Stocks surged back from the Friday 'Fed may raise rates' selloff. I suppose in the light of a new week and the world not ending after the Friday selloff the Fed just didn't seem that bad. Add to that some ultra-dovish comments from FOMC member Brainard, and a rebound in the morning turned into a surge in the afternoon.
SP500 31.23, 1.47%
NASDAQ 85.98, 1.68%
DJ30 239.62, 1.32%
SP400 1.16%
RUTX 1.37%
SOX 2.03%
VOLUME: NYSE trade fell 11% but was still well above average on the rebound. NASDAQ volume fell 9%, but it too was still easily above average on the session.
A/D: NYSE 2.6:1, NASDAQ 2.6:1
Both volume and breadth were still solid though well below the strength of the Friday selling.
The session started off weaker in a continuation of the Friday selloff, but even before the open futures were recovering. Thus a gap lower on the indices was the low as stocks started higher off that lower open. After an initial move they faltered and it looked as if the recovery might waver, but they held and stocks continued higher to midday.
Then came the Brainard speech, the one announced at the last minute. Brainard is a dove, and the need to get her statement in on the last day before the Fed's quiet period ahead of the September FOMC meeting led to speculation her words might make a September rate hike a fait accompli.
Didn't happen. Brainard was not even remotely hawkish. Reading the transcript was as if I was reading a speech from 2009, not 2016 when the economy is supposedly so good and is only getting better here in the once again 'wait until the second half' nature of the second half of the year.
The highlights:
-Brainard cautioned the Fed should use 'prudence' in its monetary policy and the case to tighten "preemptively" is "less compelling."
-The Fed should worry more about guarding against the downside.
-The Fed should be more concerned about undershooting inflation.
-She also reached overseas, an oldie but a goodie, stating that weak demand abroad will weigh on the US and that Japan and Europe are struggling. Indeed, Japan is 'greatly challenged' and European growth is slow. But I though CNBC was telling us Europe was doing great?
The result: Brainard is vying for a cabinet post after the election. Make the dove case in a big way, basically defying Yellen to hike rates. Market rallies back to higher highs into the election, all is well. Yellen won't mind because she gets to keep her job. Sounds like a conspiracy theory, but all of us have seen some incredible things the past 15 years, republican and democrat alike.
The logic or illogic of the statements doesn't matter. The market got the gist that Brainard was even more dovish than in the past. Buy, buy, buy baby. Stocks jumped higher, holding the gains to the close, closing out at session highs as the manic drive for yield continues. Even oil jumped back up, reversing off early weakness to sport gains.
Okay a reversal on apparently less worry about a September Fed rate hike. The real issue is whether after Friday and Monday the market continues its pre-Friday moves or if the Friday damage was the first in a more serious selloff.
In June the large cap indices suffered a two day slaughter, putting in a lower low that broke a 2 month lateral range. Those indices then reversed and rallied to all-time highs in August. Sure looked like a break, had the earmarks of a break, but it didn't take. The siren song of continued easy money was too great to resist.
Monday the selling was rejected. Not a 100% reversal, but one heck of a rebound in the face of that selloff. SP500 bounced from a support level at 2120, holding where it had to. Nonetheless, the damage was done, a break lower occurred, and that suggests more downside to come: volatility, sellers and buyers in a massive fight at higher highs, overall low volume on the move, fading MACD. Yet, in June that same scenario was bought and the indices powered to new highs.
So, what is the answer? In our opinion the question is not answered. Sure the market can pull 'a June' and defy the break lower, rallying to higher highs. It will, however, have to prove that. A lot of damage was done and Monday did not wash all of that away. Doesn't mean the market won't rally back as in June, it just has to show it. With guys like Jamie Dimon saying the Fed should just go ahead and raise rates, maybe the market remains worried. Nah.
Thus, we picked up some upside plays that looked good, e.g. AXAS, BIDU, CX. Took some gain on NPTN as it surged upside. The point: if stocks make the moves from good patterns, we initiate positions because we don't know more than the market. At the same time, however, you still have to respect the Friday downside. We can play the upside on solid patterns and moves, but at the same time keeping an eye on the market overall.
Have a great evening!
Jon Johnson, Chief Market Strategist
InvestmentHouse.com
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