Watching for a Near Term Washout | August 24

Stock Market Looking for a Near Term Washout

How Did We Get Here?  Global Equity Markets succumbed to a perfect storm of Currency, Commodity, and Technical influencers last week as major market averages broke convincingly below their 200 day moving averages, culminating Friday with stocks having their worst daily decline in 4 years.

There are literally dozens of potential attention grabbing data driven headlines from last week’s sell off but the debate that will rage this week; in fact it began shortly after the bell on Friday, is weather this is the long overdue “correction” that had eluded equity market since 2011, or possibly something more serious.

There will be no grumblings this year about equity market volumes and velocity grinding to a virtual halt during the last few weeks of summer.  While the Cause of last week’s carnage could be up for endless and lively discussion, the Effect is what it is, and leaves us at price points not seen for 8 to 18 months depending on your favored market benchmark.

The DJIA at 16,549 lost 5.8% last week.  The DJIA is now 10% below its May ‘15 all time high of 18,300.  More alarming is that the DJIA is down 8% YTD, but at Friday’s close has also given up all its gains for 2014.

The S&P 500 at 1970.89 also lost 5.8% last week, in lock step with the DJIA.  This is the lowest close for the S&P 500 since the “V” plunge and reversal last October, eclipsing the Dec ‘15 lows my the tiniest fraction.  The gap between the 50 day and 200 day moving averages is down to a scant 13 points, as a “Death Cross” on the daily chart is inevitable within 2 to 3 weeks.

The NASDAQ -6.8% on the week at 4706.04 is now fractionally in negative territory for 2015.  AAPL was down 9% on the week, settling slightly more than 20% below its April all time highs. This cycles 4 horsemen of tech, AMZN, GOOG, FB, and NFLX were unable to do the NASDAQ’s heavy lifting, all seeing weekly declines for the first time this year.

The Russell 2000 provided the only glimmer of hope on Friday, with a decline less than half that of the other major indices.  Having been the worst performing market index to date in Q3 this could  be just a “reversion  to the mean” trade, or it could be an early sign of a very s/t oversold market.

The Russell was the only index to close off its morning lows and actually went green, albeit for less than 10 minutes right at 2:00 PM.  We recall that after the relentless 3 week sell off in October ’14 the Russell was the first index to show selling exhaustion a day before other market averages bottomed.  With markets headed for an ugly opening this morning we’ll be watching to see if the Russell can match it’s over performance from Friday.

Market internals gave us 2 very interesting data points Friday to watch for follow through today.  While the adv/decl on NYSE was negative by greater than 4 to 1 both Thursday and Friday, the adv/decl on NASDAQ issues was much better on Friday at negative 2.5 to 1 vs. a reading of -5 to 1 on Thursday.  Clearly, in addition to the over performance by the Russell 2000, this illustrates that mega institutional investors were in the mode of  raising cash by indiscriminately  selling highly liquid names capable of absorbing tens of millions of shares of supply a day.

New 52 week highs and lows gave us a reading Friday I’ve never seen before.  Friday there 627 new 52 week lows and 0, that’s ZERO 52 week highs on the NYSE.  Thursday we had over 360 new 52 week lows.  As a point of comparison, at the end of the 3 week sell off in October ‘14 we had 2 consecutive days with 600 new 52 week lows.  Should markets start the day as weak as is currently projected, we’ll be watching the list of new 52 week lows very closely.

A third straight day of extreme new lows could set the stage for a sharp trading rally and possibly a Turnaround Tuesday.  Keep in mind, my read at this point is that any bounce would be a trading rally, not a sustainable reversal, as the technical damage dome at higher levels needs a lot more than just a few days to repair.

The Early Line:  It’s going to ugly around the opening after which we have to take a close look 60 and 90 minutes into the day as to how the market is trading vs. opening price levels.  Volumes will also be a key indicator of whether we’re putting in a tradable near term low.   China was 8% lower overnight, and there is no news yet on the expected lowering of their reserve requirements.   It’s also worth noting that the Chinese finance authorities chose not to intervene and support the Shanghai Composite 3500 level that took a stand on  last week.

It’s likely the selling throughout Asian markets made the timing of market intervention by the Chinese ill advised.

The 10 yr is just below 2%.  October 16, 2014 was the day the market reversed a 300+ pt loss and the 10 yr Note went from 2.00% to 1.8% literally in 5 minutes.   That has become known as the 10 yr note “flash crash”    possibly sets up a Turnaround Tuesday……..But right now  WE ARE A LONG WAY FROM TUESDAY!!

Again, we’re focusing on the Russell 2000 and the new 52 week low list for signs of a potential short term reversal later today or tomorrow.

tanderson@mndpartners.com tjanderson56@gmail.com

Twitter: @TJAnderson1

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