Killer Moves

The movement is at least double what you usually see.  We have a 40 point range in the ES just in the overnight session alone, that is over 2%!  These are not normal times, but a time of investor stress and uncertainty.  It is not the uncertainty of the news or events, but of prices.  When you have a 40 point overnight ES range, you are in Aug-Sep 2011/Aug-Sep 2015 mode.  This kind of persistent lasting volatility is beyond anything else we've seen.  And it is not a one off move.  This has been happening a lot this year.

You cannot treat this like August 2015.  The breakdown is more severe and broader, hitting the emerging markets and Europe harder than before.  Also, you have more stress in junk bonds and most importantly, the dip buyers have had ample time to load up on stocks.  Remember the key to the rallies in 2012 to 2015 were that dips were usually short and quick, and of the V shaped variety.

The dip buyers back then didn't have much time to buy or else they missed the dip.  It was a different psychology, the memories of 2008 were very vivid and the dips felt scary, even though they weren't too deep and usually didn't last long.  And since you had V bottoms most of the time, the timid buyers just didn't have much time to buy weakness or else they had to chase prices higher to buy what they wanted.  Not this time.  Not including the August/September correction, you had a dip in November, two in December, and a massive one this month.

The increasing frequency of these dips along with the deteriorating fundamentals and overvaluation make it shorter's market.  I have heard many times from those saying that the sentiment is too bearish.  You have to be careful interpreting sentiment, because they are usually bearish when the market is in a downtrend, and usually bullish when it is in an uptrend.  We are now in a downtrend, so it will take even more bearish sentiment to have an effective contrarian indicator.

Once again, you have to have a different mindset than the previous BTFD markets of past 6 years.  Yesterday we got a flush out that should be a short term bottom that lasts for a couple of weeks.  It doesn't mean we go higher in a V bottom, we can bounce, pullback, bounce again, and trade in a lower range (probably between SPX 1860 to 1940) before deciding on the next move.  I believe that next move out of that range will be lower, as China deteriorates and more and more investors realize that the US and European economies are also weakening.

Don Mario is giving bulls hopium this morning and we have a healthy gap up.  I see very little upside from these gap up levels and expect us to close lower today.  A weak close should be bought to ride the oversold bounce over the next few trading sessions.  This is not a long term bottom, but the price action will give bulls hope for the short term and that will help to drive the market higher for a few days.  A move to 1920 over the next few days is very doable here.  Short term bullish, but with the recognition that we are now in a shorter's market.