Friday, October 2, 2015

Choppy Bottom

It is not going to be a clean V bottom where FOMO plays a big part in motivating investors to buy stocks.  The psychological damage along with the still high valuations make this bottom much different than previous bottoms that you saw in 2010 or 2011.  Back then, you had the potential of the Fed increasing their balance sheet to suppress bond yields and pump more liquidity into the system, but this time, they are clearly waiting for much lower stock prices before even hinting at another QE.  That means the Fed put is way out of the money, unlike previous bottoms, when they were pretty much at the money puts.  Plus, valuations were much lower and the bull market much younger back then.  You cannot compare 2011 with 2015.  2015 is a much riskier market, although seemingly less scary.

This nonfarm payroll report isn't that bad, 142K jobs, which is within the margin of error of consensus at 200K, but the reaction is much more important.  This is a very fragile market, and any slight signs of a weakening economy worry investors that a possible recession is coming, or at least slowing growth.  I wouldn't overreact to this report, but clearly this is not going to be a V bottom like the past, where you didn't even have to get sentiment too bearish before the market made a V and rocketed higher.  I initially thought we would get a V bottom after seeing Wednesday's price action, but Thursday wasn't as strong as the close would indicate, and you had too many daytraders looking for a gap up today, for what reason, I don't know.

In any case, I would still look to buy deep selloffs, but this is still not a market where you can chase strength and get paid on swing trades.  Perhaps a dip buy if we get to SPX 1870-1880 range.

As for bonds, I expect us to get to 1.80% on this upswing.  Remember, bonds trade like tankers, once they get going, they are hard to stop, even if equities strenghthen again.  Bonds usually top significantly later than when stocks bottom.

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