End of Day Update:
Stocks closed modestly higher, but it was a respectable performance since we were down 20-points midday. Volume was average as most traders await Friday’s monthly employment report before making their next move.
The tail continues wagging the dog as our early stumble was driven by German weakness. While U.S. and German markets often trade in parallel, it’s because Germany’s export economy is heavily dependent on U.S. consumers. As goes the U.S., so goes Germany. But the opposite is not true. Germany consumes a nominal percent of U.S. output, so a slowdown in the German economy is barely a speed bump for us. That is why it is not appropriate for U.S. equities to be held hostage by German and Chinese markets. These countries need us, but we don’t need them. While a global slowdown is not helpful, it is not fatal to our economic recovery. Without a doubt our markets will break this nonsensical link when traders realize our fortunes are not as tightly tied to the rest of the world as they currently fear. The upcoming employment and earnings season will show just how marginal of a role the slowing global growth story impacts us.
The last few days has given both bulls and bears something to crow about. Today was the third day in a row we rebounded from midday selloffs and finished higher. If stocks were teetering on the edge, these early plunges were more than enough to push us into the abyss. The fact we resisted such an easy excuse to breakdown tells us the market is not as fragile as it feels. However, the daily chart looks horrible and we are clearly in the middle of near- and medium-term downturns. Guilty until proven innocent is the name of the game and until we see real buying push us above 2,000, every bounce should be met with suspicion.
The most interesting setup would be a sharp selloff that shoves us under August’s 1,860 lows on historic volume. But rather than devolve into another steep leg lower, supply dries up and we bounce. This would be the last hopeful holdouts capitulating and the formation of a solid double-bottom reversal pattern. While the market rarely gives us what we want, we can always hope for a great buying opportunity like this. Until we breakout, breakdown, or form a compelling double-bottom, expect prices to remain stuck in the 1,900ish / 2,000ish trading range.
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Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.