Market Breaks Lower Out of Wedge Pattern

John Darsie
May 31, 2013

Today had all the makings of quiet trading session--Summer Friday, last day of the month, market building an upper level range--which is perhaps why it wasn't. After erasing per-market gains within 10 minutes of the open and holding higher the rest of the morning, the S&P took a nose dive after lunch and accelerated lower into the close. The index finished the day down 1.43%. Sell in May, go away could prove to be wise words, after all.

The Fed continues to be the driving force of this market, in both directions. The central bank's dovish monetary policy and QE program has been credited with driving the Dow and S&P to all-time highs, but recent suggestions that the FOMC could begin tapering its infamous asset-buying program later this year has changed the dynamic of world markets. Suddenly, bond yields and interest rates have spiked to their highest levels in more than a year, although they remain historically low.

The 20+ Bond ETF (TLT) sold off early in today's session, but its fierce bounce in the afternoon likely had something to do with the market's downside acceleration. I personally thing the "QE Tapering" narrative has gotten a little bit overdone. The Fed will certainly take notice of what that type of rhetoric has done to the credit markets, and with inflation expectations and jobs growth remaining low I don't think we will see any QE tapering until late 2013 or 2014.

In a low-interest rate/bond yield environment, investor scour the market for yield. A popular destination for that money in 2013 has been the defensive, high dividend yield sectors. With that narrative seemingly getting flipped on its head in the last two weeks, you have seen those sectors show extreme relative weakness. The Consumer Staples (XLP) are one example of that phenomenon. The sector had been leading the market up until Tuesday, when it got rejected at 52-week highs. The ETF has traded sharply lower the rest of the week, and today accelerated even further, dropping 1.96%.

Tech actually showed relative strength today as the Nasdaq ETF (QQQ) and sector leaders (past and present) like Google (GOOG), Netflix (NFLX), Apple (AAPL) and LinkedIn (LNKD) held up well. Intel (INTC) looked like it wanted to break out early after news that the company's chips would be used in new Android and Samsung tablets, but was weighed down by broader market weakness. If the market can bounce or hold up next week, I think you will see INTC break above the recent pivot high.

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*DISCLOSURES: No relevant positions