The general market's three-day reaction rally came to an end yesterday after making intra-day highs and promptly reversing to the downside on heavy volume, which was up across the board. The Dow Utility index was up as were some industry groups such as Non-alcoholic Beverages, suggesting a defensive posture. This morning futures are down indicating that yesterday's reversal is continuing. The indexes remain a scant distance away from their 50-day moving averages, and a breach of support levels would confirm further weakness. The Market Direction Model remains on a buy signal, and yesterday the UVXY Model went back to a buy signal before the closing bell.
While technical action remains bearish, economic news on Thursday helped the markets higher earlier in the day as initial jobless claims were not as high as expected, the Chicago Purchasing Managers Index was better than expected, and the revised reading on Q4 GDP was revised from -0.1% to 0.1%. Friday's economic news also showed euro-zone inflation falling to 1.8% in February from 2% in the prior month, though January unemployment rising to a record 11.9% from an upwardly revised 11.8%. With inflation now below 2% for the first time since late 2010, the ECB has room to cut rates and continue their money printing in the form of quantitative easing.
Over in China, stocks in Shanghai pulled back after lackluster China manufacturing data. China's market is massive so it can have a strong influence on world markets. Of course, all of yesterday's news is exactly that as far as the market is concerned, given that it discounts the future, and it is clear that the market sees something it does not like. We believe the "sequestration" is a non-issue as it only means that increased government spending in 2013 will not increase as much and no actual budget cuts are taking place. In our view, the policies of this government are primed to take the economy down, and this may be the primary driving force behind any sustained market top.