It was a historic and very wild week on Wall Street, with record point moves (up and down) almost every day of the week. Typically, massive sell-offs do not recover overnight. Additionally, massive selloffs, followed by record volatility, leads to lower, not higher prices - especially when they occur in aging bull markets. Right now, nearly every major market around the world is trading like a penny stock (wild percent swings - up and down), and that typically bodes poorly for stocks. The only wild card remains the Fed and other government intervention. In the short term, the market bounced from extremely oversold levels and it was impressive to see the bulls help the major indices close "up" on the week. Remember, the Fed has put on the perfect hedge by saying they are data dependent: If the data improves, it gives them the option to raise rates, and if the data deteriorates (present situation) they can easily justify another round of QE. The problem is that even with rates at zero and other central banks printing money, global economic demand remains lackluster at best. So the Fed's conundrum is that Main Street is barely growing, even with rates at zero. At this point, markets around the world are clearly forecasting another global recession and notwithinstanding more Fed easing, the path of least resistance is lower for stocks. Defense is king until the S&P 500 trades above 2040. Defense is king until further notice.
Monday-Wednesday's Action: Record Moves Up & Down On Wall Street
US stocks experienced their weakest open in history after Asian markets plunged on continued growth concerns. China's Shanghai Composite tanked -8.5% overnight, which sparked a global sell-off. Before Monday's open, "fear took over," causing the Dow & S&P 500 futures were "limit-down," which means circuit breakers went off, causing them to "stop" trading. Five minutes after the open, the Dow plunged 1,089 points - which was the largest point decline in history- and then immediately rallied almost 900 points - which was the largest intra-day rally in history before closing down over 500 points. This type of exaggerated and manic trading typically occurs during bearish, not bullish. phases. The CBOE Volatility Index (VIX) did not produce any quotes during the first 30 minutes of the session but once quotes resumed the index soared past levels seen during the May 2010 flash crash. The VIX is a great fear gauge because it rallies when the market falls (or when fear is elevated).
Stocks gapped higher on Tuesday after China cut interest rates and lowered their reserve requirement to stimulate their markets. The FHFA rose by only 0.2% in June, missing estimates for 0.4%. The S&P Case-Shiller index slid -0.1%, missing estimates for 0.1% gain. The PMI service index came in at 55.2, beating estimates for 54.8. New homes ales rose to 507k, missing estimates for 516k. Year-over-year sales were up a very healthy 26%.Consumer confidence rose to 101.5, beating estimates for 94.0. The Richmond Fed Manufacturing index disappointed with a zero reading, missing estimates for 10.
The oversold bounce finally occurred on Wednesday, helping the Dow surge a whopping 619 points to its largest single day rally since the 2008 financial crisis! The rally was attributed to FOMC Vice Chair William Dudley, who said a case for a September rate hike seems less compelling than it was a few weeks ago. Durable goods rose 2%, beating estimates for -0.4%.
Thursday-Friday’s Action: Wild Action Continues
Thursday was another volatile session on Wall Street after China intervened again in their markets. Bloomberg reported, “Less than an hour before the close today the Shanghai Composite Index turned negative, dropping almost one percent before going on an astonishing rally in the last 45 minutes of trading to finish the session 5.3% higher. According to people familiar with the matter, the late-day rally was sparked by Chinese government intervention, which aimed to stabilize the equity market ahead of a military parade on September 3." Central bankers around the world met in their annual Jackson Hole conference in Wyoming. This year's conference, titled "Inflation Dynamics and Monetary Policy" will focus on helping increase inflation around the globe. US GDP rose 3.7%, beating estimates for 3.2%. Jobless claims came in at 271k, barely missing estimates for 270k. Pending home sales rose 0.5%, missing estimates for 1%. The Kansas City Fed Manufacturing Index plunged to -9, missing estimates for -4. Stocks were relatively quiet on Friday as investors paused to digest this week's wild action. Personal income matched estimates for 0.4%. Finally consumer confidence came in 91.9, missing estimates for 93.3.
Market Outlook: A Major Top?
Every bull market in history has a definitive beginning and an end. It is important to note that with each day that passes, we are getting closer to the end and further away from the beginning. This bull market is aging by any normal definition and celebrated its sixth anniversary in March 2015. The last two major bull markets ended shortly after their fifth anniversary; 1994-2000 & 2002-Oct 2007. As always, keep your losses small and never argue with the tape. If you want exact entry and exit points in leading stocks, or access more of Adam's commentary/thoughts on the market. Join FindLeadingStocks.com.
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