Gut Check for a Mature Bull Market

Wednesday recap: There were numerous forces at work in Wednesday’s market with the net result looking like a mean reversion trade among stock market averages and sectors. underperformers held up well, while indices and sectors that have been the most resilient, took a larger hit.

Fed Chair Janet Yellen threw equity markets an un-hittable sinking curve ball less than 30 minutes into the trading day.

Mature Bull Market or the New Norm that Keeps Going Higher?

Speaking in an open discussion format at IMF headquarters Yellen commented that stock market valuations “are generally quite high”. In the world of nuanced FED speak, where every word uttered and omitted is carefully scripted, that’s actually quite a bold statement. Investors clearly took notice, acting decisively, and by 10:30 AM we’d seen a 250 point reversal in the DJIA, and a 20+ point reversal in the S&P 500.

250 point intra day reversal in the DJIA

mature bull market

No doubt, when the most powerful Central Banker on the planet comments on stock market valuations, investors and traders will respond quickly, and look for clarification later.

The Market reaction to Yellen was actually quite orderly.

Keep in mind that in December 1996, when then FED Chairman Greenspan made his infamous warning of “irrational exuberance” in stock market pricing, stocks reacted so violently that afternoon on the downside that Circuit Breakers were breached, closing US stock markets for the remainder of the day.

We had nowhere near that level of volatility yesterday. In fact, market averages bottomed out between 2:45 and 3:15 PM and the “last hour indicator” was constructive, something we’ve only seen a few times in the last 6 weeks.

While a 250 point reversal in less than 45 minutes will get a lot of attention in a hurry, the remainder of the day was quite muted. The DJIA, S&P 500 and NASDAQ all finished with losses from -0.4%to -0.5%. The Russell 2000 +0.3% at 1219.36, acted well all day after 2 weeks of underperformance.

We’ll see if it can buck the trend again today, as it seems the market will get tested early on the downside.

Other laggards from the last 2 weeks, The DJ Transports +0.15%; Biotech stocks; IBB +0.8% and Social Media names all joined the Russell finishing green on the day. Social Media names should start the day well bid, with an assist to BABA +8% following their earnings report.

Where do we go from here? The US market has plenty of issues:

For starters, Where’s the stock market leadership? If you really believe the Major Stock Market Averages are going to blast through resistance to new highs and tack on another leg higher to the 6+ year Bull Market, you’d better have a great scenario of what sectors are going to provide the leadership. If this is a mature bull market, leadership will be hard to find.

The issue is ex the niche plays within Social Media and Biotech, Market Leadership has been void for at least 6 months.

The Macroeconomic roadmap gets murkier by the week. Within 2 weeks of 1Q GDP coming in at +0.2% we’re hearing quiet chatter of concern over Q2. Adhering to your trading plan gets more significant as the indecision continues.

Oil has had a good run the last 6 weeks, but may have hit stiff resistance yesterday. After WTI traded +3% and thru $62 to start the day, those gains gradually dissipated all day resulting in a small decline at day’s end. Keep in mind, Oil is +40% from the early March lows and the globe is bursting with supply.

We’re just not going straight to $80 and then higher without a big time disruptive event.

The Early Line: We’re going to start the day lower, although futures have already recouped over half their losses from very early this morning. Are the Bulls up to the test of a lower opening? Let’s see where we are at 11:00 AM.

tanderson@mndpartners.com tjanderson56@gmail.com

Twitter: @TJAnderson1

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