Terrarium: A Self-Contained Environment Producing Its Own Climate

February 22, 2015

Mish's Daily

By Mish Schneider

We ended last week steeped in the Chinese New Year metaphor of the sheep/goat for good reasons. In 2014, the Year of the Horse became an image engrained in my mind because the market so often resembled a horse-one that loves to gallop yet easily bucks, one that can be skittish but also proud.

2014 was a year to sell substantial rallies and buy substantial dips. Many adages that had held true prior, went the way of the contrarian horse.

But this is 2015. The tenor of the market has vividly changed. Hence, the New Year, new image. If we are to stick with the notion of sheep and goats, we must remember that consolidation evokes the imagery of peaceful grazing. We must also remember that they do not run as fast as a horse, therefore, we see rallies more like trots, not nearly as volatile as full gallops.

Consequently, it stands to reason, although we can expect wolves to appear disguised as sheep from time to time, after the initial scatter or sell offs, the herd’s hunger for forbs will bring them back to pasture to graze and bleat.

Now I believe I’ve beaten the dead horse and sheep analogy enough to make my point; nonetheless, I shall remind everyone from time to time to summon up the glaring differences of the horse versus sheep and how that impacts the variance in tone of the market from last year to the current one.

If we look at the layers that comprise 2015 thus far, we see bullish phases in all indices, a bullish bias going out for the next few months based on the penetration through the 6-month January Calendar range, Interest Rates (TBT) inching higher having a more positive than negative impact on the US market, and the leading sectors and groups roaring to new multi-year highs such as Semiconductors (SMH), Retail (XRT), Biotechnology (IBB), and Homebuilders (ITB).

Moreover, with the volatility index (VXX) or fear declining sharply last week in spite of the Golden Cross (the 50 DMA clearing over the 200 DMA for the first time since 2012), we now anticipate the financial sector (XLF, KRE) to play catch up and Emerging Markets (EEM) to continue to base out.

S&P 500 (SPY) Found forbs and rallied to new highs.

Russell 2000 (IWM) Yet another New high close

Dow (DIA) Found candy and went to new all-time highs

Nasdaq (QQQ) Impressive!

XLF (Financials) 24.90 the January Calendar Range high, yet cleared back over 24.37

KRE (Regional Banks) 41.06 the January Calendar Range High to clear

SMH (Semiconductors) New multi-year highs

IYT (Transportation) 165.17 January high

IBB (Biotechnology) Steroids

XRT (Retail) New highs as I would have expected

GLD (Gold Trust) Action suggests a move to 112 unless it clears 116.90

GDX (Gold Miners) 20.00 needs to hold