Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Yesterday around 2 PM I posted this chart noting how the S&P 500 had fallen out (to the downside) of an ascending channel.
Par for the course, a late day news story by the Wall Street Journal by Fed mole Hilsenrath, caused the Pavlovian reaction to buy – or at least cover shorts. At the time I thought a positive Apple reaction could create the most frustrating of outcomes and that is a jump right back into the channel on a substantial gap up. Instead Apple whiffed, and while it is pressuring NASDAQ futures, S&P futures are up some as the Euro strengthens a tad. As we have seen countless times since 2008 a late day rumor or article has constantly put a late day bid into the market – notice how these almost are always released in the 3-4 PM time frame.
While the market is somewhat oversold after 3 days of substantial selloffs it is not near an extreme level. If Hilsenrath had not “rescued” the market yesterday, and the market had had a dark open this morning the situation would have been quite different. Instead we are stuck in a familiar environment.
The market continues to be hostage to the dollar/euro/bond markets. As the euro goes the dollar and U.S. markets seem to go almost in complete inverse fashion, almost to the tick. An old recycled story is making the rounds on the European rescue fund being granted a banking license today, which has helped the euro. If this did happen it would be a game changer as it implicitly means the ECB would be buying sovereign debt directly – but using a third party mechanism to avoid treaties that currently prohibit it from doing so. (The ECB can buy secondary debt) Of course this rumor has been floating around for much of the past year.
- Governing Council member Ewald Nowotny said there were arguments for giving Europe’s permanent rescue fund a banking license which would allow it to borrow unlimited ECB money, an idea that the central bank has rejected so far.
Yesterday, IBD went back to “market in correction” which marks the third failed “Follow Through Day” of the summer. So Lucy has pulled the ball away from Charlie Brown yet again. It’s obviously been a frustrating late spring/summer for any trend to continue in one direction for more than a week or two – the exception being May, when the sustained move was down. Hence the only method working at this time is to enter positions at extremes (oversold or overbought) and immediately flush them out after 3-7 days and reverse everything 180 degrees for the following 3-7 days. Simple in theory but difficult in practice, especially with rumors, headlines, and overnight gaps up and down dominating the market action.
With Hilsenrath eliminating the chance for extreme oversold conditions now we will see how far this bounce goes – the most obvious spot would be a retest of the lower trend line noted in the chart above that the S&P 500 just fell out of. Some decent data from Caterpillar (CAT) and Boeing (BA) should help lead today’s bounce, but this latest selloff has again wiped out many of the leadership stocks, so we’re facing a bounce of oversold/broken charts and not much more. Outside of REITs and some housing related stocks there is no sector or theme that is able to consistently remain stable.
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