We’re only a quarter into 2013 and the S&P is already up nearly 10%. But take a look at the average hedge fund performance and it paints a different picture. After all the fees, most investors are barely looking at a 5% gain year to date, another huge disappointment. So what can we expect this week? Unless the fundamentals get really ugly, most funds will probably buy the weakness to desperately improve performance before quarter end.  
 

The Bellwethers Look Weak:

There was a time when stocks like FedEx and Caterpillar were considered bellwethers. Or stocks like General Electric which hit new highs with the markets.

GEThe last time GE hit a new high was March 8th (the Dow hit a new high yesterday, while GE continues to trade sideways). GE has been basing around its $23-$23.05 support. A break below would initially target $22.65.

 

FDXEven though FDX is oversold in the short term, I don’t expect a strong bounce. If it does manage to bounce (possibly on news), the $102.50-$103 resistance will likely knock it back down (doubt it even gets that high). Around $92 would be a good place to buy.

 

Cracks Appearing in the Currency Market:

EUR vs SPXSince December 2012, the S&P, Yen and Euro correlation has been broken. Correlations between securities don’t last forever, but this trio does have a tendency to revert back to the norm even after spending a couple months apart.

 

usdjpyEven though USD/JPY looks toppy (lower highs, lower lows), it has yet to break its uptrend. A break lower would signal trouble is ahead for the markets (short the Nikkei).

 

eurusdA lot of European equities topped back in February. Conveniently, so did EUR/USD. It’s been basing around the $1.283-$1.286 level. Even though a bounce is warranted, ask yourself who would want to own this pair when there’s so much headline risk? Not many. A break lower would target $1.269.

 

More Divergences:

SPX vs EEMThis is the worst start for Emerging Markets since 2008 (not drawing any comparisons to that year). I realize that money has been flowing out of those markets and into the US, but at some point you have to question whether US markets have gone too far too fast.

 

IYTAs the Dow Jones Transportation average hit new highs, Dow Theorists yelled that the Dow Jones should be bought on any dip. Well Dow Theory works both ways. IYT fell through its $110-$110.30 support (on strong volume) and still hasn’t recovered.

 

XLF

It’s not surprising that US financials are starting to look toppy given the weakness in European financials. Watch XLF‘s $18.03-$18.07 support and the 20 day moving average.

 

The Market Technicals:

SPY HourThe S&P still hasn’t broken out yet. The level to watch is that rising red line. Once that support gives, expect a pullback to $153.

 

DIANobody seems to care that markets are overbought. As long as rallies continuously get bought, this market will trade sideways. The big support level to watch on DIA is $143.50. Once that breaks, it’ll probably go down and test $141.30.

 

Conclusion:

Markets are clearly being held up by hedge fund performance chasing. Even after today’s dismal consumer confidence, don’t expect a pullback until April. Earnings season officially kicks off in less than two weeks. Even though the recent data has been pointing to a pullback, investors might want to know if earnings confirm the minor slowdown before jumping ship.

 

Questions? Comments? Leave me a reply.

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