In addition, the Philly Fed noted that respondents remained optimistic about the growth of overall manufacturing over the next six months.
The weather also received a fair amount of blame for the 15 percent decline seen in January housing starts. Some of the data contained in this report was downright shocking as housing starts in the Midwest plunged nearly 70 percent to the lowest level on record. But, as anyone in that area of the country will attest, this has been one of the most brutal winters in history. Thus, it isn't surprising that folks are holed up at home and waiting for the weather to break.
In addition, the National Association of Home Builders said that weather conditions dampened homebuyer traffic last month. The cold and snowy weather pattern helped to drive biggest monthly decline in homebuilder sentiment on record in February.
And Yet, Here We Are
Through it all though, the S&P 500 closed Friday within spitting distance of an all-time high.
S&P 500 Daily
So, what's the takeaway from the action over the past couple of months, you ask? In short, it appears that traders are giving the economic data a pass for now. However, it is worth noting that the buying/short-covering that reversed the January correction looks to be waning as the S&P failed each and every day last week to break on through to the other side of the current resistance zone.
From here, investors will want to watch the action around the 1850 zone. It is a pretty good bet that any data refuting the bearish #growthslowing theme could give the bulls the edge here. But it is clear that the resistance overhead is formidable. So, how the market acts going forward will tell us a lot about which team is likely to make the next important move.
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