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If the interest rate sensitive issues can maintain their buoyancy over the next couple of weeks, this may be our first indication that the markets will be looking for further monetary accommodation by the new Fed Chair, Janet Yellen, when her term begins early next year.

What a difference a week made as the markets were hit with statistic after statistic of economic expansion and this again convinced traders to move their money out of interest rate sensitive issues. The biggest loser came with the NYSE Bond CEF advance/decline line as it moved to its lowest levels since August 15th and it now stands 52 net declining issues from seeing a new low. With that aside, however, the major market indices actually settled mixed on Friday with the biggest losses seen in the small caps of around 1% while the mid caps and NDX saw the best gains closing up 1/2% week over week.

Looking at the breadth chart array this week shows that on-balance selling was indeed prominent with the NYSE Composite, NYSE Specialty CEF, NYSE Preferred and FTSE advance/decline lines all bouncing off various lines of support on Friday that helped to propel the expected "oversold" reflex rally. However, this higher imbalance in the sell to buy ratio was large enough to where many of our short term indicators, such as the McClellan Oscillator and this week's BETS indicator reading of +20, now strongly suggest that were not likely to see much more improvement than what was seen on Friday, and that a defensive posture should now be maintained for the next couple of weeks.

In other areas, the Precious Metals, XAU and Aussie advance/decline lines all continued to make lower pattern lows this past week. This would continue to suggest that any rally in the gold market should be approached with extreme caution especially if the interest rate sensitive end of the market is going to gang up on this asset class in suggesting that future monetary policy is likely to tighten.

Bottom line...the large cap's 8 week winning streak was finally broken as the actual fundamental reasons of why money continued to bid prices higher became all to clear, and profit taking came in once this good news was known. Last week's weakness in the interest rate sensitive issues may also suggest that the market might be preparing for the Fed's input the week of 12/16 on any "tapering" schedule they might share given that the unemployment rate of 7% is all so close to their policy objective of 6 1/2%. Any announcement of such a schedule would likely have a negative effect on the precious metals market as well as this asset class would starve in looking for any excesses in liquidity that a tighter monetary policy would produce. Given the assumption that equities have already made the shift from that of a liquidity driven market to that of earnings driven one over the summer, no less that we continue to see current liquidity levels in the NASDAQ and small caps remaining buoyant, the expectation for stocks overall would be for continued strength into the first quarter of 2014 once all of the willing and unwilling sellers are removed from the system using any monetary policy changes that we may find out next week as for their opportunity to do so.

In any event, it should be an informative couple of weeks coming up...stay tuned.

Have a great week of trading!

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