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By Jani Ziedins | End of Day Analysis
End of Day Analysis:
The S&P500 steadied itself Wednesday following Tuesday’s crash through 2,40 support. While this price stability ended Tuesday’s emotional wave of selling, the muted rebound was hardly confidence inspiring. The calm didn’t last long because as I write this, overnight futures are down more than half-a-percent. Is this a sign of worse things to come? Or is it simply another routine bounce off the lower end of the trading range?
There wasn’t a clear headline driving Tuesday’s selloff. The best the media could come up with was disappointing earnings. We fear selloffs without a reason if it means the market knows something we don’t. But we ignore ones when the market is simply humiliating nervous and impulsive owners by convincing them to dump their stocks right before the next rebound. Which is this? That’s what we have to figure out.
New and unexpected headlines drive large directional moves. That’s because new information causes traders to change their outlook, and as a result, adjust their portfolios. This wave of buying or selling fuels the big moves. On the other hand, recycled headlines produce fleeting gyrations and quickly reverse because everyone already knows about these problems and they are factored into their outlook. If traders expect something, they don’t adjust their portfolio when those headline pop up again. The million dollar question is if the driving force behind Tuesday’s selloff is truly new and unexpected, or if it is simply recycled headlines we have been talking about for months.
Wednesday’s Fed meeting minutes gave us the strongest hints a rate-hike is just around the corner. Rather than extend Tuesday’s selloff, stocks hardly budged. That’s the clearest indication we have that the next quarter-percent increase is already priced in. We can cross that one off our list.
The next big bogie is third-quarter earnings. Expectations are relatively muted and it is hard to find anyone excited about our economic growth. Many even claim we are in an earnings recession. Given that less than enthused outlook, earnings have a very low bar to clear. While things could certainly could come in worse that this, they have to be be worse than the widely expected sluggish. Since front-line managers continue to see more demand than their current staffing levels can handle, we shouldn’t expect a large falloff in earnings. It will be another lackluster quarter, but the sky is not falling.
Assuming the overnight futures hold these losses into tomorrow morning, expect another wave of reactive selling to hit the market as nervous owners bailout before “things get worse”. But without any real meat to this selloff, this is definitely a better place to be buying than selling. Remember, risk is a function of height. By that measure, this is the least risky place to own stocks since June. Unless earnings over the next few days come in far worse than expected, a bounce off 2,100 support makes for an attractive entry point. When yet another selloff fizzles and bounces, expect underweight money managers to start feeling pressure to chase this market into year-end.
Jani
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By Jani Ziedins | End of Day Analysis
The S&P500 slipped for a second day as it continues to struggle with 2,160 resistance and the 50dma. Volume was above average, but average is relative since it is calculated using the last 50-days of painfully slow summer trade.
The market crashed under the 50dma in early September as traders woke from their summer slumber just as the Fed started hyping the prospects of a rate-hike. While it was a brutal 2.5% selloff, bears haven’t been able to do much since. Volatility has definitely picked up, but we remain stuck in a sideways market.
Directional moves happen when people change their mind. When bulls become less bullish and start selling, or bears become less bearish and start buying. The reason we remain range bound is bulls are stubbornly bullish and bears are stubbornly bearish. The Brexit bears haven’t been able to do anything with those headlines, while the no-rate-hike bulls haven’t been able to move the needle either.
The high levels of intraday volatility come from a small group of traders that overreact to every headline and gyration. While they bounce back and forth like a ping-pong ball, no one else is interested in joining them. The vast majority of the market is content with their positions and over-caffeinated talking heads and sharp price moves are not changing that.
Supply and demand are fairly balanced because sentiment is similarly balanced. When the crowd gets overly bullish or bearish, we setup for a snap-back. Reversals from unsustainable levels are quick and decisive. But the trade over the last several months has been anything but quick or decisive. That tells us prices are sustainable and not overbought even though we are within shouting distance of all-time highs.
While the market suffers from a serious lack of demand every time prices move to the upper end of the 2,100s, I still give the edge to the bulls. There have been more than enough spooky headlines to send us tumbling into the abyss. Instead owners shrug off every bearish headline. Whether rational or not, when owners don’t sell, supply remains tight and prices firm. As long as owners are confident, expect selloffs to stall and bounce like they have all summer.
The next big bogie on the horizon is third-quarter earnings. While this is a multi-month event, over the next couple of weeks we will know if there are any systemic problems hiding under the surface. Even with as few as 10% of the companies reporting, we will have a good sample of the overall economic conditions. If there are serious problems, we will know by then.
If third-quarter earnings don’t kill us, expect the stable trade to seduce underweight money managers to start chasing stock prices into year-end. September’s 2.5% selloff priced in the inevitable rate-hike, so we no longer need to fear that. Anytime the market slips to the lower half of the 2,100s, treat that as a buying opportunity. If we were vulnerable to a crash, it would have happened by now.
Of course the significant disclaimer is as long as nothing new and unexpected happens, like a surprise Trump victory. If that happens, all bets are off and we need to reevaluate. Most likely that will be another dip buying opportunity, but the key is figuring out how low we go first.
Jani
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