Was Friday capitulation or another false bottom?

Free Weekly Analysis: 

Friday was another choppy session for the S&P 500 with the index traversing more than 150-points throughout the day.

The morning started off well enough with a nice opening gap that pushed the index back to 3,800 support. Unfortunately, those gains evaporated and turned red within a couple of hours. 10-year Treasury yields flared up again that that unleashed another wave of selling in the equity markets. But not long after the index challenged Thursday’s lows, the selling capitulated and stocks bounced hard, rallying 100-points from the intraday lows and closing up nearly 2%.

When it was all said and done, this choppy week crashed through 3,800 support and it still managed to close 0.8% in the green. As hopeless as things felt Thursday afternoon, we actually finished the week in pretty good shape.

As I wrote previously, equity investors are not afraid of 1.5% Treasury yields. It wasn’t all that long ago when 1.5% was a record low. And in fact, most equity investors would be thrilled if 1.5% rates were our new reality. But that’s not what investors are afraid of. They worry this jump to 1.5% will continue to 3%, which is a much different proposition when it comes to interest rates and stock valuations.

While I was cautious following Thursday’s collapse under 3,800 support, I also warned readers the bounce could be just around the corner:

I have no idea how much further this selloff will go, but chances are it will only last a few days and that means shorts need to be ready to lock-in profits quickly. Fight the urge to get greedy. Remember, this is still a bull market and these things bounce hard and fast. Hold a little too long and all of your short profits will evaporate.

It turns out my estimation of “a few days” was overly generous and in reality, we could have measured this violation of 3,800 support in hours.

I’m impressed with Friday afternoon’s bounce. Thursday’s violation undercut recent lows and could easily turn into this pullback’s capitulation point. In more normal times, I’d be embracing Friday’s bounce with open arms.

The problem is this time equity investors are not trading stocks, they are reacting to the bond market. Was Friday afternoon’s stabilization in Treasury yields the real deal? If so, all the lights around us are green. But if the bond market continues to struggle, the index will tumble even lower next week.

While I love the way stocks responded Friday afternoon, I have a lot less confidence in the bond market. But that’s the way this usually goes. Most of our best trades have very questionable beginnings.

At this point, as long as the S&P 500 remains above 3,800, stocks are ownable. If yields flare up again next week and the index retreats back under 3,800 support, lower prices are ahead.

Given how volatile things have been lately, we should have our answer pretty quickly on Monday. If prices retreat, sell. If the bond market calms down over the weekend and stocks rally Monday, buy. 3,800 is the tipping point and we should follow the market whichever way it goes next week.

While I’m cautiously optimistic about the indexes, it is a lot harder to find nice things to say about TSLA. At the depths of Friday’s collapse, the stock was down 40% from the highs of only a few weeks ago. Easy come easy go. If $600 doesn’t hold, unfortunately, $400 is the next logical support level.

TSLA’s bounce is buyable as long as the stock remains above $600. But all bets are off if prices violate $600 support again. At that point, it’s best to step aside and wait for the dust to clear.

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