Is The Market A Hot Air Balloon?

The U.S. market made new highs yesterday (in the DJIA). Certainly, the market makers are fueling the balloon with fire.

My radar screen looks as colorful as these balloons. Stocks such as JetBlue (JBLU) roared into an unconfirmed Recovery Phase. Other stocks such as TripAdvisor (TRIP) and Pandora (P), fell hard.

The Modern Family all gained. Regional Banks (KRE) went neck in neck with Transportation (IYT) for the highest percentage gainer. Granny Retail barely budged. However, at least XRT is holding above 40.00. It’s Russell 2000 (IWM) where I always keep my focus. No surprise that ahead of the FOMC minutes due out Wednesday, IWM had an inside day. Yesterday, IWM made a new all-time high and closed on the intraday low. With today’s inside day, tomorrow sets up as an anything-can-happen day, regardless what everything else is doing. When piloting a hot air balloon, there are 2 concerns. First concern-conflagration. Not so much a concern for the market. Most folks anticipate the current flames will go higher in a good way. Of course, too much fire can cause a blow-up.

The second concern and our metaphor for the day? What would a market tangled in power lines look like?

“The greatest threat to the bull market, running into its ninth year, isn’t that valuations are too lofty but instead this period of low volatility and complacency, which statistically should revert to its normal roll and pitch”, according to Michael Gayed, portfolio manager at Pension Partners LLC.

We have a hot air balloon flying in a wide-open field with no power lines in view. So, what if our hot air balloon pilot gets any more complacent? Power lines can show up unexpectedly. Oh sure, the pilot has some control over the balloon’s direction. Yet, what if the market cannot avoid power lines hence runs the risk of electrocution? Watch IWM particularly. Should the Fed create a power line, IWM will fall 149.18 and possibly drop to next support around 145-146.  That will not impact the recent market complacency however. That will merely shake out the longs of the more active traders. What will make balloon passengers panic in the basket is some other watershed event. Which is why I maintain my recommendation that you look at the historically low ratio between stocks and commodities. Yesterday, both DBA and DBC rallied. Perhaps a one-day wonder. Or perhaps the start of something bigger. Regardless, I remind you that when commodities run hot, they sizzle. And when balloons tangle with power lines, they fry.