Tuesday, July 28, 2015

Finding Excuses to Sell

This market is going back to the China is bad playbook.  The Chinese stock market does NOT matter.  The Shanghai went down Tuesday, after going down 8% on Monday,  and the S&P is now up 1% on the day.  Sure, if Shanghai goes down 8% in a day, it matters for that day, but only for that day, and maybe just for the overnight session.  And 8% down days happen in Shanghai about as often as you get an S&P bear market, which is about once every 7 years.  The reason the market went down for 5 straight days is because the S&P is just not Superman anymore.  When you are no longer Superman, you will have periods of weakness that just show up after getting overbought.  But what makes it tough trading is that S&P is no pushover either, so you definitely can't short.  For example, you get days like today with the big gap up overnight and the extension higher in the middle of the day for NO reason.

 Investors and traders are always trading to find reasons for something going up or down.  It satisfies our rational thoughts, but the market is driven by supply and demand, not rational thoughts.

So you have a market that is neither super bullish or bearish.  I would consider it a slightly bullish market, with a potential for significant weakness in the long term (over the next 3 years).  I don't have any significant convinction expect to buy dips on oversold days like Friday or Monday, and catch a bounce into the next day's overnight session or the next regular trading session.

The Fed is coming up for tomorrow, they will probably repeat the same old same old and that will be that.  The strategy for this week is to buy weakness that takes S&P down towards Monday's lows, and hang on until you get the bounce back higher into all time highs.  You cannot keep this market down for long, but at the same time, you can't keep it up that long either, at least by 2013 and 2014 standards.

As for bonds, after you had the weak hands flushed out in May and June, it is now a honey badger.  It will do its usual thing:  be tough and nearly indestructible.  Look for sub 2.00% on 10 year yields by November.


Anonymous said...

So do you think the Fed signaled more or signaled less that they would hike rates this year with their statement today.

Market Owl said...

It seemed like a repeat of what they always say, statement seemed inconclusive to me. It seems like they want to jam through one rate hike just to show that they can raise rates, but I think that will be it for a long time.

Anonymous said...

Bonds, gold, nor equities rallied much after the announcement. Market is seeming to interpret it as 100% certainty they will raise rates given statement talking about job growth and inflation slowly creeping. Before there was uncertainty as to if a rate hike will occur at all this year. Seems more certain now wouldn't you say?

Market Owl said...

How about after the ECI came in the lowest in over ten years? Bonds rocketing higher on a bet that Yellen doesn't have the guts to raise rates after these weak wage growth numbers. Economy is in stall mode, there is no escape velocity. Fed starts tightening and they will guarantee a recession.