1. Moving the markets

The first part of the session showed the bulls clearly in charge when suddenly Brexit concerns hit the headlines, which was followed by news that the Democrats voted to block the Republican’s stimulus bill. That was enough send stocks, bonds, and gold diving, while the dollar enjoyed a rebound rally.

ZH summed up the 3 things that kept the bullish dream alive in the last few weeks:

• The Fed – hasn’t bought any HY/IG bonds in a while and balance sheet flat
• Stimulus – fail on any further deal (McConnell Senate comments and skinny bailout bill didn’t pass Senate)
• Vaccine – the AstraZeneca news did not help

The Nasdaq swung wildly between +1.5% and -2% causing one of our tech ETFs, which had been bouncing against its trailing sell stop point, to break through it, giving me a reason to sell it and take profits. The index has now moved back into correction territory, and we’ll have to wait and see if this was just another flesh wound, when compared to the recent enthusiasm, or if there is more injury to come.

At this moment, yesterday’s rebound looks like a dead cat bounce, but we are living in such uncertain times where anything is possible, so it pays to be more cautious and take some money off the table.

The much hoped for rotation from growth to value has not worked out so far, as both seem to be moving in sync.

Not helping the mood were Jobless Claims with the Initial ones staying about even with last week, while the Continuing Claims rose week-over-week.  

All this brings back the question as to whether the analog to 1929 is still valid. So far, it’s a remarkable development:

1. Moving the markets

After 3 days of the markets getting slammed, with the Nasdaq having one of its worst stretches and reaching correction territory, conditions became so oversold that buyers stepped in and restored bullish momentum.

As it turned out, the Nasdaq 100’s 50 day Moving Average provided critical support, at least for this session, and up we went.

“A setback like that seen in Nasdaq stocks over the past days has been overdue,” Commerzbank strategist Alexander Kraemer wrote citing excessive valuations. “Nonetheless, the underlying drivers of the recent rally remain in place. We believe that the recent setback will emerge as a buying opportunity for year-end performance.”

All the major indexes ripped higher, but the tech sector took top billing with a gain of +2.71%, but it is still down some 8% from its recent highs.

Tweeted analyst Jim Bianco:

The NASDAQ completed a 10% correction just 3 trading days after setting a new all-time high (September 2). This sets a new record for the fastest 10% correction in history.

The old record was 6 trading days from Feb 19 to Feb 27, 2020.

The NASDAQ Index started in 1978.

Even disappointing Covid-19 vaccine news and a ZH report that US Hiring unexpectedly plunged my most on record, despite a surge in Job Openings, nothing could stop the markets from thundering back.

The US dollar tanked, after recent advances, which helped gold to recover with GLD gaining a solid +0.97%.

We must wait and see if this was truly a turnaround Wednesday, or merely a hopeful blip in an ongoing correction.  

1. Moving the markets

Last Thursday’s sharp sell-off, which continued Friday in a more moderate fashion, thanks to a late rebound, accelerated today, as the Labor Day weekend did nothing to encourage a return to bullishness. Instead, the major indexes puked again, with the Nasdaq showing the steepest losses except for crude oil, which took top billing by swan diving almost -7%.

News about Softbank’s tech sector manipulation over the past few weeks made the headlines at ZeroHedge, as it became clear that the company, by using a sophisticated deployment of options and the their underlying stocks via billions of dollars, catapulted the markets no reckless heights, only to then unwind their positions leaving the Nasdaq supported by nothing other than an air pocket.

Added ZeroHedge:

Well, that escalated quickly… All of a sudden, out of nowhere, the Nasdaq, and most especially its high-flying mega-tech members, are collapsing faster than an Adam Schiff narrative. No news, no earnings, no headlines… just the fact that a massively over-levered Japanese ‘hedge fund’ is no longer buying massive exposure in call options and sparking the virtuous opening bid to ignite momentum and set the Robinhood traders up for the day.

The markets ended up bobbing and weaving on the red side of the unchanged line all day and accelerated into the close. Good thing, we started to lighten up on our most volatile tech holding last week and will continue to do so, as respective trailing sell stops get triggered.

Can things get worse? Here’s one opinion:

“Given how extreme many of the indicators we follow had become by early this past week, we believe it will take more than just a mild decline to work off those conditions,” Matt Maley, chief market strategist at Miller Tabak, said in a note on Sunday. “Therefore, we still believe a correction of more than 10% is probable.”

While that may be correct, it will be interesting to see where the Fed’s pain threshold lies which, once reached, may cause the Central Bank to flood the markets with liquidity and prop equities back up. After all, looking at this chart, it’s a long way down to correlation.

Spot Gold was offsetting the down draft very well, but the GLD ETF was not able to remain in the green but only surrendered a modest -0.18%.

Again, our exit strategy is defined and in place, as we move deeper into the notoriously volatile and unpredictable market period of September and October.