Mid-week market update: I am writing the mid-week update a day early for two reasons. First, tomorrow is FOMC day and anything can happen. As well, I am getting on an airplane and I will be in the air when the market closes.
It is astonishing how nervous the market has become after Facebook’s disappointing earnings report. Callum Thomas performs an unscientific Twitter poll on weekends, and the bears have come out of the woodwork. Even if you are bearish, you have to ask yourself how much downside risk could there be at current levels? These conditions are indicative of the jittery nature of this market. A brief and minor pullback was enough to move sentiment to a crowded short reading.
In the short run, the ability of the SPX to hold above its breakout level, and the NDX to hold above its 50 day moving average points to an oversold rally here.
Poised for an oversold rebound
In my last post (see The universe is unfolding as it should), I outlined a number of bearish tripwires, which have not been triggered. SPY/TLT, which measures the stock/bond ratio, recently staged an upside breakout to an all-time high and retreated to test its breakout. Watch for signs of a decisive pullback before turning more bearish. Keep in mind that pullbacks after upside breakouts are normal.
There has also a lot of angst about weakness in FAANG stocks. The following chart shows the relative performance of the Russell 1000 Growth Index against the Russell 1000 Value Index. How worried should you be about that minor blip and pullback?
In short, until these trends are violated in a major fashion, I am inclined to give the intermediate term bull case the benefit of the doubt.
Tomorrow is FOMC day and while anything can happen, the following study from Rob Hanna of Quantifiable Edges shows that FOMC days tend to have a bullish bias. In light of the Powell Fed’s tendency to avoid market surprises, Wednesday’s market action is likely to conform to historical norms.
The real test for the bulls and bears is the market’s behavior on the market bounce. Will it be able to sustain upward momentum, or will it fail and price weaken again? Even if you are bearish, I suggest that you wait for the rally before putting on a short position.
Disclosure: Long SPXL