Crash alert conditions have prevailed for some time. Traders are taking too much comfort from the outlined rinse & repeat cycles, writes Gene Inger.
That isn’t to say much needs to be done here; since we outlined the sell signal as a failure to achieve higher highs over the preceding two weeks and the drop as a confirmation after-the-fact.
But now the evidence is broadly clear, so there is a chance for a broader cross-section of traders to run for the hills (or the East Hampton dunes) and square positions (raise cash) while they aren’t fighting a hoard to accomplish that. Doing so in this algo-driven age might itself trigger the hoards.
Despite this being a very notable key reversal session; I’m a bit calmer than most as it may be since our forecast for the week was the rebound and a Thursday failure based on the idea of breaking trend, rebounding, and then faltering.
While I realize others will see this reversal and either freak or minimize its importance, I’ll take a different approach as I outlined even before the rally projected off-of the Tuesday morning lows.
That’s because we anticipated a pattern like this, suggested it meant nothing to investors because they are at the point generally should not be buying stocks (rather fading rallies for a few months now).
Traders were guided to not only catch the rebound, but I observed we’d achieved the minimum goal for Tuesday-Wednesday of getting over S&P 2740 (SPX) and profits should be taken if they played for yet another of the rinse & repeat bounces.
Which brings me to this point: internals have been deteriorating for weeks, and before. Rebounds are artificially mostly led by overpriced momentum stocks, which had help in the heavy lifting from Oils, which remain strong. But those techs, did buybacks and also saw lots of insider selling this year, were constantly living on borrowed time.
Apple and Samsung are ending their patent fight.
I’ve felt that as we got into Summer, volatility would increase, and things would not be nominally boring as they often are. That is not to say we can’t see another bounce as HFT (high frequency traders) mostly are accustomed to that. But I’ve warned for a couple weeks now of a potential break of the market, in which leadership falters a couple times and then simply does not come back, resulting in a trap-door effect again.
Is this such a set-up? Probably. It should be. Earlier could have been. The repeated efforts to keep the overall trend alive has engendered a sort of disinterested complacency assuming all these moves come back. It’s almost a cliché but don’t assume that.
We have the quarter’s end effectively these next two days, not just trade meetings. We have a half-day session Tuesday and no trading on the 4th of July. Hence, it’s not an even pattern professional traders prefer either. It can see a no-holds-barred breakdown. Or, imply a technical breech of the next level of underlying supports (or at least a move in that direction) from just an absence of bids with so many concerns and a holiday hiatus too.
Thursday morning might see some skirmishes (depending on news) just desperately trying to hold the bottom of the standard deviation envelope, which happens to be right here. Early in the week I talked about a rally to or over 2740 Sept. S&P, and then drop back to 2705 or so; and we’re just about there now. Then maybe some feeble effort to save the day fails; a set-up for the S&P to plunge into the 2600s.
Such a capitulation doesn’t have to appear extremely broad, because the upside preceding was concentrated in that usual suspects small group of overpriced stocks that (now hiding) pundits were generally cheer-leading, after the major moves of the preceding year.
So, it can be deceptive from a breadth standpoint. (Wednesday was a nearly 450 Dow point up-down reversal, but breadth was only 2.5/1 negative at the end). That handful of stocks as you know, makes up 20% or more of S&P capitalization; hence out-sized impacts short-term in either direction, in this case first up and then down.
Conclusion: this week’s market adheres to the case I made over weeks just past and more specifically to the assessments of recent days as well. It’s not easy to identify swings in a see-saw market; but the rinse & repeat cycle last week and this week was outlined closely in advance.
Now we’re in a last-ditch spot, at the end of the Q2 no less, with a holiday coming, and presumed thin attendance early in the coming week.
I think it’s a recipe (at best) for failing Hail Mary rebound attempts; and as I look back at my remarks of the past three weeks about lateral moves being sell signals, preceding breakdowns of a slew of daily moving averages, well, this fulfills what we anticipated likely.
