This was a very interesting week and it provided plenty of 2 way action for traders. From a technical perceptive last week we discussed the relevance of the 21 day moving average as a point of key resistance for markets. And sure enough the entire week was marked by repeated pings and rejections of this moving average which I highlighted in MA Rejects and pointed out repeatedly on twitter:
— Sven Henrich (@NorthmanTrader) February 22, 2018
On Wednesday we saw efforts to recapture the 21 MA fail when the Fed minutes produced a spike in the 10 year yield to 2.95% and this resulted in renewed selling. The lines were clearly drawn in the sand and the message was clear: Markets did not like yields rising and concerns of a 10 year heading toward and above 3% provoked heavy selling.
In fact, a pattern emerged from Tuesday through Thursday, magic up gaps and open ramps based on overnight low volume price levitation and then a complete breakdown in internals during the day producing selling into the closes:
Clearly this market needed calming down and we saw this in the tried and true form of jawboning by policy makers and officials, and boy did markets get the royal treatment.
The first thing to note was that all selling into closes was eradicated at night and markets started gapping up every day resulting in a reversal of the negative internals from the day before as you saw in the chart above. Here’s the overnight action marked on $ES:
The nature of this type of action was not lost on experienced market observants and I quote Todd Harrison who made this humorous observation:
Been reading the tape almost 30 years; staring at screens watching ticks.
— Todd Harrison (@todd_harrison) February 23, 2018
I point all this out as there are still large agendas at play when it comes to markets. Here’s what I told clients before the open on Friday:
“And while markets continue to fail to hold above the 21MA during the day why not just gap above it in overnight action:
The agenda is clear: The close above it and target 2800+ by next week for month end. After all JPM is out there telling everyone that pension funds have to buy a lot of stock before the end of the month for rebalancing.”
How to get it accomplished? A magic show of jawboning. The 10 year yield had to retreat from the 2.95% level.
And the jawboning was fierce. First Treasury Secretary Mnuchin came out telling everyone that we can have our cake and eat it too. Wages will rise, but no inflation will happen and debt, don’t worry, it’s all good. No really that was the message.
One guy wasn’t having it. At all.
Mnuchin: policies will raise wages w/out inflation. Yeah, sure. And we are going to expand the Buffalo Art Museum without making it bigger.
— Jeffrey Gundlach (@TruthGundlach) February 23, 2018
And then came the Fed in all their glory. Having been a keen observer of markets and the Fed for years there’s one certainty that has emerged when it comes to the Fed: When markets get wobbly the Fed gets dovish. And in addition to all the dovish Fed speakers we got in the middle of the week (See Fed Watch) Friday saw a parade of 4 Fed speakers in addition to a dovish report to calm fears about 4 rate hikes:
— Sven Henrich (@NorthmanTrader) February 23, 2018
The messaging was consistent across the board and the intent was clear: Calm markets by suggesting slow rate hikes, no need for 4 rate hikes, oh, and it doesn’t hurt to take on a favorable open door policy for bringing back QE if needed:
“Mr Dudley — a voting member of the monetary policy setting Federal Open Market Committee — argued that large scale asset purchases “should be viewed as a viable tool in our arsenal to be used when the zero lower bound is a relevant policy concern”.
The effect: Drop the 10 year and mission accomplished as stocks rose while yields dropped reversing the concerns of Wednesday:
Correlation Watch folks.
Bottomline: Key indices reparied the technical damage within the last hour on a Friday:
As long as these MAs hold then buyers have open road to head toward the next fib level into 2800 and perhaps the open gap at 2850:
However there are larger concerns that suggest bulls are not in the clear yet, not in the slightest.
Firstly note the vast discrepancy in markets driven by even fewer stocks than in 2017.
Amazon nation I called it:
Indeed only 7 stocks of the $NDX 100 make up for 70% of its gains this year:
— Thomas Thornton (@TommyThornton) February 23, 2018
Not a healthy picture from my perch.
And despite the rally on Friday we can observe that $SPX is on its 2nd inside week in a row:
…and price may find itself pressed against trend line resistance again in short order:
What say you Mr. $VIX?
What should be clear from this week’s action: Markets are sensitive to higher yields and the Fed is sensitive to market volatility. Next week Jerome Powell will give his first semi-annual testimony in front of Congress. Powell ain’t Yellen I wrote before. Now he has a chance to prove it, but so far his underlings seem to send a clear message: Business a usual.
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Categories: Market Analysis
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