Friday’s action was compelling and seemed to be telegraphed earlier in the week. But as we know, if this is truly a bottom then it is part of a longer process. Reversal patterns are powerful and when accompanied by declining volatility we have a clearer picture going forward. I was asked several times this past week to provide an analysis of a more predictive nature. Yet, if you know my style then that is not my approach, rather I will wait for the evidence to come in, analyze it and then make an assessment. Too often when we try to anticipate an outcome without having a mountain of confirming evidence we are often taken back on a counter move.
During this week’s webinar I mentioned the jobs number was irrelevant to the market, and that due to the fall in volatility (VIX fell sharply Wed and Thur) there was little to worry about. Fear was being reduced, and we see movement in front of big events. However, the poor jobs report (gain of 144K jobs rather than the 203K expected) dropped futures over 30 handles, and when the markets opened the Dow Jones Industrials were down a whopping 200 points (after being up 140 on futures at one point before the report).
The panic set in but was short-lived, and the markets staged a powerful rally to close at the highs of the day and the week. This was notable, but not anything I would have anticipated prior – guessing not my game, as a broken clock can be right twice a day.
But now there is some good evidence that tells us we ‘could’ proceed with some caution and move slowly toward bullish portfolio positions. I will look to improving charts, better internals, technical data such at MACD buy signals, stronger momentum and overall better price action. As we see from the chart of the S&P 500, the reversals staged on Friday was on higher turnover, nearly 50 handles from low to high. It was notable that price improved all day long, as did volume and when the market turned green it did not turn lower – a marked change in character.
Was this a one day wonder? Is this just a setup for a fall as we get started on earnings season? Maybe there is something else lurking to trip up market players. It’s too soon to tell, I would never rationalize and make that assessment anyway. Most stocks are still stuck in a bear market, the S&P 500 is off 5% and the Dow Industrials are down 7% for 2015. Friday’s rally, while a powerful first step – is potentially just that. Some believe a market with no memory from day to day needs to be played accordingly, and while that is true we have to be open-minded to a shift in the trend.
Volatility is trending lower now, so players are becoming less inclined to believe big range moves are going to happen down the road. This is a fact based on the VIX chart and option activity we have been seeing. The oscillators are racing higher now and will be overbought in a few days (last time they were overbought the S&P 500 dropped 140 handles from the Fed day to this week’s low. So, not out of the clear at all. But, if we are stubborn and refuse to accept that changes in direction (were you prepared for the swoon in August? not many were) occur then we will lose opportunity and be wrong-footed.