I’ll make this simple in 5 easy charts. And while I don’t believe in hyperbole I can’t stress enough how defining the next two weeks may be for US stock markets. The set-up is quite simple: We’ve had an early year correction, we’ve had a strong recovery driven largely by a bounce in crude, massive global central bank intervention and record buybacks, not by earnings expansion. Currently markets are heavily overbought and buybacks may soon retreat again as the next quiet period begins. So the basic question one needs to ask here: Can markets maintain momentum here or will they all fall apart again?
Firstly let me just point out that markets still remain largely uncorrected. I say this because the chart says so. Where’s the correction? And how does it compare to the past?
The fact is every single small correction over the past 2 years has resulted in immediate multi-week recoveries. Buy the dip remains the basic modus operandi. I would consider a basic correction to be a move toward the .382 Fib which would be mild compared to the two previous big corrective moves.
So while a major trend line has been broken still no basic correction has taken place.
But principally we all know why there haven’t been any deeper corrections: The constant and increasingly desperate interference by central banks to prevent one from happening:
How desperate? Well, consider what it took to get price back to green for 2016: The most unusual quarterly candle in stock market history. On what basis is this kind of price action rooted in any history? On declining earnings no less? I think that’s a fair question:
There are 8 trading days left in the quarter. Either this candle will sustain this tail or it won’t. It’s a binary scenario and hence represents a big fork in the road for this market.
And if the market doesn’t have the strength to maintain this candle than participants must grapple with the fact that $SPX may reject Friday’s close above the weekly 50MA:
The technical consequences should be obvious.
While April is seasonally a strong month we have yet to see any evidence that markets can sustain price without active buybacks and/or additional central bank intervention. And if it can’t, then the $VIX, which has been pummeled to a pulp in recent days, may indeed still surprise to the upside:
I, for one, will be watching closely how this quarter will close. Then we may know toward which side of the road this fork may be inclined to fall.