Yesterday I say "What the bulls would probably like to see now here is a more quiet move higher, keeping volatility lower", and clearly the bulls did not get what they wanted as the exact opposite is what happened, and so we got a reaction.
After Wednesday's close it looked like a typical positive reversal that was heading to new highs. Then Thursday happened.
I don't know if it's related, but I have been concerned about the odd behavior in those short squeeze stocks, and the fact that I mention it repeatedly tells you I'm a little obsessed. Again, I don't have any concerns about what either side is doing - shorting stocks, or squeezing the shorts, it's part of the game and strategy of making money on Wall Street, but I think investors see it as something they don't understand, and the crazy action could be something that happens to one or more of the stocks in their portfolios.
That's total speculation on my part because there are obviously other concerning things out there right now. The sharp spike in the 10-year bond yield is the main concern, then there's the precipitous drop in the dollar, skyrocketing commodity prices, the credit market taking a it yesterday, you name it.
It may be surprising to know that the U.S. bond market is a lot bigger than the stock market, and when yields move sharply in one direction or the other, it does disrupt things on Wall Street.
This is a little paranoia on my part, but
I'm leaning toward some of this being the big money trying to shake out weaker investors, or even a finger waging from those hedge funds to those trying to mess with their short positions. This market has been due for a more meaningful pullback. The question is whether that pullback has to get severe, or will a test of the 50-day EMA on the major averages suffice?
The move in the Volatility Index is troubling as it jumped 35% to 29 yesterday, after falling back in that comfort zone below 22, where it close for just one day. The jump in yields has investors quite jumpy and preparing for more volatility.
The S&P 500 (C-fund) plummet back down to test the Tuesday lows. It got there and held, and the 50-day is also still holding, but often times a bottom is created with a midday reversal like on Tuesday, so it wouldn't be too surprising if we saw a lower low today at some point. Also, it's not very common for the market to put in a low on Friday, but with Monday being a new month, there is a tendency to see some buoyancy in stocks in the first couple of days because of new inflows into funds. So what I'm saying is, anything can happen in the next few trading days. Good analysis, huh?
The DWCPF (small caps / S-fund) took a major hit on Thursday, although it shows us how powerful that rally was on Tuesday afternoon and into Wednesday, because Thursday's loss didn't even hit the Tuesday low. There is support in the 2075 - 2100 area, but if that breaks, I'd have to take my shoes off to calculate the possible downside target. The 200-day EMA is so far below the current level that it doesn't show on the chart.
Here are things that are getting the market nervous.
The yield on the 10-year Treasury closed over 1.5% yesterday. That's not super high, but the speed at which it rises is what is causing the stir. It changes a lot of asset allocation for some big investors. If you had $1 billion handy and all of a sudden you could get a guaranteed $15 million a year return with a bond, you have some decisions to make.
The HYG High Yield Corporate Bonds are getting dicey. The 50-day EMA was tested back during the fall pullbacks, and after brief breakdowns, bounced back, so a break here may not be a deal breaker, but this is a warning.
The price of oil was up slightly again, and gas prices will certainly be going higher. Copper was down yesterday, but it is still at prices not seen since 2011.
The BND (bonds / F-fund) was hit hard again ( and so was gold) so there weren't many safe havens yesterday. Bond prices fall as yields rise. I said it was due for a bounce yesterday. That didn't happen, but it is still due.
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