Bending But Not Breaking

Stocks have opened on a slightly positive note this morning.  Yesterday the selloff started to pick up some steam mid-day but never really gained any traction.  Overall the selloff was fairly mild and volume was mixed.  So we didn't see heavy distribution and we didn't see the type of sharp selloff that we used to see when the market got frothy and overbought.

There has also been group rotations going on with hot groups undergoing corrections and funds flowing into other sectors.  The shale gas plays have had large corrections, many biotechs have pulled back, and the last few days have seen sharp pullbacks in the 3D printing stocks.  So there certainly is profit taking going on in areas that become overheated.

In economic news, October existing home sales were 5.12 million units, which is down from the prior month's pace of 5.29 million.  Also, October retail sales rose better than expected by 0.4%, showing that the govt shutdown didn't have as big an impact as some feared.

The economic reports had bond yields moving higher initially, but bond yields have eased back since with the 10-year yield falling back to 2.69% so far.

Asian markets were mixed overnight.  Japan's trade deficit widened as exports rose 18.6% but imports surged 26.1%.  Major European indexes hover near their lows.

Oil prices are steady near $93.43 and gold prices are weaker today to $1262.

The volatility index remains at low levels around 13.25.

Trading comment: The market continues its recent pattern of bending but not breaking.  The last 2 days could have seen much deeper selloffs and no one would have been overly shocked.  But instead we see this continued mild pullback on reasonable volume, indicating more of another consolidation phase rather than the typical correction most investors are accustomed to.  The downside of this type of action is that it breeds more complacency and at some point when investors have been conditioned to buy each and every tiny wiggle without losing money the market will surprise them with a much sharper correction that will test the conviction of all of the newly minted bears.  It's hard to envision this scenario playing out before year-end, although its possible.  But more likely this is an early 2014 event that folks should be thinking about.