Robo Santa Squeezes Shorts: Dave's Daily

On Friday we roughly had 100 daily DeMark 9 setup counts (to close shorts) out of our database of over 580 ETFs and indexes. Monday the number grew to over 300. Technically, when DeMark indicators cluster it generally indicates a trend reversal which happened on this Turnaround Tuesday. No, there wasn't much in the news to account for the rally beyond some obvious spin. New Housing starts were strong but 25% of that was due to rental apartment construction. Reuters and others would have you believe this indicated a bottom for housing: "Housing starts and permits for future construction jumped to a 1-1/2 year high in November as demand for rental apartments rose, suggesting the housing market was starting to recover." People looking for rentals aren't looking to buy any of the excess inventories for sale making this quote misleading.

There was also a better bond auction in Spain. It was also noted Monday that the available funds for purchasing euro bonds was only ¿150 billion. This was too little and meant Spain and Italy had to kick-in cash to the ECB which then in turn would lend it back to them. Perhaps buyers Tuesday remain a mystery but don't count out our own Fed which has proven itself a willing participant in such schemes. In fact, according to this note from SocGen's Aneta Markowska: " Nuclear options -- Can the Fed buy European bonds ? This was a question that came up in Friday's testimony by NY Fed's Dudley to a congressional panel. Dudley confirmed that the Fed has the legal authority to buy foreign sovereign debt if the collateral is considered good and with appropriate haircuts. Though he wouldn't rule anything out , Dudley noted that this has never been done and the bar is extraordinarily high. Theoretically speaking, this could actually be seen as a good option that solves a number of economic challenges: the US would see a weaker dollar, helping to rebalance its economy, while Europe would see its funding costs go down . Yet, we believe that the Fed would be facing tremendous political resistance in the US to such a decision. To date, the Fed's crisis fighting operations have not led to any losses; buying foreign assets would expose US taxpayers not just to credit risk but also to currency risk. The Fed would probably think long and hard before taking such a step, particularly during a politically charged election year." More of her comments continue HERE .

While most will give Santa his due for the rally, I'll give most credit to DeMark and the pressure from portfolio managers and HFTs to lift markets higher. Just remember it was only recently markets rose nearly 500 points and shortly thereafter all that, and then some were given back. There are plenty of hedge fund types with redemptions to meet and fees to earn to mark stocks up before the year ends. The rally will please many but remind others of the casino-like environment that highlight contemporary markets.

The Fed has returned to "too big to fail" plans to protect (bailout) those companies (read: Primary Dealers and other associates of the Fed) from failure. Or as this article from Bloomberg points out "The Federal Reserve sought to curb the risk of financial turmoil by strengthening the central bank's tools for preventing the collapse of large firms and demanding stricter oversight by companies' boards of directors.

"The proposal would create an integrated set of requirements that seeks to meaningfully reduce the probability of failure of systemically important companies and minimize damage to the financial system and the broader economy in the event such a company fails," the Fed said in the draft rules today. So once again Moral Hazard issues are set aside and the debt end game get postponed for another day.

Meanwhile Americans are growing poorer as exemplified by the following graph.

Stocks rallied sharply Tuesday; commodities (oil, gold, grains and etc) advanced while the dollar fell. Bond prices gave back some of their previous gains. Earnings from Red Hat Software (RHT) and General Mills (GIS) came in below expectations and both were sold with little fanfare.

Volume was light which is typical for holiday periods (Hanukkah today and Christmas this weekend) and for recent rallies. Let me repeat, heavy volume sell-offs, light volume melt-ups have been the hallmark of recent market movements  (HFT algos don't give a rip about holidays.) Breadth per the WSJ was  quite positive and perhaps scored a 90/10 day at least on the NYSE.

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The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.

The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.

The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.

Continue to Concluding Remarks

Oracle stunned markets after the close with a poor report missing its own projections. This is just another in a series of tech disappointments that will become harder to shrug off no matter what bulls say.

Once again the powerful rally Tuesday was the result of the following factors: A broad cluster of DeMark 9 counts, arguably meaningless New Home Starts, a well-received Spanish bond auction and ideas that the Fed is ready to backstop any too big to fail companies. That's it. Have a great evening.

Let's see what happens.

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The charts and comments are only the author's view of market activity and aren't recommendations to buy or sell any security.  Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period.  Chart annotations aren't predictive of any future market action rather they only demonstrate the author's opinion as to a range of possibilities going forward. More detailed information, including actionable alerts, are available to subscribers at .


This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Dave Fry is founder and publisher of ETF Digest, Dave's Daily blog and the best-selling book author of Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management, published by Wiley Finance in 2008. A detailed bio is here: Dave Fry.

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