The market has shown these high to low reversals before and has recovered after a few days of downside chop and consolidation. Late December, late January, again in early March and then mid-March. Up to this point it has come back from each episode, though this last recovery from mid-March did not provide much of a bounce in terms of SP500 and DJ30. Even NASDAQ, though it put in a couple of marginally higher highs, didn't provide a lot of upside off that last fade.
After the Wednesday solidly higher open, an open spurred higher by an unexpectedly solid ADP employment beat (263K versus 175K expected), failed, questions arise again whether the market can once again shake off a selling attempt and continue the trend.
SP500 -7.21, -0.31%
NASDAQ -34.13, -0.58%
DJ30 -41.09, -0.20%
SP400 -0.77%
RUTX -1.17%
SOX -0.69%
The stock indices were fine on the open, gapping upside and rallying nicely. Then the trouble started. The status quo-loving, power-centric career politicians made clear they are still in charge. The democrats don't like Trump and want to do whatever they can to make his every policy initiative fail. The republicans give lip service to tax cuts, healthcare reform, regulatory rollbacks, but they really don't want much to change; they just want to be in power and rule over the same hugely oversized, over-budgeted, and all-powerful federal government. Apparently they believe because they have an 'R' by their name when they run for office they are the best for the country. What we are all discovering, again, is that no matter if it is a democrat or republican, the status quo is too entrenched, the government too powerful to result in real change.
Thus, we heard from that utterly useless House majority leader Ryan, and he basically put a stake through tax reform AND healthcare reform for quite some time, and you can ready that as 'forever' in terms of meaningful change to either. They are now talking as if reducing the corporate tax rate to 25% is a win. No, that is a loss. The corporate tax rate should be 0% so we could actually see prices fall for the consumers. Instead they are at least 35% higher in many situations thanks to the inability to avoid the tax.
That was a big fat belly flop for the stock market. Stocks sold off below the pre-market highs. They were not dead, however, bouncing into midday ahead of the FOMC minutes. Surely the Fed would provide some sage words to assuage the betrayal of yet another group of politicians. I know, I know, it is a laughable statement, but one can always hope. As Gandalf said in 'The Return of the King,' a fool's hope.
The FOMC minutes were released and there were two issues for the stock market. First, the FOMC opined it was time to start reducing that balance sheet bloated by all of those purchases of assets and instruments many of which it created itself just to buy. That means, in financial market parlance, selling them. Selling equals downside pressure on the markets where the assets are sold.
Second, some of the FOMC members mused that stock prices were too damn high. Sure they are. There is no way 8 years of asset inflation based upon the Fed creating and buying assets and injecting massive amounts of liquidity into the financial markets built sustainable stock prices. Then the sprint higher post-election only added to the bloat because, at this juncture, nothing has changed because no policies have been enacted.
That was the 1-2 punch. The Fed is worried that asset prices are too high, and with the powers in Congress forestalling any SUBSTANTIVE tax or healthcare reform for good, this was not welcome news for the markets. At least the market could have beaten back the issues regarding the Fed if it felt tax reform and healthcare reform were coming. Without those all you have is a Fed starting to fear market new highs, and that is ALWAYS dangerous for equities.
Thus the bounce into the FOMC was summarily dispatched and stocks were in freefall to the close. The morning gaps were wiped away and in some cases some stinging losses for the indices, particularly the growth areas.
Leadership took hits. Biotechs saw money leaving. Financials were acting better but then were not with stocks such as JPM showing downside engulfing patterns (gapping upside, reversing to close below the Tuesday low on strong volume). Chips were not bludgeoned, but some names were beaten up. Software took some hits.
Perhaps it was just an off day. Perhaps it was just some rotation to new areas. It was not good action for certain, and the market will have to show if it can once again heal itself to continue the move higher.
Jon Johnson, Chief Market Strategist
InvestmentHouse.com
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