Weak Bounce

Heading into this week, I was looking for a bounce to take up to at least SPX 2800, as the market seemed to have flushed out the weak hands in the short term.  But the lack of follow through buying and the weakness overnight was an omen.  Clearly, investors don't have FOMO here and are not ready to take any risks chasing strength here. 

Monday should have been an up day, with short term traders looking to buy the dip to start the week, after the panic last week finally subsided, with a V bottom on Friday.  But the intraday bounces were sold and the put/call ratios went back to normal levels, not a great sign. 

You can forget about the V bottoms that you saw with regularity from 2009 to 2014.  We are in the messy bottom phase of the stock market cycle, similar to 2015, and earlier this year.  This market can't hang on to strength without stock buybacks to fuel the buying power.  There are many that are skeptical about the seasonal effects of the buyback blackout period on stock market performance, but the data is right there if you look for it.  When retail is still a net seller of equities and fund managers don't have the inflows, they don't have the buying power to support the market.  Pensions are becoming a smaller part of the buying pool and have a much smaller effect on the market these days.  The main buyer of stocks are the companies themselves.  This makes any earnings downturn deadly for stocks, because these companies won't be able to borrow money at decent rates to buy back their stock, and will have less cashflow to direct towards supporting their share price. 

A note on the bond market.  There was a below consensus CPI number on Thursday and weak retail sales number on Monday, and the SPX has gone down 180 points from the highs.  And the 10 year yield is still lingering near the highs, at 3.17%.  The lack of a flight to safety bid for Treasuries is the most important thing that no one is mentioning over the past week.  Remember, this whole pullback started because the 10 year started breaking out to new highs, and that monkey is still on the stock market's back.  Once the buybacks comeback starting in late October and the stock market bounces, look out for a potential ugly selloff in Treasuries. 

The game plan for trading the SPX is either to put on a small short on a bounce towards 2780-2790 either today or Wednesday, or wait for the next sell wave to complete and buy around 2680-2700 later this week.  Not expecting much to happen today, probably just chop around the range traded on Monday.