Stocks opened lower on Monday morning, following Friday's big sell-off, but we quickly saw capitulation-like action and the sellers exhausted themselves opening the door for a rebound. The Dow gained 240-points on the day. It didn't get back all of the 394-points it lost on Friday, but it was a good start. There is overhead resistance on the charts where the indices had broken down from, and that's the next challenge.
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After Friday's hawkish statement from Fed Governor Eric Rosengren, another Fed Governor, Lael Brainard, was center stage yesterday and gave much more dovish statement confusing investors that much more, but added to the rebound. If that name sounds familiar, she was the Fed Governor I had written about before that gave the Hillary Clinton campaign the maximum donation during an election cycle, despite the Federal Reserve priding itself on being non-partisan institution. So, a more dovish statement from her wasn't too surprising and could be why stocks were rallying in front of her statement.
Program trading has morphed into high frequency trading in the last few years and this seems to have hastened any sell-off... or rallies. After Brexit, and even last Friday, we saw that if the market shows some weakness and the dip buyers don't jump in, program trading and high frequency traders hit their switches and things happen very quickly. Having two trades a month basically leaves us at the mercy of these traders unless you can anticipate the weakness a day or more prior to it happening.
On the other hand the snap back rallies tend to be quick as well and because of these programs, other investors now have to buy back in quickly or they could miss out, which I believe is what we saw in June after the Brexit sell-off, and possibly yesterday.
From here, the more bearish view would have to do with investor's state of mind. An investor or trader who was in stocks on Friday and took that loss may feel very satisfied just to get their money back, so there could be resistance once the losses are completely recouped - and that's the same reasoning why the market can turn once a gap gets filled - and we're already nearing some gaps getting filled.
The SPY (S&P 500 / C-Fund) opened lower but quickly caught a bid and the dip buyers were back in business. After the breakdown of the F-flag formation, the bottom of the flag becomes an area of potential resistance after being support. If this is going to be anything like the Brexit reversal, it may not have any issue continuing higher, but more conventional action would see resistance at the bottom of the flag, and or once the open gap is filled. Again, as I mentioned above, once investors get their money back from a big loss they can feel relieved and satisfied to take their money and run.
As we talked about yesterday, the large inverted head and shoulders pattern on the weekly chart of the S&P 500 would remain healthy as long as the neckline held up. So far, so good.
The DWCPF (S-Fund) bounced back, but like the Brexit reversal, the small caps lagged a bit, but tend to catch up later once the larger indices become less of a bargain.
The EFA (EAFE / I-fund) hit the 50-day EMA on Monday morning and rebounded sharply with the rest of the market. It closed at the highs, which happens to be about where the neckline of its inverted head and shoulders pattern is. It needs to recapture this line.
The High Yield Corporate Bond Fund bounced back too and the 50-day EMA has held up again so far. Since it broke back above it last February, it has not closed below the 50-day EMA since. It fell below it once, but closed above it that day in June. This chart is a good pulse of the credit markets and as long as it is rising stocks tend to hold up.
The AGG (Bonds / F-fund) was up slightly after Friday's big sell-off on bonds. The bottom of its flag is still trying to hold, but bonds didn't get the rebound that stocks did.
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Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
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