There’s No Nation Like Rotation

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MARKET WRAP UP 01/04/11

The new year has certainly brought back some intraday volatility that we have not seen in a while. Early in today’s session, it looked like we were on the brink of a much steeper pullback, with commodities leading the way down after a series of nasty reversals from yesterday’s breakouts. However, the bulls were able to get their act together to muster a late day push to finish the S&P 500 down 0.13% to 1270. While commodities and many small cap stocks were weak, some of the larger cap names attracted capital, namely $AAPL $AMZN $DIS $GE and $PFE. Whether we see a further rotation out of the commodities as well as the higher beta names and into larger, more value oriented issues will be a key “tell” going forward. Adding to the case for a rotation into safety was the “hanging man” candlestick printed on the S&P 500 today.

In Japanese candlestick terminology, there is no difference in appearance between a bullish hammer and a bearish hanging man. Both candles feature a long shadow with the real body at the top of the candle, and basically no upper shadow. After a steep downtrend, we call them “hammers,” to illustrate the possibility of the bulls hammering out a bottom and reversing trend. After an uptrend, however, we call it a “hanging man,” to denote the idea that perhaps the bulls are losing the momentum and leaving it hanging out to dry. Either way, we are going to need to see some follow-through to the downside before we can call any type of major reversal here.

Moreover, despite the ugly red candles printed on the daily charts of the leading indices and sectors, we have not seen yesterday’s multiple breakout points breached yet. Thus, like it or not, we are going to need to be as agile as ever and ready to change our market posture at a moment’s notice.

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