Morning Market Thoughts
Good morning. The futures are pointing to a much higher open, with the Nasdaq looking about 40 points higher, the S&P up around 14, and the Dow-30 up about 126. So this morning should be a dramatic. This is something we covered over the weekend, where a spike in the VIX (which always accompanies a broad selloff in equities) will be followed by an oversold rebound. So we’re going to see that oversold rebound today.I also suggested that this would be a rally that I want to sell into — or at the very least avoid committing new money based on a theory that last week’s equity dumping was a “one off”, and that all is well now. The June 9th mega-reversal in the semiconductor sector ($SMH) was a shot across the bow, and I am respecting that signal.
I’ll post a chart in the forum this morning in the forum that shows the relationship between VIX spikes and subsequent moves in the major indexes (SPX, DJI and NDX). The results are pretty clear and show a near perfect relationship between VIX spikes and market rallies. And you’ll also notice that each spike in the VIX has ultimately led to new highs in the market. So why not just pile in now and reap the rewards of buying the latest low?
Well, you could do that, but things are a bit more complicated than that. The second chart I’ll post will be the same chart…only it will look at the 2016 data. In that, you’ll see that the outcomes of spikes was a bit different. The similarities are that the spike in the VIX rarely led to further declines in the next few days. But unlike the more recent data, VIX spikes didn’t necessarily lead to new highs. They just didn’t lead to new lows.
One difference is this: Last year, we were right in the drama of a presidential election. The bull market was tired (still is), and money was nervous. This summer, the “Trump Rally” has been in play since November. Each pullback has brought in buyers who were anticipating the promised changes in tax rates, regulation cutting, health care overhauling, etc. Just a lot of commitments that the market perceived as being equity-friendly. Well virtually none of those things have happened. (I’m not saying whether that’s good or bad — I’m just pointing out the reality of the situation).
So the market has continued to move higher even as it becomes clear that a lot of the actions intended to stimulate the economy aren’t going to happen anytime soon. In light of this, why hasn’t the market topped? Because there’s nowhere else to go. The Fed may hike rates one more time, but they’re basically sidelined and are taking their cues from the market. They realize that a mistake in monetary policy can wreak havoc in global equity markets, so they’ll err on the side of kicking the can down the road — take just a little action now, but not enough to roil the markets. And what is the “correct” move for the Fed to make? Nobody knows for sure…so you can bet that they’ll be taking baby steps, with each step being accompanied by an intense look at the market.
I could say more about this — such as the fact that there is no imminent threat of a nuclear war (this is something I never really envisioned myself saying in a morning note). So any idea of a bout of panic selling being right around the corner is likely wrong.
Also, let’s not forget about the actions of retail vs. corporate insiders. Since the election, $80 billion has been put into ETFs and mutual funds. At the same time, corporate insiders have been selling at levels not seen in 30 years. So she shift in equities has been shifting into weak hands.
See — I told you it was a bit more complicated than you might think.
So what’s the play right now?
1. Assume that the intraday low on Thursday (in both the major indexes and most stocks you are tracking) is an important low that’s not likely to be violated for a while (“while” means in the next week or so — after that, we take it one day at a time). Keep your stops fairly close to those intraday lows and you’ll have a solid definition of the risk you are taking by being long.
2. Don’t ignore the pain created by last week’s damage. Lots of bulls are unhappy because their positions are unprofitable. Many will be selling into this strength. The result will likely be “heavy” stocks, and a heavy market. We’ll see higher prices in the near term, but the supply is likely to fill all the dip-buying demand before equities move to new highs.
3. Look for an absence of lower prices rather than a big move to the upside. There is a difference. Not going down is not the same as going up. Stocks do tread water — and I think that’s the likely market environment for the next week or two.
See you in the forum.
–Dan
So I think the lows on Friday
Market Update