Stocks Weighed Down Below the August Lows
- Once again some modestly better US economic data cannot overcome all the other negatives, fails to help stocks.
- SP500, SP400, SP600, DJ20 Transports all undercut the August lows.
- Shrinking Greece economy means it will miss its deficit targets.
- German CDS rates soar as retail sales decline.
- US earnings to struggle as exports fall.
- Homes: no recovery until 2020.
- GS says recession risks are high and getting higher as ECRI says a recession is a done deal.
- Fed’s Fisher revises his growth calculations much lower.
- ISM rises, fighting off contraction, but it is still weak.
- With the undercut of the lows the question becomes a rebound that tests resistance and fails or a false breakdown that reverses for a rally.
Stocks weighed down below the August lows by the same old issues.
Over the weekend I discussed the indices at the bottom of the trading range to end the quarter, a good setup for a bounce back up in the range, particularly if new money came in. Didn’t happen. Stocks had to deal with the same old issues times two or three, and thus stocks were lower again pre-market. Seemed as if the indices, not at the bottom of the range as of Friday, had some more ground to give.
They opened lower but nothing massive. They even managed a bounce in the first half hour that pushed into positive territory. The ISM came out and staved off contraction with a 51.6 reading. Seemed as if stocks could pull off the bounce, but that was not to be. After that first half hour they started back downside and continued into lunch when things really turned ugly. Mid-afternoon they found bottom and tried a couple of bounces, the last one in the last hour even looked as if it had the right stuff. That only set up a sharp selloff in the last 10 minutes of trade that pushed the indices to session lows and yes, SP500 below its August low. SP600 and SP400 were already there as were the transports (DJ20). The Dow made a closing low on this selling but held above three prior intraday lows.
NASDAQ -79.57, -3.29%. SP500 -32.19, -2.85%. DJ30 -258.08, -2.36%. SP600 -5.06%. SOX -3.67%.
Perhaps splitting hairs on the closes, but enough indices closed below the prior lows to show a clear break to a new selloff low. The small caps are very domestically oriented, and their knife below those prior lows is a relative clear warning, among other signs, that the economy is in for tough times. When you consider the litany of other news and indicators, as I will discuss below, the recession I have discussed since May is here or coming.
At the same time the market itself is in an interesting condition. Undercutting prior lows is always an important point because it sets up possibilities. The further selloff is the traditional view: you break a key point and then everyone sells. That is not the way the market has reacted the past few years, however. Instead it either bounces to test and then fails (still a somewhat traditional reaction) OR it simply reverses and rallies right back up in what we call a false breakdown.
This would likely happen after another selloff early Tuesday. Remember the discussion last week about a breakdown late in the week that bleeds over into the next week and that is what sets the near term bottom? That is the textbook case right now as the indices break the prior lows and all hope is abandoned. With the massively negative sentiment indicators and market internals, this is a time to be vigilant and watch for a reversal. Not one that ends the selloff; we feel the economic problems are too serious for this to be THE ultimate bottom in the selling. But, it can give us some upside moves that help us in a couple of ways and then set up new downside as well.
Thus we need to be ready to play either way, i.e. the bounce to test the move that then fails, or the bounce that is the false breakdown and just continues back up into the range and a further bounce.
TUESDAY
The only scheduled data is Factory Orders but anything could happen. The situation is ‘fluid’ as they say in terms of Europe, China, and even the US. There is also earnings season that is all but here. That means the potential of more warnings.
Outside the data there is the technical setup. With the recent action and the positioning of the indices, the technical action would trump the news. Unless of course there is a big event such as, say a Greece default.
SP500, SP400, and SP600 all closed at new lows for the selloff and this year. In classic technical analysis this would mean a major selloff is coming. While I don’t disagree that ultimately there will be more selling, in this new market of the past several years these breakdowns tend to lead to reversals. Maybe the reason for those reversals is now gone what with the obviously weakening economy, but it is still one of the main possibilities. Yes there can be a further selloff that continues lower, a further selloff Tuesday that then reverses for a test, a further selloff that reverses for a break back through the August low for that reversal move.
Thus we have to see how the breaks are handled. The one thing you don’t want to see: futures up on Tuesday. That will mean more selling without giving us any good downside setups. Given all of the massively (my view) negative sentiment indicators as outlined above (new lows, bulls/bears, breadth, put/call, global economic worries) coupled with where the indices are after 4 to 5 days downside, a bounce is likely; the strength of that is the question.
The setup is there for the early Tuesday downdraft that leads to a reversal discussed just over a week ago, something that did not materialize given the higher open the following week. Now the market has set up and we see if it can deliver this time. The positions to take are a bit more difficult. You want to play the upside if the move sticks and we have several in position. These are short term at the outset unless there is a big reversal that keeps running. That can happen but we don’t anticipate a super surge. Thus they would be trades as the market ultimately sets up for further downside. The difficult part: the old support on the rebound can stall the move. If the reversal is good enough, however, you take some positions on the turn, not loading the boat, and play the move back up.
