[Chart courtesy of MarketWatch.com]

1. Moving the markets

After three days of gains, the major indexes traded near their respective unchanged lines but dove into the red during the last hour. The exception was the Nasdaq, which gave up mid-day gains but ended up in the green.

Contributing to the sell-off were reports that coronavirus cases were on the rise in at least 9 US states and China, but hope remains that a quick recovery will be still possible. Fed chair Powell continued with his second day testimonial before Congress, and while emphasizing the lasting toll of the pandemic, he also suggested that unemployment benefits should be extended.

Powell also said some form of unemployment insurance should continue past the expiration date of July 31 and defended the central bank’s more than $2 trillion slate of emergency funding to keep credit flowing during the pandemic.

Overall, the trading range of the indexes was relatively small, but that could change in a hurry with an uptick in volatility.

As ZH explained, first, there is a massive option expiration set for this Friday the 19^th with some $1.8 trillion in SPX options to expire, which makes it the 3^rd largest non-December expiration on record.

Second, there is massive pension selling ahead towards the end of the month, at the tune of $76 billion, due to outperformance of stocks over bonds this quarter. The required rebalancing makes this an unavoidable event.

The question is: “How much downside will come into play and will it affect our current bullish theme?”

Since no one has that answer, we will need to be prepared for either scenario.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

The futures markets kept bullish momentum alive based on news that a live-saving steroid, dexamethasone, was found to cut the risk of coronavirus death by 35% for patients on ventilators, and 20% for those on supplemental oxygen without intubation.

How this will turn out is everyone’s guess at this time, but it was enough to ramp the markets higher. This momentum put a fire under the Dow, as the regular session got underway, with the index sporting a 700-point gain after the opening bell.

Giving an assist was Fed chair Powell’s testimony before Congress and his suggestion that more fiscal stimulus might be needed before the American economy can make a full recovery from the coronavirus pandemic.

With the Fed now having admitted to buying individual corporate bonds as well, stocks and equity ETFs are on deck and will most likely come into play after another 20% market drop.

Added Global Market Monitor:

The United States is on the fast track to a Japanese style zombie economy, where the Nikkei 225 is still 45 percent below its December 1989 high, even after massive fiscal stimulus and quantitative easing, which includes direct equity purchases by the central bank. Japan is also a net saver and the U.S. is not.

Technical analyst Sven Henrick saw it this way:

But it’s not just the Fed. Yesterday’s announcement was apparently not enough as the Trump administration suddenly tossed a trillion-dollar infrastructure plan soundbite on top of the liquidity fire. Also, on the heels of a 10% correction. How convenient. Whether that plan ultimately materializes or not is beside the point, futures reacted and squeezed vertically even higher. What a circus. Not a stable market and my mantra of the extremes getting ever more extremes continues to hold true.

In the olden days future growth came about because the system was allowed to cleanse itself and new business models sprung to fruition from the ashes. Inefficient businesses went bust; new businesses were formed. Corporate debt was reduced. That’s called a cleansing and new innovation.

Be that as it may, the markets rallied strongly also supported by soaring retail sales in May after a disaster number the month prior.

Thanks to today’s levitation, our Domestic TTI (section 3) rallied back above its long-term trend line thereby confirming our bullish position—at least for the time being. We are seeing market absurdity, and I am sure that increased volatility and sudden reversals are here to stay.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

The markets took a dive this morning with the Dow skidding some 500 points, as fears about a resurgence of Covid-19 spooked traders around the world.

Analyst Graham Summers saw it this way:

Stocks have fallen hard over the weekend again. The media is pinning this drop on the potential for another COVID-19 pandemic, but the facts don’t support that theory.

My point with all of this is that today the market is literally a crap shoot. The easy money from the rally has been made, and the next trend is not clear yet. So now is NOT the time to be putting a load of capital to work.

Uncertainty in the markets needs to be eradicated with pointed action. That came in form of a 2^nd press release by the Fed that it will now finally start buying corporate bonds, which was announced some three months ago but not yet executed.

However, since they were already buying between $1-2 trillion in corporate ETFs each weak, according to ZH, today’s confirmation provided enough ammo to propel the markets not only out of a deep hole but also to a solid green close.

The Fed made it clear that it is expanding the scope of its $750 billion emergency corporate loan facility to include individual corporate bonds, while at the same time reducing the restrictions for potential borrowers. Huh? In other words, even companies with inferior credit are encouraged to apply.

In the end, the markets were saved for another day with all eyes now being on Fed chair’s upcoming testimony about the state of the economy before Congress this week.

Our Domestic Trend Tracking Index (TTI) improved and is now in striking distance of breaking back above its trend line again (section 3), which means we are holding on to our current positions for the time being.

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