It’s not often you can say that a session in which the S&P 500 gapped down and closed 0.55% lower qualified as a “good day” for the market, but considering the index was off more than 2% at its worst yesterday I think we have to chalk this one up for the bulls. Most importantly, there was little downside follow-through after the S&P 500 broke below its October 11 low of 2710, meaning we did not see the sharp “whoosh” down that has very often come when support breaks during one of these corrective phases. Instead, buyers stepped in once again around the late June low of 2691 and the subsequent rally continued well into the afternoon. Most weeks, due to the amount of work that goes into this report, I try to start writing and formulating the content around mid-morning Tuesday, shortly after the stock market opens. However, with conditions as volatile as they have been in October, it has been difficult to get much of a head start since a lot can change between 10:00 a.m. and the close. Yesterday was one of those times when I was glad I did not get very far in the morning since most of what I would have written would have been stale by 4:00 p.m. anyway.
As expected, with the poor open yesterday I was almost immediately swamped with questions, and it was interesting to see how the tone of the inquiries changed as the day went on. There was a definite sense of “here we go again” resignation in many of the calls/emails I received just after the October 11 low was taken out, but by around noon sentiment had flipped to a point where I could barely respond to one “is the bottom in?” email before I received another. My general response to those looking to put cash to work yesterday afternoon was something like the following: “This very much looks like the typical retest/undercut low pattern that has often marked bottoms the last few years. We have also already seen many indicators hit downside extremes, so, unless this time is different, a bottom should arrive very soon (we may have even gotten it today). It will be a big red flag if we continue to see weakness in the near term since the market SHOULD be bouncing here from extremes.” And that’s the way I still feel as we head into today’s session.
The bottom line is that we REALLY don’t want to see continued weakness from here that takes out yesterday’s lows. The market is washed out, it’s hard to find a positive headline in the financial media, and we have evidence thanks to yesterday’s session that the dip is being bought, so we now need to see follow-through on the upside in the days ahead to help confirm a turnaround. It is worth noting that despite yesterday’s intraday reversal, the major U.S. indices (S&P 500, NASDAQ, Russell 2000, DJIA) still made lower highs and lower lows and none have managed to climb back above their 10-day moving averages. The market’s internals, in terms of volume and advance/decline data, were also not that impressive yesterday. The potential for additional selling pressure, therefore, remains in place, but yesterday was a step in the right direction. Now, we just need to see that follow-through to take us away from these recent lows.
And with that, here are the Charts of the Week…