Thursday, September 25, 2014

Still Waiting for Lower

I am not shorting today, although I feel like we need to test 1960 on the SPX before the all-clear signal to get long.  There is also a strong support zone in the IWM at 109-110, which would mark a double bottom from the August low in the Russell 2000.  The S&P has been much stronger, as you probably know, so a move down to 1960 would equate to about a move down to that 109-110 August bottom area for the IWM.

This selloff reminds me a lot of the early April selloff, when went down from 1888 to 1815 over a span of a week.  It is definitely less volatile than that selloff, but the sentiment and put-call readings are quite similar.  The seasonal characteristics are also similar.  Back in April, there was tax selling to pay for 2013 capital gains in stocks.  This time, it is quarter end fund flows, which often mean selling stocks at the end of September.

Without a lot of big bear catalysts, other than a fairly slow global economy I don't foresee a big drop in stocks.  The Fed is on hold till at least next summer, so that is nothing to fear.  And Draghi will jam down a QE of some kind before the end of the year.  And a strong dollar has never been a catalyst for weakness, but simply a sign of dollar demand.

Bonds look strong here, the 5 year auction is over, and after the 7 year auction today, there are no bear catalysts and of course month end extensions coming up next week.  Would not be surprised to see overall bond strength till the end of the month.


Anonymous said...

Could this be the QE-ending equity correction that we have been waiting for?

Market Owl said...

Anything is possible in the market, but until companies stop buying back stock and we run out of M&A, then the market can go down in earnest. Everything else is just tertiary and temporary.

A recession would help to cut off the corporate cash flow in a hurry.