Understanding Wednesday's Market Ramp Higher Into the Close
It is probably a safe bet that Wednesday's ramp higher into the close left more than a few folks scratching their heads. The move created fresh all-time highs for the S&P 500 (NYSE: SPY) and the venerable DJIA (NYSE: DIA).
But wait, hadn't the market been hit hard just a couple days back? And after nearly three weeks of sideways action, wasn't everyone under the sun looking for a meaningful correction to begin? So, what gives?
The start to Wednesday's trading offered no sign of what was to come. The Bank of England had gotten the bears' attention by talking about raising rates sooner than had been expected. And there was a fair amount of disappointment over the results of China's latest long-term planning session. And before one could pour a second cup of coffee, the S&P 500 had opened down nearly 0.5 percent.
The opening sell algo pushed the S&P below the prior day's low and to hear the bears tell it, things were about to get ugly.
The Bears Thought They Had a Case
The fact that the market opened lower wasn't surprising. European bourses were down across the board and Asian markets finished with big red numbers. In addition, the glass-is-half-empty crowd could be heard touting the sentiment indicators, which were starting to get a little frothy, and the idea that valuations were becoming stretched.
The bear camp went on to cite the slowdown in revenue growth, the lackluster GDP numbers, and the fact that the gains in housing are unsustainable. Now toss in the overbought condition and fact that the Fed was back to "talking taper" again, and well, it appeared that the traders in the bear caps might just have the edge.
As a result, the bulls could be heard nervously talking about the important support just below. The general thinking was that as long as the S&P stayed above last week's algo-induced low at 1747, things would be okay. But again, there wasn't exactly a lot of swagger seen in the bull camp Wednesday morning.
Everybody knows that regardless of where one starts counting, this bull is getting old. Everybody knows that there is some froth in the mo-mo names. And everybody knows that this type of environment has a tendency to end with a bang.
And They're Off
However, within minutes of the opening bell, the market stabilized. And within an hour, the early losses were erased. And then right before the time traders were heading to lunch, the buy algos arrived. Just like that, the bulls were off and running.
However, most traders recognized that there were some important earnings coming after the bell (Cisco (NASDAQ: CSCO) for one) and some fairly important economic data (Retail Sales, US Productivity, and Weekly Jobless Claims) this morning. As such, it was assumed that the move up that had occurred at about 12:15 eastern wouldn't last.
Then The Fireworks Started
But then a funny thing happened. Instead of the expected intraday pullback, another round of buy algos hit the tape. And then another. And then, with less than an hour left in the session, stocks spiked higher, and higher. Boom, there were new all-time highs.
The question of the day, of course, was what had triggered the spike to new highs? There hadn't been any big headlines. Nope, just a lot of algo-induced buying.
Still All About the Fed
Turns out that rumors of what was in Janet Yellen's prepared testimony started making the rounds. And the algos apparently liked what they read.
First there was the fact that Ms. Yellen would say that 7.3 percent unemployment is too high.
Then there was the comment about the Federal Reserve needing to do more to support the economic recovery.
And finally, the future Fed Chair wrote, "I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy."
Suddenly QE-Infinity was back. Suddenly, traders were reminded of the recent papers written by Fed officials talking about lowering the unemployment trigger. And suddenly, the "Dectaper" seemed like a really silly idea.
Although the algos will start fresh again today and they could always reverse yesterday's "breakout" on the charts in a matter of minutes, it would appear that this market is still all about the Fed. And with Janet Yellen's prepared remarks sounding pretty darned dovish, the bulls may be looking to start the year-end rally earlier than normal this year.
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 Economic Growth
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: 1775
- Near-Term Resistance Zone(s): none
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: Moderately Positive
- Volume Thrust Indicator: Negative
- Breadth Thrust Indicator: Negative
- Bull/Bear Volume Relationship: Moderately Positive
- Technical Health of 100 Industry Groups: Moderately 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 modestly overbought from a short-term perspective and is neutral 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...
Try sending positive thoughts to someone who could use an lift - you never know, it just might help...
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Wishing you green screens and all the best for a great day,
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Founder and Chief Investment Strategist
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Positions in stocks mentioned: none
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