Why Did This Happen?

S&P500 daily

End of Day Update:

The S&P500 finally climbed through 2,100 resistance Tuesday on below average volume. The last time we found ourselves this high, the rebound stalled the next day and we tumbled back to the low 2,000s. Will this time be any different?

It was hard to identify a bullish catalyst that fueled these gains. The biggest headline was a disappointing manufacturing report showing the first contraction since 2012. If we put our “inverse-logic” hat on, maybe traders were hopeful this revelation would further delay the Fed’s impending rate-hike. But that wishfulness is a stretch since the Fed already recognized a stronger dollar and slowing global growth would pressure exports. If traders were buying this headline, they were grasping at straws.

The most likely explanation is the one I’ve been talking about for weeks. It is getting harder and harder to find owners willing to sell their stocks regardless of the headlines. If terrorism and a NATO nation doing a Russian jet won’t spook stock owners, are one or two points on a manufacturing report going to make a difference? Given today’s price-action, apparently not.

While we have countless reasons to sell-off, it is far more insightful to look at the market’s response to these bearish headlines. Rather than argue with the market and demand it go lower, we should acknowledge this uncanny strength in spite of the bad news. If we are open-minded enough to listen, the market is telling us it isn’t bothered by these widely known issues because they are already priced in. While a stubborn trader refuses to believe bad-news could be priced in near all-time highs, what he is failing to account for is where we would be without these economic and political headwinds. 2015 has largely been a bust because we are trading at the same levels the year started at. This is in comparison to the nearly 20% yearly gains we’ve averaged over the last six-years. If we continued to receive positive economic news throughout the year, there is every reason to expect we would trading near 2,500. That means slowing global growth, a strong dollar, slumping energy prices, and a sluggish US recovery have already taken 400-points out of our market.

It’s been a bumpy ride this Fall as we digested these headlines. Over the last four-months, nervous traders have been given plenty of excuses and opportunities to bail out. If the headlines didn’t scare them out, then no doubt the plunging prices did. But just as things looked their worst, we bounced. This recovery wasn’t driven by good news, it came from running out of sellers. Anyone who wanted to get out sold their stock at a steep discount to a far more courageous dip-buyer who demonstrated a clear willingness to hold these risks. Flushing out weak owners and replacing them with confident ones is what solid bases are built on. These new owners bought when the hysteria was at its worst, so it shouldn’t surprise us when they shrug off far more trivial headlines. As long as they remain confident, supply stays tight and prices continue defying “logic”. Don’t think about what the market should do, figure out what other traders are thinking and trade the resulting supply and demand. Strength in the face of bad news is extraordinarily bullish and only a fool would argue with this market.

Jani

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