Wednesday was an interesting day, to say the least, and the 173-point decline in the Dow wasn't even the biggest story. That's because the Dow was down 460-points just a couple of hours before the close, and the day ended with a 287-point rally of the low. Meanwhile, the Dow Transportation Index and Russell 2000 (small caps) actually closed with gains - the Russell was up over 1%.
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There was a large decline in bond yields to open the day, which may have turned into a capitulation (in yields), a few hours before stocks started to rebound. The yield on the 10-year treasury briefly fell to 1.87% and closed at 2.09%. You'll see in the charts below how big of a move that is.
So we had a nice reversal that did look capitulatory, something we have been looking for. The bad news is, after the close yesterday, Netflix was getting pounded (down $115 a share, or about 25%) after releasing earnings, and that was hurting the Nasdaq futures. So Thursday's early trading should be interesting.
The SPY (S&P 500 / C-fund) gave us another big kangaroo tail, and after the last one only gave us one more positive day, I am a little reluctant to get too excited about this one, but this was big and on huge volume. If you look up market reversals or kangaroo tails in the dictionary, it would have a picture of this...
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The longer-term chart shows how high the volume really was. We'd have to go back to late 2011 to see trading volume this high in SPY, and the two below in 2012 and 2013 with just over 300 million shares traded, were very close to market lows.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The big story was a near collapse in the yield on the 10-year treasury. That reversal came quickly and early on Wednesday, and it took stocks several more hours to move past its panic mode. This almost looks like a bad "tick" on this chart, but it's real. The yield still finished way down, but well off the lows.
Chart provided courtesy of www.stockcharts.comm, analysis by TSP Talk
The AGG (bonds / F-fund) shows what happens when yields plummet then bounce back. It's the opposite affect. Looks like a top for bonds... but I've said that before.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The Russell 2000 (small caps) reversed up from a less severe decline on Wednesday morning, to actually close up over 1% on the day. The end result was a positive outside reversal day, which looks very promising, but again, we've been burned before and at this point nothing would surprise me.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The Wilshire 4500 (S-fund) benefited from the success of the Russell 2000 posting a modest gain on the day. We also see a big kangaroo tail reversal here, something we'd expect to result in at least some temporary follow-through to the upside.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
Ditto for the EFA (EAFE Index / I-fund) - even though it is technically in a bear market.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
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Thanks for reading! We'' see you back here tomorrow.
Tom Crowley
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