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.

1. Moving the markets

Yesterday’s “reckless advance,” as I titled it, hit the skids today with a long overdue correction instilling some reality in the markets that nothing can go up forever nor in a straight line.

As a result, the major indexes plunged with the Nasdaq setting the dubious record of giving back the most, namely almost 5%, while snapping a 10-day winning streak and surrendering all of September’s gains.

However, given its relentless rally over the past few months, this was to be expected, the question in my mind was only “when” and “how much?” The Fang stocks like Apple, Amazon, Netflix, Facebook, Google and Microsoft all donned red numbers for the session.

The question now remains if today’s negative action was an outlier or a sign of things to come. Opined Liz Ann Saunders, investment strategist at Charles Schwab:

“I’m not sure that just today’s weakness is sufficient enough to ease some of those excesses and tell the short-term folks this is the kind of dip you want to buy. I don’t have a clear crystal ball more than anybody else, but certainly the excess suggests something more than a single-day compression in the high-flyers may be necessary to kind of right the ship.”

For clarity, ZH pointed to this chart showing the divergence between the Nasdaq and the 10-year yield closing, which could be an ominous sign of things to come, as the longer term chart demonstrates.

On the economic front, none of the numbers were able to provide market support. We learned that US Services data weakened in August amid a “highly uncertain path ahead,” as ZH called it. Filings for First-Time Unemployment benefits fell below the 1 million mark, but stilled showed a horrific number, namely 881,000 Americans looking for assistance.

Estimates as to where the S&P 500 might end up by the end of the year vary wildly, but I had to chuckle when I saw BofAs forecast range of 2,200 to 4,000. Hmm, why not make it 1,000 to 5,000 just to be safe? Of course, I am being facetious here, but looking at those kinds of wide-ranging estimates is simply a waste of time.

Despite today’s correction, none of our trailing sell stops were triggered. Gold dropped as well but to a much lesser degree than equities.