Our models remain bullish longer-term, but we have some concerns on a shorter-term time horizon. The yield on a ten-year Italian bond has crept back up over 5%, a level which was last seen just prior to recent corrections/big drops in stock prices (see purple arrows below). Economic data has started to weaken relative to expectations in a similar manner to what we saw in spring 2011 (blue arrow below). These readings do not mean a correction is coming, but they tell us to pay attention. Note the S&P 500's performance after the blue and purple arrows below.
As we noted yesterday, materials stocks (XLB) are still contained within a two-month consolidation pattern. If the economic outlook is favorable, we would expect to see XLB break to the upside. If XLB can close above 37.65 in a convincing manner, it would alleviate some of our concerns relative to the market's short-term outlook. A failed XLB breakout or push below 36.50 would heighten our concerns.
Higher highs in stocks remain quite possible, but a weak push toward 1,430 could be met with resistance from sellers between Wednesday and Monday. Nothing too alarming has occurred yet, but enough to watch with a skeptical eye.
