Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Are We Still In 'Buy the Dip' Mood? Today's Action Could Be A Telling Point

By TD Ameritrade (JJ Kinahan)Stock MarketsMay 20, 2021 10:06AM ET
Are We Still In 'Buy the Dip' Mood? Today's Action Could Be A Telling Point
By TD Ameritrade (JJ Kinahan)   |  May 20, 2021 10:06AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

Last Thursday featured a comeback after days in the red. Can it happen again? After a mostly unimpressive overnight session, the major indices started clawing back ahead of the open. It’s amazing how resilient this market remains.

The question again is whether the 50-day moving average in the S&P 500, now near 4080, can continue to hold. There was a nice bounce off of that late yesterday, and it possibly reflected a “buy the dip” mentality that for some investors has paid off again and again in recent years. That doesn’t mean it will keep working, obviously, but if you’re a football coach and you have a play no one has ever been able to stop, you tend to keep running it.

Yesterday’s amazing comeback happened despite the first somewhat hawkish words from the Fed since arguably around late 2018. The resilience continued this morning, but we’ll see if it can last all day. They’ve tried to sell it hard a few days in a row, and we could test the 50-day moving average again.

Tech Led Comeback, But Not All of Tech

By now, everyone likely knows what the Fed minutes said, so we’ll offer some thoughts on that farther down. What stood out about Wednesday’s late recovery was the way technology led things back. One reason could be that if you look at which tech stocks managed to rally, it was the more mature ones, like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL). Whether it’s fair or not, these mega-caps had been getting thrown in with all the other tech stocks, but now maybe people are starting to be more selective and beginning to bifurcate technology.

As a reminder, tech is one of the growth sectors that generally seems to have the most to fear if the Fed tightens the screws. That’s because many tech stocks are priced more for anticipated growth, which a tighter monetary environment could possibly hinder. But for an AAPL or a MSFT, the danger from that might not be in the same ballpark as the danger faced by a smaller, newer tech darling. A lot of people also turn to the AAPLs and MSFTs in rough times because they still believe in the stories. The “buy the dip” mentality often starts with those companies.

Financials also helped lead the comeback late Wednesday, helped in part by higher bond yields after the Fed minutes. As we’ll discuss lower down, however, the yields didn’t really pop too much, with the 10-year hitting 1.68% by the end of the day and then easing to 1.66% this morning. We’re now only a couple of basis points above the level before the Fed news hit.

There’s some new business to take care of as we start the day. First, weekly initial jobless claims of 444,000 continued the lower trend that’s been going on for a few weeks now. It was the second straight week below 500,000 and a little under Wall Street’s consensus. It might not be incredibly helpful for the market today, but it’s not likely to hurt, either.

Volatility is up just a bit, with the Cboe Volatility Index (VIX) above 22. That’s still well below peak levels yesterday but still on the high end of the recent range. Any move up from here might trigger fears of more stock market weakness ahead.

Earnings today include Applied Materials (NASDAQ:AMAT), Kohls (NYSE:KSS) and Ralph Lauren (NYSE:RL). KSS missed expectations and the stock is being taken out to the woodshed in pre-market trading.

Fed Confirms It’s Thinking About Thinking About the “T” Word

The cat’s finally out of the bag, so to speak. The dreaded “T” word, or “taper,” isn’t just something keeping Wall Street up at night. The Fed is also talking about it, even if it’s not saying the word directly.

After weeks of investor hand-wringing over inflationary data even as Fed officials kept emphasizing its “transitory” nature, minutes from the Fed’s last meeting said what some of us thought we might have to wait longer to hear.

“A number of participants suggested that if the economy continued to make rapid progress toward the committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases,” the minutes said.

No one knows when this could happen, but it’s probably not anytime too soon. It’s not even that surprising, when you think about it. We’ve known all along the Fed would eventually have to start warning about a taper, because few if anyone expected the $120 billion a month in bond buying to continue forever.

The only question is when, not whether, it will start to wind down. Some analysts think the Fed might formally warn about plans to taper sometime this fall before getting to the actual unwinding by early next year, but that’s not necessarily how it’s going to work out. Only time will tell, and there’s a lot of data ahead that could influence the Fed’s plans.

Maybe that longer view helps explain why the bond market—after an initial flinch when the minutes came out Wednesday afternoon—stayed relatively tame and yields didn’t go too crazy. In fact, the 10-year yield remains about 10 basis points below the 2021 high of around 1.78% recorded back in late March.

Looking a bit closer at the 10-year, it probably needs to reach 2% before people start getting scared, and it would potentially seem a bit more interesting if it climbs above 1.75%. Except for that brief surge in late March, the appetite for yields that high just hasn’t shown up.

Despite Fed’s Words, Yields Stay Relatively Tame

One possible reason yields didn’t get out of hand yesterday comes down to simple relief. Sometimes it can soothe worried investors to actually hear the words they’ve been waiting for, even if the words aren’t bullish. The Fed’s acknowledgment that it might have to eventually act basically wiped one worry off Wall Street’s whiteboard. It doesn’t mean there’s not a whole long list still there, but worrying about when the Fed might say it’s “thinking about thinking about” tapering is over and done.

It might also have been a relief for some to see that the Fed isn’t ignoring the economic growth and possible overheating that it might generate. There had been concern that the Fed, in its understandable eagerness to help employment recover from the pandemic, might risk letting inflation get out of hand, which is never good for the market.

Despite the relief following the Fed’s words, you still can’t dismiss the possible impact of inflation on both the market and the economy. The Fed expects that rising inflation will be temporary and related to the recovering economy, but investors are still uncertain, and that might be why they’ve been acting more cautious.

That’s one of the things people are struggling with. They go to get gas and get in line at a grocery store and they see higher prices. There’s this mixed message for the average investor.

The fear is that the Fed will have to dial back its extensive support if inflation persists. This fear might be generating some of the overall caution in stocks so far this week.

Stocks came under pressure from the start on Wednesday, but made a nice recovery from their lows by the end of the day. Everything remains on pace for another disappointing week, but it is a bit encouraging to see the 50-day moving average near 4080 hold again for the SPX. That seems to be a place where there’s a lot of technical support, and a drop below it early yesterday couldn’t seem to generate too much additional selling interest.

In fact, stocks were on the rebound from their lows even before the Fed minutes yesterday, as “buy the dip” appears to still hold some luster. The Tech sector rebounded from steep early losses, and this could mean positive things for how the market performs today and tomorrow. A lot of people look to tech as a leader, either down or up.

Amazingly, tech actually moved temporarily into the green by late Wednesday, though it finished in the red with all the other sectors. Tech and communications services were the leading sectors Wednesday, while “cyclicals” like energy and materials had the worst days.

For tech to follow-up Wednesday’s relief rally, it would have been helpful to see a strong earnings report from Cisco (NASDAQ:CSCO) after the close. The numbers did look good from a top- and bottom-line perspective, but investors seemed disappointed with the company’s profitability forecasts and margins, and the stock dipped in pre-market trading.

Where’s Inflation? Not In Commodities…For The Moment

If inflation is what’s really worrying investors, the commodities market had a funny way of showing it Wednesday.

Crude prices crumbled Wednesday, and lumber futures hit “limit-down” at one point before recovering later. They’ve still been falling most of the last week. Copper, platinum and palladium—all used widely in industrial applications—fell yesterday.

The pressure on stocks and the “flight to safety” (though no investment is safe) so far this week got blamed on worries about price growth. One day isn’t a trend, obviously, but if commodities keep pulling back from recent highs, it could be harder for investors to really believe it’s all about inflation.

Instead, it could be the opposite of inflation that’s weighing on the markets. The actual cause could be fears that the economy and corporate profit growth have already peaked and can’t find new catalysts.

Of course, no single day makes a market, so yesterday’s commodities weakness could simply represent some profit taking after a long upward run. Let’s see how commodity markets finish the week. Crude is lower this morning, trading below $63 a barrel and metals are mixed.

S&P 500 Daily Chart.
S&P 500 Daily Chart.

CHART OF THE DAY: S&P 500 HANGING ON TO SUPPORT. The S&P 500 Index (SPX—candlestick) went below its 50-day moving average (blue line) but recovered and closed above it. Looking at past activity, this level has had a lot of support. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Crude Conundrum: Diving a bit deeper into the crude picture, there’s a bit of a conundrum. Despite high prices, U.S. production has basically flattened out and isn’t back to where it was pre-COVID. Last week’s 11 million barrels a day was unchanged from early April. Typically, higher prices trigger more production, and the U.S. would seem to have ample excess capacity, based on current production being down around one million barrels a day from this date in 2019. Most oil industry experts will tell you it’s hard to just turn production back on after it’s been turned off for a while at any particular well, so maybe it’s just a matter of “catching up,” so to speak.

In the meantime, with crude production apparently having trouble keeping pace with demand in a reopening economy, gas prices are averaging more than $3 a gallon for the first time in a few years. Until U.S. crude production gets back to where it was (or OPEC loosens the tap a bit), we may be burdened with these high gasoline prices just as people want to get back on the road (see more on travel below). Gasoline supplies are tracking well below levels seen this time of year in the 2016-2019 period (2020 was an outlier due to the pandemic).

Inflation Tug-of-War: Another conundrum, as research firm pointed out yesterday, is the divergence between the stock market and the bond market around inflation expectations. The upward run in stocks that dominated through early April hit a roadblock and hasn’t really resumed amid the steady drumbeat of inflation, inflation, inflation. The bond market wrestled with those same worries in February and March as the 10-year yield raced from 0.95% to 1.78% in less than three months. Since then, however, the yield has cooled off a lot. Even on Wednesday when Fed minutes hinted that some Fed members might consider a more hawkish stance, the yield wasn’t able to get all the way back to 1.7%.

What are bond investors seeing that stock investors aren’t, and why didn’t the 10-year yield drive toward the 2021 peak after yesterday’s Fed minutes? It may not be that complicated. It could simply suggest that jitters are sending more investors away from what are traditionally seen as “riskier” assets like the Tech sector and bitcoin, and into bonds, resulting in a lower yield. As pointed out, if you want to measure risk sentiment, cryptocurrency performance can be a good place to start. So can the Treasury market.

Patience A Virtue: We’ve said here before how much quicker things move these days. The bear market last year only lasted a month, vs. at least three months for other bear markets this century. The bull market that followed was fierce and fast, featuring a more than 80% jump from March 2020 lows for the SPX in just over a year. Now it looks like some investors, at least, think it’s on to the next thing. The lesson? There’s no need to try to buy at the bottom or sell at the top, and most traders don’t. There’s plenty of room in between where a lot of trading goes on. That’s something to potentially keep in mind if the selling picks up here and takes us much lower. Corrections and even bear markets are a normal part of trading, and investors need to learn to manage emotions around them.

Disclaimer: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

Are We Still In 'Buy the Dip' Mood? Today's Action Could Be A Telling Point

Related Articles

Are We Still In 'Buy the Dip' Mood? Today's Action Could Be A Telling Point

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email