A Soul Searching Stock Market

soul searching stock marketEquity markets have been on a roller coaster ride of price and emotion the last 2 days as investors have toggled their attention between Greece and China in an attempt to separate the optics of the moment from the true investment impact of events outcomes front end loaded with uncertainty.

And not to be “shrugged off” we did get FOMC minutes from the June FOMC policy meeting yesterday afternoon as well as the unofficial start of 2Q earnings season with Alcoa reporting an “upbeat miss” after the bell.

Most disappointing on Wednesday was the lack of even an attempt of a follow through after the sharp reversal off the lows Tuesday, leaving market averages at their highs of the day.

In fact, Monday and Tuesday produced 2 back to back days where the S&P 500 closed higher than it opened for the first time in close to a month.  Similar to the last hour indicator, this was an optimistic sign that selling pressure was beginning to wane, and possibly the market had pulled back enough for investors to accept what most expect to be a 2Q earnings season that is “OK” at best.

Major Stock Market Averages closed very near their intraday lows on Tuesday, with the S&P 500 at 2046.68 closing below its 200 day MA for the first time since the brief market correction last October.   Lets take a closer look at where this leaves us 5 trading days into the Third Quarter:

Map of S&P 500 July 8 Trading

spy map july 9

Market Internals were horrific Wednesday, as declining issues led advancers by nearly 5 to 1 on both NYSE and NASDAQ.  Dvol was greater than 10x Uvol, the second time in 7 trading days we’ve hit that metric.

Contrast this to the “relief rally” Tuesday afternoon, where the adv/decl stats were positive by 3 to 2 on NYSE and negative by the same count on NASDAQ and it’s not a pretty picture.

The positive of course is that it’s building the case for an oversold market in the near term.

The S&P 500 at 2046.68 closed below its 200 day MA of 2055 for the first time since October 2014.  It is now 3.9% below its May 21 closing high of 2031.  As a point of reference, the closing low during the October 2014 sell off, was 8% below the 2014 highs from 4 weeks earlier.

The DJIA at 17,515 is 1% below its 200 day MA and 4.3 below its May 19 all time closing high of 18,312.

NASDAQ at 4909.76 is still 2% above its 200 day MA, but is 4.8% below its June 23 closing high just 11 trading days ago!!

There is a bit of “mean reversion” going on with both the NASDAQ and the Russell 2000 as they were the clear leaders in the first half of 2015 but have miserable starts to Q3.

We’ve mentioned numerous times that NASDAQ is also under the heavy weight of concern over an inventory build in the DRAM market since MU traded down 15% after its earnings report in late June.   

Nothing rattles tech investors like an unexpected inventory build in the chip space.

The Russell 2000 at 1229 is 5.1% below its June 23 high close.  Again, has happened in just the last 10 trading days.  The 200 day MA is at 1204, and the 1205 to 1215 level showed good support during both the March and May lows.

China of course was the catalyst for the sharp sell off Wednesday that markets just could not recover from.

The “Buzz” for the last 48 hours has been the very high percentage of Chinese stocks that have been suspended from trading, mostly on the Schezhen, but also on the Shanghai exchange.

Nimble Chinese investors have been in survival mode, selling what they can, not necessarily what they want to.  This has inspired a rash of selling in stocks still free to trade with 600 Chinese stocks down 105 in Wednesday’s session.

China Stock Market Update!!!  For one day at least the selling pressure has lifted in China with a strong rally Thursday.

Stay Tuned!!!  It feels like we’re just in an early chapter here.

Greece:   The good news from the Greece drama is we finally have a definitive deadline for Greece to submit a legitimate proposal for a lifeline from its creditors.  If there is not a final deal done by Sunday, Greece will likely de base itself from the Euro Currency, although there would still be a path to remain in the EU for trade and travel.

Both Greece and their creditors appear to be stuck in different versions of “no man’s land” between economic reality and politics.

Greece realistically needs debt relief and could be totally debt free with a default and “Grexit”.

This is a High Risk/High return option.   The creditors would like craft a way for Greece to remain in the Eurozone without risking a “moral hazard” precedent of debt relief.   Stay tuned.

Nothing here will be easy, but something has to break by Monday morning.

tanderson@mndpartners.com tjanderson56@gmail.com

Twitter: @TJAnderson1

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