Market Pulls Back From Overbought Reading

Yesterday I mentioned that the market had moved deep into overbought territory, and that sentiment among options traders had become too complacent in the near-term. A look at the graph below shows how the oscillator has rallied back to its mid-December level, and now appears ripe for a pullback.

The catalyst for the pullback were some downbeat economic reports and an earnings warning, but those news items aren't all that surprising in this environment. The ADP employment report indicated 693,000 jobs were lost in December (vs. -493k consensus). This is a big figure, and although ADP's numbers are volatile, it has traders worried that Friday's payroll figure could also show a large decline.

Semis are the weakest group this morning, after another guidance downgrade from Intel (INTC). The firm now sees Q4 revenue near $8.2 billion (vs. $8.7B consensus). Financials are also weak after analysts at Oppenheimer said they expect banks to raise more capital in 2009.

On the plus side, Monsanto (MON) topped earnings estimates and raised guidance for 2009. That helped spike the stock +15% higher.

Asian markets were mixed overnight, with Japan higher and India sharply lower. Japan had its first 7-day winning streak in nearly three years. The government there will look to eliminate capital gains taxes for foreigners investing in Japanese companies.

The dollar is lower today, but so are oil, gold, etc. Oil is being hurt by a build in supply, which is pushing crude prices back down below $46. The 10-year yield is down slightly to 2.46%. And the VIX is up +6% back above the 40 level.

Trading comment: I used the strength in the market yesterday to take profits in my trading longs and trim some other positions. I will look to buy back into these positions on a pullback, including my index and sector ETFs. I have not really added that much to individual stocks here as I prefer to wait until Q4 earnings reports and guidance are announced.

long MOO