What’s most astounding about the latest dive in the markets is how widespread the selling has been, pretty much across all asset classes and regions.
That’s a sign that the fear currently gripping investors is universal and that the traditional safe havens are no longer perceived as such.
It’s also why equities of all stripes are losing ground, including the best yielders, why bonds and cash are slipping, pulling the dollar down with them, and why commodities are losing steam after several months of fairly good momentum.
Some people point to the increasing probability of a Trump presidency, with its great walls and bellicose rhetoric as the cause of the decline – an outcome that’s only been encouraged by the revelation of Hillary’s latest illaries.
Others point to the Bank of Japan’s next policy meeting on the 21st of the month, where it’s expected that… well, nobody knows exactly what to expect, and that’s the issue. Will they go deeper into the negative with interest rates? Will they spend more on equity market purchases? Will they maintain their current bond purchase program? cancel it? expand it? replace it? They’re not letting on. And that’s scaring a lot of traders, particularly those who deal in Japanese Government Bonds.
And of course there are others who point to the ‘deep state’ and its tentacled representatives in the major brokerages who are trying to bury the market in order to hasten the outbreak of a third world war and create a New World Order on its remnants.
But we say nix to all of the above.
The real story is much simpler.
And it goes like this –
We’re experiencing a minor reset here. Nothing more. After the Brexit dump and subsequent extraordinarily swift climb to new highs, the markets required a cooling off period. It may take another week or two or even three, but we’re fast approaching a resolution to the tremendous heat we experienced through July and the subsequent lock on prices that obtained through Labor Day.
Have a look at the following chart of the Dow for the last six months –
According to the chart, and particularly the RSI and MACD indicators (in green), which have once again arrived at their midway waterlines, we’re now at a point of balance. Generally speaking, when these two indicators are trending above their waterlines, the underlying security is in bull mode, and vice versa when they’re below.
As of the latest volatility (in black), RSI and MACD appear poised to slip below their respective waterlines into a bearish posture.
We, however, don’t believe it’s going to happen.
If there’s a theme that’s been consistent over the last seven years of this bull market, it’s the following: that the powers-that-be hate volatility.
That includes sitting governments and central banks, primarily, but also the major broker dealers, who are regularly drafted by their government sponsored peers to act in the market to forestall volatility.
And today, directly before perhaps the most meaningful presidential election in the last half century, you can bet your skid bucket that the current slide is over.
We repeat – this could happen because all that was required was a cooling, and a new round of buyers are about to step in to make purchases. Or, it could be that another heavy-handed intervention is about to occur.
Either way, the question’s moot.
This is not the beginning of an ice age for stocks. We’ll get there, to be sure, but it’s not yet time.
We note, too, that at its recent low at 18,000, the Dow effected a perfect Fibonacci retracement, giving strength to the hypothesis that it’s all guns a’blazing as we head back toward new highs.
So are all asset classes are going to rise?
We’re betting on equities rising because both the Fed and the sitting administration have an interest in propping up the stock market, a reality they believe will boost consumer confidence and get folks borrowing and spending, not to mention voting Democrat in November.
Does that mean the bond market and commodities, including the precious metals will also see better days ahead?
There could be some enthusiasm spilling over into those domains, but because the Anti-Volatilians aren’t committed to higher bond and gold prices per se, we don’t see it as likely. If anything, the current Fed stance on interest rates would dispose them toward lower prices for fixed income – and higher rates.
We’re going to turn our attention to a number of areas in the market that have bucked the trend of late, moving higher even as the volatility surged and the indexes shook.
This Week is Now
Amidst all the uncertainty and the market’s widening swings, the tech sector has actually made a strong showing of late, rising up from beneath the rubble toward former highs set just weeks ago, while Apple stock (NASDAQ:AAPL) in particular has been flexing its glutes.
Have a look at a chart of the world’s biggest company by market cap –
As if trading in a different reality altogether, shares of Apple stock jumped 14% since the beginning of the week, just as sales of its new iPhone 7 are ready to commence this Friday.
Technically, the picture looks especially bright for the long term, with the stock recapturing the all-important long term average (in yellow) while both RSI and MACD remain above their waterlines. We’re in bull mode, but not yet too hot.
That said, the near-term, we believe, will see some profit taking, ‘backing and filling’, as they used to say, before traders push it to the next level. We see it concentrated around the aforementioned long term MA at $112.
With that in mind, and considering all the implied volatility on the indexes and Apple stock itself, we’re going to take the opportunity to sell some premium.
And the trade looks like this –- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Many happy returns,