|SPY July 25 2013|
Thursday, July 15 2013 was another disheartening day for the Bears. After sinking to a low of 1671.75 overnight, down over 20 points from the high, futures bounced higher into the cash session, and then kept bouncing. There was one serious attempt to challenge the lows late in the morning, but once that failed at 1675, it was off to the races. After 1680 was crossed after that, that level held for the rest of the day. Futures managed to break the overnight during the afternoon and closed near the day's highs, at 1684.
Technically, the chart shows the day as being fairly straightforward, but it was a huge battle between Bulls and Bears. The key to the day was momentum off the open - with the overnight crowd almost all short (or "net short" for those who are unduly picky), the first big move would either encourage the shorts to hold their positions and add more, or cause them to start doubting the wisdom of holding increasing losses and cover. The latter turned out to be the case, given the surprising early strength. In the usual turn of events in this market, short-covering thus contributed to the market's gains, the shorts being their own worst enemies. This won't change, we feel, until there is a true blow-off top.
There's an element of obvious market psychology going on here. A lot of retail traders are frustrated at the market always going up, and being unable to buy in "cheap." These sell-offs that lose momentum are like catnip for these traders. They see the "lower" prices and gain the courage to jump in. That's just the way it is and has been all year.
Somebody posted an interesting chart today (above), and I thank them for it. It shows that the "Pros" have been selling into the rally "since late June," while "Retail" has been buying "since early June." If you look a little more closely at the chart, though, you notice that the chart shows that the "Pros" in fact have been on the sell side all year, just with a bigger spike in their selling "since late June." Selling all year! Are you kidding me? Who do you think has been on the right side of the trade this year, based on the above chart? Just because they are "pros" does not mean they are infallible. I'm not inclined to take their decision to sell throughout a major Bull run as being particularly instructive and worthy of emulation, sorry. Of course, the market will drop at some point, and they'll say, "See! We were right all along." No you weren't, buddy, no you weren't.
Regarding another lingering technical issue, believe it or not, the gap we were talking about a few days ago about the gap down to the 50-day moving average is getting a little better. It has narrowed, though not by much. It remains a healthy 40+ points, which in normal times is extreme, but these are not normal times. "Will this time be different?" is the standard rhetorical question. Um, yes, this time has been different. It is what it is.
Facebook (FB) was up huge in the morning (+25%), sending the Nasdaq Composite to early gains. We don't think that earnings from "big" companies have been particularly important recently. However, this unexpected FB surge that led the Nasdaq futures higher was a tip-off for those uncertain about holding long positions in the teeth of the overnight E-minis selling: a big selling frenzy will hit all stocks, not just those in the S&P 500. When people panic, they PANIC, indiscriminately and with extreme prejudice. With the Nasdaq providing an anchor, combined with the morning's good economic data (unemployment claims were just weak enough for the "bad news is good news" crowd, and Durable Goods numbers were stellar), it was possible to watch the downward SPY tests in a relaxed way, because it was unlikely it would drop too far. If you were adventurous, you even might have bought the dip.
Just to address something perhaps percolating in the back of your mind, no, being long does not mean we are getting "complacent." We play the market as it is, not as it "should be." Many learned commentators can be found on the Internet suggesting that "us floor traders back in the '80s would have been shorting this market left and right, and it is plain as day that the big fall is just around the corner." Ok, fine. I'm as ready as anyone to go short when the situation warrants it. The situation doesn't appear to warrant it right now, at least not shorting on a continuing basis (counter-trend short scalps are always there to take).
The market will not go down because we think it should, and it matters not how many reasons you dredge up why it should - if it doesn't go down, it doesn't go down. Period. The market will show its hand when the end comes. Today's action in particular didn't reveal the slightest hint that the market is ready to crack. And it may crack wide open at any time, tonight, tomorrow, next week, next month, so we must remain vigilant and play the market as it is. Always.
Despite all the sturm und drang, the best conclusion we can come up with is that we are continuing the basing process just below 1700 that we mentioned yesterday. You must expect tests and feints in both directions before the market shows its true hand - but once it does show its hand, most of the gains will be behind us again, and you will hear the "it's not fair, it's all rigged" crowd in full cry. It is quite valid to presume, based on old ways of thinking, that the market averages will resolve to the downside. We, however, for the above reasons, remain Bullish and expect to see 1700+ when all this digesting is over.