SPY September 3, 2013

State of the Market

Tuesday, September 3, saw bleary-eyed traders greeted by a hyper market. A huge gap up from the weekend peace talk degenerated into an epic gap fill after House Speaker John Boehner gave his support to President Obama's war plans, raising the probabilities of death and destruction and punishment and retribution. A late recovery disappointed Bears but didn't really excite Bulls too much, either.

The technicals right now signal solid support in the (futures) 1630 region. The recovery of SPY back over 164 was an epic achievement that spoiled a lot of traders' lunchtimes, helped along by another spurt of mysterious last-second buying, as was the case on Friday.

The Arguments

The Bullish case is this: once again, we saw higher highs and higher lows, plus a higher close. All this war talk is a complete sideshow, which is being magnified by the unnecessarily melodramatic presentation by the Administration (led by tough-talking Count Dracula clone John Kerry) into some epic confrontation between Right and Wrong. Regardless of the intraday volatility, the indisputable fact is that the market closed higher after a weekend when many either expected or simply pretended to expect an unleashing of Armageddon. Economic news from China over the weekend was stellar, and US economic news in the morning beat expectations. Even the Nikkei is getting some vigor again as the Yen, a traditional safe currency, loses ground as war fears dissipate. The intraday sell-off was a simple gap fill, spurred on by the spineless John Boehner's caving to a misguided attempt by US leaders to become (or remain) the world's Lethal Enforcers.

The Bearish case is this: today was another red candle, and there was another look above that failed in epic fashion (as has been the case often this summer in this classically overbought market). War is inevitable, and it will produce a sell-off of Biblical proportions due to the proximity of defenseless hostages in the person of innocent Israelis and others. SPY couldn't even close above the 10-day moving average after trading above it all weekend. The market short-term is overbought, QE is ending, and interest rates are rising, signalling that the economy will cave in like a house of cards due to Fed Chairman Ben Bernanke running out of ammunition to prevent the inevitable. The housing market, the backbone of the economic recovery, will take a huge hit from rising mortgage rates. The market simply has run too high, too fast, and the downtrend from the August 2 highs remains very much intact. A rest is needed, and statistically September is the worst month of the year for the market.

Eventually, one line of thought will prevail, though the other side inevitably will say that they just need a little more time for their analysis to prove correct. And they may be proven right, as virtually anything you predict about the market will come true - eventually.

The Bottom Line

Quite simply, the Bullish case is more convincing right now, as we began saying quite openly after last week's huge Syria sell-off. The decisive points are that, even during Friday's Kerry sell-off (could the guy have been any more menacing?), the lows from earlier in the week held. Today, the market saw new highs during trading hours, not just highs overnight when volume is light. Yes, there was a vicious gap fill, instigated by, but most likely not really caused by, Boehner - he just lit the match for something that looked likely even before his news headlines hit the wires. That happens all the time.

A lot of Bears make the mistake of trying to be both economists and traders, and given my own degree in Economics I can tell you that is a very dangerous thing to do. This is a two-way market, and betting too hard in either direction, especially once it starts to look "safe," will get you singed or burned. Badly. Not all Septembers are calamitous, the numbers are skewed by some really bad years.

The Bearish case does not become convincing until one thing happens: the congestion area support that we drew out on the chart last Tuesday must fail. That's the bottom line. It has held rock solid. If that support is breached for any length of time, then we might actually see those 1600 or even 1560 levels that the Bears chirp about after every ten-point drop. Until then, we are stuck in the mid-1600s, and it's a good idea to get used to it.

What the Market is Actually Doing

The market is respecting technicals. That is not a sign of a market out of control, nor one driven by panic or desperation, which is what the Bears really need for it to blast through that congestion support in the 1620s. Now, the joker in the deck is Syria, and the market remains hostage to it, but relying on a Black Swan to happen is not playing the probabilities. It is gambling, plain and simple. Sometimes gambles pay off, longshots do come in, but we play the probabilities here.

Notice on the chart below how the futures hit the downtrend line and stopped cold, then sought out the fib line and reversed.The lines in question have been on my chart since last week (obviously not the lowest trend line, I put that one in today).

Let's look at that a little closer, just for effect, this time on the one-hour chart:

What is happening is the formation of a wedge. It most likely will continue to play out, with perhaps false breakouts and perhaps formation of another wedge slightly higher or lower, until the Syria thing resolves, one way or the other. If you expect a huge move before then, you might be disappointed. The resolution might not take the actual war votes of Congress, but a consensus on what will happen.

Even then, it's a bit mystifying why everyone simply assumes we get a huge sell-off due to Obama lobbing a few cruise missiles in a somewhat token gesture of despair. Clinton did it, Reagan did it, and the world did not end and the market did not collapse. But this market has proven itself extremely sensitive to the Syrian crisis for whatever reason, so we are extremely sensitive to it, too.

Chart of the Day

Someone posted this chart showing that SPY volume has hit a 15-year low. Lowest since the 1990s! That's pretty impressive - right?

Mark Twain famously said that there are lies, damned lies and volume charts. No wait, he didn't say that, I said that. Anyway, chirping about fifteen-year lows sounds mighty important until you notice that volume has been cratering since... wait for it... 2009. In fact, you could make the case that volume has been declining since 2001 or so.

This is not to belittle volume as a vital part of trading. Anyone who trades without taking volume into account in some fashion is a fool or a tool. The point is that, if you see something that has been declining steadily for three (or maybe 12) years, then claiming that it means that this month it will cause a sell-off - you are reading way too much into it.

But the chart is there, make of it what you will. Others "are concerned" about it. Maybe you should be, too, think it through for yourself.