Some day when the markets drop severely nobody wants to be left holding the bag. And while the collapse in 2008/09 is still very fresh in our minds we have to recognize that event was an outlier. For some it seemed rather surreal – how could the markets lose it? Yet the pain was REAL and felt across the investment world. Even with the SPX up 200% from those deep lows in March 2009 there has been hesitancy along the way. Unless you just bought at some point and closed your eyes and ears then you might not have even racked up enough gains to cover those deep losses. Every situation is different of course, and as a trader I am always ‘on the edge’ looking for the next big move within an uptrend or downtrend.
The feeling I get today is everyone is on edge. As the Fed shifts into a new control phase of less accommodation and soon to raise rates (hawkish posture) we still have investors and traders trying to squeeze out the gains before the trend changes. Of course, who will tell us that is going to happen? The pundits, experts and gurus who seem to ALWAYS tells us the exact wrong time? The MARKET always tells us. The assumption of course is the markets will turn down as the Fed removes their stimulus, in place for nearly five years. Yet, I would argue that while this action is hawkish it is not necessarily the death of equities as some would believe. Are stock market gains the result of aggressive Fed policy?
I would say yes for the most part, but then corporate profits are at record highs. That may be the result of easy money but businesses still have to PERFORM, and in a positive environment that has taken place. So, the Fed easy money policy was as much a psychological crutch than it was actual stimulus. Chair Yellen and former Chair Bernanke are both on record several times saying monetary policy is not a driver of growth, yet they stop short of saying it was a psychological tool – meant to create a positive environment and shore up confidence. Clearly policy has had an effect on investors/traders minds.
But the next move? I defer to the charts and technicals for the answer as they guide me into the next time-frame. The charts help me stay focused on the message of the markets.
On the SPX chart we see the potential formation of a top on September 19 and with some confirmation to the downside but that seems only corrective in nature. Further, the trend line is still intact but it falls down to about 1950, an area of fibonacci support and the 100 ma (an area where the markets tested this year and bounced sharply).
Distribution has been high as institutional selling is noted by the high volume bars on down days, yet like previous times the market catches its footing. We’ve seen potential tops and top calls on numerous occasions only to fail, this bull market has fooled so many. I will follow the trends and patterns that have worked in the past to find the right combination.
Bob Lang, Senior Market Strategist, trades various option trading newsletter Explosive Options. Check out the updated site & chat room.