Analysis: Investor sentiment has decreased while financial writers enthusiasm has increased. One group will be right, and so far it is the financial writers and money managers. VIX remains in the complacent zone, which reflects the bullish bias, as well as an attitude the Fed won't be tapering anytime soon. The most bullish indicator is moving averages, and the market trend is clearly in an uptrend. The most significant development this week is the spike in the 10-year yield, which is pressuring bonds.
Opinion: This will be a shortened week because of the holiday, so trading should be light. As we enter the holiday season, it appears as if the market will give us that Christmas rally. The trend is up, the Fed is being cooperative, and sentiment is generally subdued.
For your information, retailers are giving out fantastic deals before and during Black Friday, including 50% and 60% discounts. Perhaps it's because of the shortened shopping days (compared to last year), or that retailers are desperate. It's too early to say for sure, but I'm stunned at some of the deals (especially in clothing).
There are also a few lumps of coal looming in the background. First, as the yield on the 10-year rises, bond prices go down. In a week or so, bond mutual fund investors will open their statements and see losses. As the yield climbs to 3 percent, those losses will increase. In fact, 3 percent will be a significant turning point in the bond market, and the media will announce it all day.
When the yield does hit 3 percent in the future, and bond losses increase, bond investors have choices: Stay put, move to cash, or move to the stock market. Many believe bondholders will move to the stock market to chase after higher returns. Others think they will move to cash. I have no idea what bondholders will do, but I know this: The 30-year bull market for bonds is coming to an end, and the financial world will change.
Another distressing development is emerging markets. The Chinese say they are on the right track, and investors believe them. As a result, the Chinese stock market is in bubble territory (up 20 percent in four months), and bubbles never end well.
Meanwhile, other emerging market countries are in deep economic trouble (Brazil is the latest). Even some European countries are showing more signs of trouble (i.e. France). I'm not sure how this will play out, but if there is going to be a market correction, the catalyst will likely come from emerging markets or bonds. The clock is ticking for both, and it will not be pretty.
How will this affect the U.S. stock market? The positive view is that the U.S., although not out of the woods, is stronger than everyone else. In addition, you can't fight the trend, and the trend is up. The negative view is the world's problems, as well as a bond dislocation, will negatively affect our stock market. Seems obvious, right? Except that our stock market has so far been bullet proof. It's possible that as the world's problems increase, investors will flock to the U.S. for safety.
The world is a dangerous place, and an unknown catalyst can cause a correction or major pullback. With the holidays approaching, the bulls have the edge, but it may not last long.