Mid-week market update: I wrote on Monday (see Everything but the kitchen sink) that market sentiment was overly stretched on the downside, “If you are short here, you need a catastrophe within the next 10 days, otherwise, you run the risk of a rip-your-face-off relief rally.”
The relief rally appeared right on cue on Turnaround Tuesday and prices stabilized today in the wake of the release of the FOMC minutes. Before the bulls get too excited, don’t forget that the intermediate trend is still down. The Value Line Geometric Index, which measures the performance of the average stock, broke a long-term support level and is tracing out a falling channel.
Mike Howell at Crossborder Capital
also pointed out that global liquidity is drying up. Changes in global liquidity is historically correlated with asset prices, such as stocks, bonds, gold, property, and so on.
Tactically, the market may still see an upward bias as it rebounds from an oversold extreme. If seasonal patterns hold, the market should be positive for the rest of this week and then correct and bottom in early March.
This week is also option expiry week. Historically, February OpEx has exhibited a bullish pattern.
Short and long-term sentiment
Short and long-term sentiment models present a mixed picture. Short-term sentiment, such as Callum Thomas’ (unscientific) Twitter poll, shows bearish extremes.
By contrast, longer term models such as the Citi Panic-Euphoria Model is in neutral territory. There is lots of downside before a long-term washout low can be declared.
Broadly speaking, the stock market has sustained too much technical damage for it to roar back to test the old highs. The S&P 500 may be forming a head and shoulders formation, but H&S patterns are incomplete until the neckline breaks.
I expect the S&P 500 to encounter resistance at the 50 dma, which also coincides with last week’s highs. My base case scenario calls for a continuation of the choppy range-bound market that has frustrated both bulls and bears this year. Nevertheless, I do find it constructive that the S&P 500 has managed to find its footing and hold above its January lows in the face of potentially catastrophic news.
My inner investor is neutrally positioned at roughly the target asset allocation weights specified by his investment policy. My inner trader is standing aside. There is no need to take excessive exposure in the face of wild volatility.