A Long Ride to Nowhere

End of Day Update:

While the S&P500 finished Thursday unchanged, it was anything but a boring day. An impressive mid-morning, 16-point rally was gutted and crashed 35-points, pushing us deep into the red. But just when it looked like the bottom had fallen out, we rebounded 20-points and finished the day exactly where we started. For as much as the market moved, volume was surprisingly light and didn’t even reach average levels. While it was an impressive day, most people resisted the urge to trade these volatile swings.

This insanity was driven by the European Central Bank’s latest stimulus efforts. They initially surprised global traders with the size of their move, but then follow-up by underwhelming us with their commitment to future actions. Those contradictory statements lead this unhinged price-action.

What does this volatility mean for our next move? That’s the million-dollar question. Following February’s 200-point rebound we’ve been struggling with 2,000 resistance. We raced up to this level last week but have been unable to break through it ever since. Thursday was the 3rd time we’ve traded above 2,000, but so far we failed to hold those gains because buyers keep disappearing. Given how far and fast this market moved since the February lows, this pause is anything but a surprise. But it would be helpful if we knew if this was simply a pause before continuing higher, or hitting our head on resistance and tumbling back into the heart of 2016’s trading range.

The thing to remember about selloffs is they are shockingly fast. The two-weeks we’ve been struggling with 2,000 by contrast are moving in slow-motion. If we were going to crash, why hasn’t it happened yet? That’s a tough question bears need answer. But we cannot give bulls a free pass either. We had great employment last Friday, a huge surge in oil prices, and now additional stimulus from the ECB. Given these tailwinds, why can’t we break 2,000? Failing to rally on good news is often a signal to look out below.

This afternoon I would have given the edge to bears given the massive intraday selloff. But everything changed when we ran out of sellers and closed flat. As I said, selloffs are fast. No matter how well things are lining up for bears, we have to respect this price-action. If people don’t sell the headlines, they don’t matter. I’ve been expecting a routine pullback following this 200-point run, but given how stubborn owners are clutching onto their stocks, this sideways trade could be all we get. That said, the smaller the correction, the less upside we will see from a continuation. If we break 2,000 resistance Friday, expect the upside to be limited to a quick run above the 200dma before the necessary pullback happens. Given the limited upside, this is still a better place to be taking profits than adding new positions.

Jani

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