A Worrisome Sign or Simply Computer Folly?
There are times when "why" the market does what it does may be more important than "what" it actually does.
Cutting to the chase, Tuesday's wild intraday action may be a perfect example of this phenomenon as neither the final tallies on the indices nor the intraday chart action itself told the entire story. And the bottom line is that if one understood why things went down the way they did, they may not look at the outcome the same.
Just Another Day At The Office, Right?
To the casual observer, Tuesday was probably seen as just another up day for the stock market. The S&P 500 finished with its fourth consecutive new all-time high and was once again accompanied in that rarefied air by the NASDAQ, Russell 2000 and S&P 400 Midcap indices. And while the DJIA did finish with a gain of 75 points, the venerable index once again lagged behind its broad market counterparts. In sum, Tuesday's results looked pretty much like the past several days had.
However, if one simply looked at the closing results for the market indices, they would have missed a large part, if not all of the story.
It Wasn't About the Jobs Report
Coming into Tuesday's session, most everyone in the game was on pins and needles waiting for the September jobs report. This all-important data, which had been delayed by the government shutdown, was viewed as the key to both the state of the economy prior to the shutdown and the Fed's next move.
So, when the Nonfarm Payroll report came in weaker than expected, traders immediately hit the buy button because it meant that the Fed wasn't likely to start cutting back on their QE stimulus programs any time soon. Although the unemployment rate actually fell a tenth to 7.2% in September, many analysts now don't expect the Fed to start "tapering" QE until sometime in the spring.
While the logic of weak data being good for stocks sounds a tad counterintuitive, don't forget that the big banks and hedge funds play all kinds of games such as the "dollar-carry trade." So, anything that keeps the dollar down (the dollar was hitting fresh lows for the year after the release of the jobs report) is actually good for stocks.
It Was About the Mo-Mo Stocks
But a funny thing happened on the way to the Fed-driven celebration yesterday. Just before 10:30 am Eastern Time, stocks were hit with a sell program. And then at 10:39, stocks were hit VERY hard, VERY quickly as the S&P 500 fell ten points in a matter of minutes.
While the decline definitely wasn't of the Flash Crash variety, the move was VERY odd and VERY suspicious. Suddenly and without warning, a strong market had turned on a dime. In short, this is the type of move that is generally associated with news.
Analysts watching the most active lists and the "hot dot" stocks were quick to point out that some of the high flyers such as Facebook (NASDAQ: FB), Amazon.com (NASDAQ: AMZN), Tesla (NASDAQ: TSLA) and Netflix (NASDAQ: NFLX) - especially Netflix - were getting crushed. This was odd because NFLX had soared after the company had reported earnings on Monday afternoon and had opened 9.2 percent to the upside!
But by 10:40 am, the big gains in Netflix were gone and the stock was down more than $20. The bears pointed out that this action represented a classic case of the momentum leaders reversing after strong runs - and it did NOT bode well for the overall market. Quickly, the bears smelled blood.
But... As was alluded to earlier, there's more to the story. It turns out that "somebody big" was selling a large slug of Netflix. As was discovered later in the day, that "somebody big" was none other than billionaire activist (and big-time "book talker") Carl Ichan. According to reports, Mr. Ichan was selling half of his stake - or 2.99 million shares - in NFLX.
This type of news spread like wildfire on Wall Street and the 9 percent gain that Netflix enjoyed at the open turned into a 9.2 percent loss by the time the closing bell rang. A $67 swing or 17.4 percent swing - wow.
What Does It Mean?
The question investors were left with at the end of the day was if the big moves in Netflix, Facebook, Tesla, and Amazon were a precursor of things to come. The bears contend that these names have lost all semblance of fundamental reality and were merely trading on momentum. Thus, the argument follows that the market too may have gotten ahead of itself and is due for some corrective action.
However, there is another, less worrisome angle to consider. Remember that a "whale" investor such as Carl Ichan doesn't just bomb in or out of positions. No, his positions are carefully guarded and carefully traded. In other words, Mr. Ichan didn't just call up his broker and say "Sell 3 million shares of NFLX at the market."
Thus, there is a decent chance that "word" of Ichan's potential sale got out and the resulting dive is what happens when all the algos do the exact same thing at the exact same time. Therefore, yesterday's move in the mo-mo names may have been little more than computer games being played by the big banks and hedge funds.
While no one knows for sure what the "action" will mean going forward, it is important to understand why things got a little hairy yesterday. This way, should the market begin to correct in earnest from here, it will be obvious that stocks had gotten ahead of themselves and needed to correct. And if stocks simply continue higher, well, it means that yesterday's moves were simply another example of computer-driven folly that the regulators will ignore.
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of Fed Policy
2. The Outlook for the U.S. Economy
3. The State of the Earnings Season
The State of the Trend
We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:
Short-Term Trend: Positive
(Chart below is S&P 500 daily over past 1 month)
Intermediate-Term Trend: Positive
(Chart below is S&P 500 daily over past 6 months)
Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)
Key Technical Areas:
Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:
- Near-Term Support Zone(s) for S&P 500: 1728
- Near-Term Resistance Zone(s): 1760
The State of the Tape
Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...
- Trend and Breadth Confirmation Indicator: Positive
- Price Thrust Indicator:Positive
- Volume Thrust Indicator:Neutral
- Breadth Thrust Indicator:Positive
- Bull/Bear Volume Relationship: Moderately Positive
- Technical Health of 100 Industry Groups: Positive
The Early Warning Indicators
Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.
- Overbought/Oversold Condition: The S&P 500 is overbought from a short-term perspective and is overbought from an intermediate-term point of view.
- Market Sentiment: Our primary sentiment model is Negative .
The State of the Market Environment
One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.
Weekly State of the Market Model Reading: Positive
If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.
Thought For The Day...
The way we choose to see the world creates the world we see. -Barry Neil Kaufman
Looking for Guidance in the Markets?
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The Top 5 Portfolio: We keep things simple here by focusing on our five favorite positions. This concentrated stock portfolio employs a rigorous custom stock selection approach to identify market leaders. Risk management strategies are built in to every position.
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At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.
Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)
Positions in stocks mentioned: none
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