Honestly, it is nice to have yesterday behind us, even if I get it. Even if I understand this has to happen now and again, it bothers me, which I find interesting. The big sell-off for no apparent reason bothers me for two reasons. The first is I abhor irrational behavior and yesterday’s sell-off was irrational.
- US shares closed sharply lower, dragged lower by Apple, which slipped 3.8% after the technology giant was forced to pull an update to its iOS 8 operating system.
I can think of a number of rationales for yesterday’s market action, and I proposed some yesterday, but Apple’s screw up is not one of them. There are other, more sinister boogeymen at work in this market.
- A funny thing happened on the way to the rally recovery on Thursday. In short, traders forgot about all the good stuff from Wednesday and the market got blasted.
Yes, irrationality bothers me when the big sell-off occurs, as does the understanding that high-frequency trading and trade-seeking algorithms drive the consistency of the sell-off. I know both reasons are silly. Regarding the first, as long as humans trade the market, irrationality will be a part. As to the second, computers and software are an integral part of the market and they are going nowhere.
As to understanding yesterday’s sell-off, there are lots of thoughts out there. Here are four. The first I mentioned yesterday. I suspect it played a bigger role than I like, but, honestly, it is a real fear. The rest are somewhat enlightening and entertaining.
- The internal components of Durable Goods report suggests GDP might be hotter than expected, causing traders to worry again about the Fed raising rates sooner than anticipated.
- Thursday was the last day a position could be sold in order to get it off a manager’s “book” by the end of the quarter (i.e. window undressing)
- The S&P broke two important technical levels: (1) near-term support at 1980 and (2) its 50-day moving average
- There has been an awful lot of jawing about the so-called “death cross” (which occurs when the 50-day moving average crosses below the 200-day moving average) seen on the Russell.
Actually, there is a third reason an irrational big sell-off bothers me – the breathless media’s response to it. The “I told you so” and self-satisfied sensibility that is displayed is like really hot tea on the tongue – you want to immediately spit it out.
- It should be pointed out that such an occurrence [Death Cross] when the 200-day is rising has been a pretty good buy signal – but that doesn’t stop the press from fawning all over the possibility of something REALLY bad happening (and given the recent ratings of CNBC, they could use a good crisis right about now!).
CNBC is the worst of the financial lot for creating and hammering crisis and it is good to know folks are tuning out. I have hope.
Beyond hope, given the current US economic situation, the market has nowhere to go but up, even if it takes time and an occasional precipitous drop. Unless the economic conditions change substantially, all yesterday’s plunge did was to set up the market for more consolidation.
- The government’s second revision to the nation’s GDP for the second quarter of 2014 showed that, once again, growth was stronger than expected.
- The report stated that the economy’s growth rate was +4.6% during the April through June period.
- The growth rate was above Wall Street expectations for a rate of +4.5%, above the last revision of +4.2%, and also well above last quarter’s pace of -2.1%.
As well, as long as the US consumer is still in the game, and she is, the market will, at a minimum, churn about within a range and, at best, it will top expectations in another leg up.
- The final reading for the University of Michigan’s Consumer Sentiment Index for September was reported at 84.6. The reading was in line with the consensus for 84.6, but above August’s final reading of 82.5. The September read is the highest of 2014 and represents a third consecutive monthly gain for the sentiment index.
According to the above, the US consumer is still in the game, and that is about as important as it gets to ascertaining the near-term future of the market.
Trade in the day; invest in your life …
