The memo that broke the market rally's back? Perhaps. The afterhours announcement of a President to FBI Director memo asking the Director to call off the dogs in an investigation of General Flynn appeared to be the last story of many regarding purported President indiscretions that finally broke the market's upside momentum.
Looking at the timeline it appears this was a post-firing memo with the President, on behalf of a now private citizen Flynn, asking the FBI to give the guy a break given all of Flynn's years of service for the country. In this political environment, however, the optics are bad and the opposition is very ready to scream first and maybe ask questions later. Happened to Obama, happening to Trump, but Trump has more enemies than Obama because Trump plays outside the government's and DC's prearranged course.
The market knows this and is relatively quick to adjust pricing. With these latest allegations and the predictable boisterous outrage from the usual sources, the chance for tax, healthcare, regulatory, and other reform dims further. The more time an administration spends on damage control, the less time and clout it has regarding its agenda. Clinton got nothing done after his lying under oath though he did manage to stay in office. Reagan didn't get much done after the Iran-Contra affair. Bush, well, neither one got a damn thing done; as part of the DC establishment they just went along to get along and the democrats were happy to let them occupy their presidencies fighting wars.
Thus, with this latest controversy, one that will take some time to clear up as now the FBI's documents have been subpoenaed and Comey is to appear before Congress next Wednesday, the market decided to avoid the summertime rush and bale now. Remember, it is May, so when in doubt, sell them out. Thus a sharp drop with the rush to get out, trying to avoid the rush but creating the rush as it does.
SP500 -43.64, -1.82%
NASDAQ -158.63, -2.57%
DJ30 -372.82, -2.57%
SP400 -2.07%
RUTX -2.78%
SOX -4.37%
VOLUME: NYSE +26%, NASDAQ +17%. NYSE trade spiked above average for its strongest showing in 2 weeks. NASDAQ volume also spiked, easily its highest volume since mid-March. On selling so of course that means shares were dumped.
A/D: NYSE -3.7:1, NASDAQ -5.6:1. Impressively negative.
So, the NYSE indices finally made a move in the 12 week patterns, and that move was decisively lower. SP500 broke the 50 day MA's in a single bounce, just about filling the mid-April upside gap. Same action on DJ30 as it too is close to that lower gap point.
NASDAQ sold through the 20 day and is near the April upper gap point; kind of. It was a lot higher to start with.
SOX sold through the 10 day EMA and into the early May upside gap zone that started the move, holding over the 20 day EMA.
SP400 was wrecked, gapping through the 50 day MA's, closing at the session low and not far from the March and April lows at the bottom of its base. RUTX shows the same kind of massively weak action.
The noteworthy points of the move. New breaks higher by the indices and many stocks were harshly reversed. The indices that were not at highs but setting up bases broke hard downside, destroying the bases. The magnitude of the loss: in one day SOX lopped off the gains of prior 5 sessions. It can still hold the breakout, but that misses the point of the virulence of the selling.
With this kind of action and the likely cause of the selling being something that won't likely resolve overnight or otherwise near term, we unloaded a lot of positions. We kept those holding some kind of support, but on a relief kind of rebound that stalls, we will be using that to close out more upside unless the improbable occurs, i.e. the alleviating of the Trump agenda worries.
That seems highly unlikely, but I do note that Senator Thune is set to unveil his tax proposal, and out of the din of political rhetoric, sometimes these kinds of moves work. That won't likely help the market near term, but as the market works through its selling you keep an eye on stocks that hold up relatively well along with the news flow on these kind of proposals. If they start lining up with some positives, you are then ready for any 'surprise.'
A harsh selloff, issues that likely will not be quickly resolved. No new stories hitting thus far this evening, so perhaps as sharp as the selling was Wednesday a reflex bounce occurs. That can be an indication of a false break and rebound, or more likely it is just a reflex bounce before more downside that we use to leave upside positions and look for the next plays.
Have a great evening!
Jon Johnson, Chief Market Strategist
InvestmentHouse.com
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