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MLR - Premarket Pulse August 19, 2013

Though in the black for much of the day, major averages sold off near the close to finish down for the day on mixed volume despite options expiration which usually causes a spike in volume. The S&P 500 is sitting on its 50-day moving average which could act as short term support in the form of a dead cat bounce. Alternatively, QE remains on full so as has happened before, the market could find its low then tip toe higher from here as the Fed may not begin tapering QE until well after September, depending on how the economic story plays out. Still, keep your stops tight in this tentative environment which has been riddled with distribution days, weakly acting leadership, and ominous signs from the Hindenburg Omen.

Bonds hit a new low as they telegraph an eventual tapering of QE. Markets are often forward looking by at least 6 months. In the meantime, stocks and precious metals can move higher on growing evidence that global economies may be turning the corner. Of course, this evidence may be short lived as the markets would need to see continued evidence of renewed growth in the coming months.

In economic news, data was mixed across housing data, productivity, and the University of Michigan's consumer sentiment survey which was weaker than expected. The less evidence the economy is turning a corner, the longer the Fed will keep their foot floored on the quantitative easing pedal.

Precious metals jumped higher over the last week or so as there is growing evidence that the economies may have turned the corner in China and in Germany which implies renewed demand on precious metals. Furthermore, China has an interest in reducing their exposure to US treasurys by buying gold.

To summarize, bonds are weak due to the markets being forward looking on the issue of QE being tapered. Meanwhile, precious metals can potentially move higher with QE on full for possibly a number of months and renewed demand on gold especially out of China. Stocks can also move higher in such an environment provided institutional money flow remains, on balance, committed to buying stocks, though currently, the selling pressure is on the verge of tipping the Market Direction Model into a sell signal.

In stocks, Apple (AAPL) moved higher after last week's patent ruling in their favor against rival Samsung as well as a couple of high-profile hedge fund managers taking stakes in the company, including noted investment activitist Carl Icahn who Tweeted last week that he had taken a substantial stake in the company, helping to drive the price up through its 200-day moving average.

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