Bears Find Reasons To Sell
Stocks suffered their second worst decline of the year on Thursday as traders went into “risk off” mode. And as is usually the case when rallies become extended and volatility is low – everyone appeared to make the exact same trade at the exact same time.
To be sure, it’s been awhile since investors have had two deal with a 1.5% decline on the S&P 500 (or a 2% drop over on the NASDAQ 100), let alone two 1% drops within a span of just six trading sessions. And for those keeping score at home, this remains one of the longest periods in history without a 3% and/or 5% corrective phase. As such, the question of the day is if Thursday’s dance to the downside was the start of an overdue pullback or simply another day of hedge fund follies.
While no one can know the answer to this question in advance, I’ve found over the years that trying to understand the reasoning behind a big dive helps in trying to figure out if the move might have legs. From my perch, it looks like there are five issues at work here…
Earnings Matter: In case you missed it, there were some high-profile earnings disappointments from the likes of Cisco Systems (CSCO), which reported lower revenues; Wal-Mart (WMT), which experienced lower profit margins; and NetApp (NTAP), who cut sales guidance. In addition, big names like Goldman Sachs (GS) helped put the major indices on the defensive early in the session.
Terror in Barcelona: In what appears to be the new trend in terror attacks, a member of the Islamic State drove a van into a crowd in Barcelona. Reports indicate there were 13 fatalities and more than 50 injured in what was immediately deemed a terrorist action. While it sounds cold, stocks haven’t been moved much lately when such events occur. But with an overbought market and weak seasonality, the bears have been looking for any reason to begin hitting the sell button.
Chaos in Trump’s Administration: Next came the big, market moving story; the rumors that Gary Cohn, the ex-Goldman exec who is viewed as business- and Wall Street-friendly as well as a major force in the Trump administration, was ready to walk in protest over Trump’s handling of the Charlottesville incident. During the President’s recent news conference, Mr. Cohn was visibly uncomfortable during what has been described as a very strange exchange with reporters.
The big worry here is that a Cohn defection could open the floodgates for a mass exodus amongst the Trump cabinet. This would effectively become a vote of no confidence for Trump, which, when added to the current angst among the Republican party, means that the issues important to the market (tax reform and fiscal stimulus) could have a reduced chance of getting done.
The Debt Ceiling: Lest we forget, Congress will only have 11 days to raise the debt ceiling when politicians return to Washington. And given the difficulty this issue has caused in the past, traders can’t be blamed for stepping aside in front of what could quickly become the latest D.C. circus.
Technical Damage: And finally, there is the technical picture. The bottom line is that the algos are programmed to be aware of where the big-picture technical indicators such as the 50-, 150- and 200-day moving averages reside on a daily basis. So, when one of these key MAs breaks, surprise, surprise, additional selling tends to occur – and this was definitely the case yesterday as the S&P went through its 50-day like a hot knife through butter.
So… in my humble opinion, it looks like there may be enough here for the bears to work with for a while longer. The bottom line is that if traders decide to remove some of the upside discounting done based on expectations for tax reform/fiscal stimulus, we could easily see a garden-variety correction of 3.5% – 7%.
However, I’m of the mind that stocks have basically moved on from the Trump agenda issue and have more recently focused instead on the fundamentals such as the state of corporate earnings, the economy, inflation and the Fed’s next move. And it is for this reason that I would expect any corrective action – assuming there is more to come (which is not a given IMO) – would be relatively short-lived and present a buying opportunity as the weak seasonal period comes to a close in a couple months.
Thought For The Day:
Be a good listener. Your ears will never get you in trouble. -Frank Tyger
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of the Trump Administration
2. The State of the Economic/Earnings Growth (Fast enough to justify valuations?)
3. The State of Tax Reform
4. The State of Fed Policy
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.
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