TheSlayer's Market Thoughts

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.

SPY daily chart, July 24, 2013

There was a bit more excitement during the trading day on Wednesday, July 24, 2013 than has been the case recently. After opening around all-time highs after a run higher overnight, the market sold off steadily through lunchtime. It then bottomed out and formed what Bears were hoping was a Bear Flag, and Bulls were hoping was the bottom. At least for today, the Bulls were right, and a sharp bounce in the final few minutes of trading recovered about a third of the day's losses.

The chart shows that the narrow newer uptrend channel off the lows was finally breached. It remains to be seen whether the older uptrend channel now will take over again. The rapid pace of advance off the lows was unsustainable in any event, so it is almost with a sigh of relief that Bulls no longer have to worry about that parabolic secondary uptrend channel.

The big news overnight was the Apple (AAPL) earnings. They were solid, but not spectacular, and AAPL traded several percent higher throughout the day. The Nasdaq Composite was conspicuously strong today as a result. However, the broader market was not pulled higher in Apple's wake and instead seemed to be looking for an excuse to sell off early in the day. When the market wants to find an excuse to move, it invariably will (some might remember a huge rally that developed after an Apple earnings report in 2012, on similarly tenuous grounds). Probably the most interesting comparison was the difference between today's weak action, after a leading company reported solid earnings, and the strength that was shown last week after Microsoft and Google both missed. Other earnings, such as by McDonalds and AT&T, just seem to be ignored by the broader market. Just reinforces our belief that this market is not earnings-driven, and in some perverse fashion simply disregards earnings. Why? Who knows, but the market's reaction to important earnings releases this quarter has been peculiar to say the least.

If you were watching the action closely, there were a few clues that the day's sell-off was not likely to develop into Armageddon. The sell-off was not especially panicky, without high volume (though volume did pick up a bit over the previous few lackluster sessions) and the selling lost its momentum once the futures dove into the high 1670s. It was all very orderly, and almost resembled an overnight sell-off that typically goes nowhere. After the futures nudged to a new daily low around 1:00 EST, that low held for the rest of the day, though it wasn't obvious at the time that it would. Market internals such as the advance/decline figures and the TICKs were all weak until after lunch, but they were not so weak as to suggest full-scale liquidation. The TICK picked up after lunch and was a good tell that the market wasn't going to completely roll over.

One other factor should be borne in mind: the actual highs in the futures have occurred during the overnight session (last night's highs were never matched during today's action). That is unlikely to remain the case - the usual outcome is that lasting highs are hit during the cash session, not while almost everyone is sleeping. There are no topping tails, nothing resembling a topping pattern yet on the chart. That is another factor militating against a Bear Market suddenly developing until upside issues are resolved.

There were several rumors and news items today to support the Bearish case, none particularly noteworthy or important. If anything truly serious had happened, SPY would have made new lows after the mid-day bottom, and closed at the lows. When we see a real sell-off, that is what you can expect - low after low after low, not a rapidly diminishing rate of decline and finally a bottom that holds, especially one made at mid-day that holds through the close. The late-day surge showed that the Bulls remain firmly in control for now.

Thus, if you were adventurous, the day turned into one of deciding if you were brave enough to take the chance that, indeed, the bottom was in and there wouldn't be a late-day sell-off. That the bottom actually was in didn't become obvious until the final few minutes of trading because of the sideways action throughout the afternoon, but once it did become clear, buyers emerged from their "places of concealment" before it was too late. That is one hidden benefit of all these ramps up during the overnight session - many Bulls are frustrated at not being able to participate in the overnight gains and thus buy late in the day in anticipation, which helps keep the rally going. The Bears likewise fear the overnight sessions and cover late in the session even when they've won the day.

As a general matter, with all this choppiness in the upper 1600s, it appears that SPY is pulling itself together for an eventual run through 1700. The run through the 1600s has been fairly quick by historical standards, and it is asking a bit much for SPY to just cruise to new highs every week, especially during the summer. This consolidation in the upper 1600s is forming a base for future advances and, if you really look far ahead and believe in the rally, it also is forming a support area for future pullbacks. Whether we see further pullback now nobody can say, but the failure to drive lower today than was the case was a good sign for the Bulls.