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Assessing the Market's Mixed Messages

NEW YORK (TheStreet) -- If you have been trading the markets the last couple of months you have probably recognized that something doesn't seem right. If you traded these markets last week, then you really know something doesn't seem right.

The large swings last week were uncanny. It is assumed that the massive swings we saw are a day traders dream, but I wouldn't be so sure as they were fairly hard to navigate. The end result though was about a 53-point move in the S&P 500 Index (^GSPC) to the upside that almost matched the 58-point previous down week.

Underneath the Surface: We have recently had multiple distribution days (down days on heavy volume), but no recent accumulation days (up days on heavy volume) so one could speculate that the rallies on lighter volume are being used by large institutions to sell into. The facts are that the discretionary sector is still underperforming, while the sectors considered more risk averse such as utilities are outperforming.

Although all of this sounds ominous (and if you are actively trading it feels ominous) I'm still of the belief that this is all part of a healthy correction within a bull market. After a five-year bull run, it makes sense that we pause and digest the enormous gains that have come since the 2009 bottom. The implications of that are more volatility, mean reversion, and more realistic valuations as opposed to momentum being the primary driver. Put another way, fundamentals will now start to matter.

So What's Next? The truth of the matter is nobody knows, but I would assume the volatility, at least for the rest of 2014, is here to stay. I am of the belief that the S&P 500 will visit the 200-day moving average (MA) in the not to distant future. Whereas before I assumed that meant a decent sized correction, I am starting to wonder if perhaps all these price swings are 'buying time,' in that they are allowing the 200-day MA to catch up so that the two shall meet under circumstances that don't necessarily result in a large correction or crash type scenario. This would then be referred to as a correction through time rather than price (but to short term traders might not feel so smooth). We saw a lot of that last year, but on a shorter time frame. Perhaps 2014 will end up as an entire year of correcting through time. If that is the case then investors will have a stale year, but traders if they play it right can greatly benefit.

Are Recent Earnings Reactions a Sign of Weakness? One thing we have seen, albeit still with a very limited sample size, is how earnings reactions are panning out. International Business Machines Corporation (IBM), which did not beat both top- and bottom-line expectations fell 3.3%. Google (GOOGL), which also missed street expectations, but reported a fairly decent quarter fell by 3.7%. Chipotle Mexican Grill (CMG) which beat street expectations, gapped higher but then fell about 6% intraday.

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