In what was a fit of rage by the markets in the face of an FOMC that didn't whisper sweet enough nothings into the ears of investors, followed by a Tweet happy President announcing major economic policy decisions on a whim, the markets experienced their worst week of 2019.
For readers of this online diary, the market weakness shouldn't have been a surprise as the past two weeks have been a persistent exercise of telling investors of this outcome. Here are the titles of the notes posted over the past two weeks:
July 20th - The Market Just Posted A Sign On Its Front Porch Saying Beware Of Dog
July 21st - Week In Review: Textural Changes Of A Subtle Nature Bearing Serious Consequences
July 23rd - How Much More Ammo Can The Market Waste?
July 24th - SOX Faces A Reinforced Brick Wall Of Resistance At 1640
July 25th - A Negative Confluence Of Events
July 29th - Is It Time To Go Full Rambo On The Markets?
July 30th - Earnings Exhaustion
One of the primary theories presented here in recent weeks was the negative nature of the SOX moving up while the rest of the market simply sat on its hands watching. This created a precarious situation.
When the SOX goes parabolic while the market lags, the violence of the reversal on the downside when absorbing the gains will cause the remainder of technology fits as a lagging market is indicative of underlying weakness to begin with. The SOX was down close to 7% for the week. With a confluence of negative fundamental events from uncertainty about rates to trade war fears, the SOX retracing a parabolic run predictably added to the fury on the downside.
There was, however, one small glimpse of hope during the latter half of trading Friday. The S&P made a valiant effort to save 2940 - a level that was discussed extensively here last week - in the last hours of Friday's trading. In fact, it got rejected right at that level in the last couple hours of trading, closing at 2932 for the week.
This type of glimpse, we can call it, into the intentions of the market shouldn't be overlooked. It was very easy for the market to completely lose it on Friday with the negativity from both a fundamental and technical perspective. Yet the markets found a way to close well above the lows. This sets the week ahead to be nonconformist in every way possible. This simply means that investors should expect every type of head game that the markets can conjure up to be thrown at investors in an effort to remove any scent of the true path of where the markets are headed.
We should begin the week then with a move above 2940 (futures are currently down in early Sunday trading), removing fears of a precipitous decline. The remainder of the week should be choppy, as the extreme plunge in interest rates creates some buoyancy in equities from a pure value perspective.
Whatever strength the markets are able to glue together should be used as an opportunity to either lighten long exposure or put on hedges of one form or another.
There is a high probability of an applause worthy, mouth-watering rally to end the year. However, for that rally to take place, the proper sequence of events dictates a risk reset to create enough cognitive dissonance to allow the markets room for the amplification of energy that is to come on the upside.
The markets will need work to get there, with lots of slight of hand taking place along the way.
Investors will be well served to not allow market theatrics the opportunity for misdirection, instead focusing on a few simple truths: We are going into a seasonally tumultuous period and the markets just accelerated to the downside, making for the worst week of 2019. There really isn't much more to consider than that.
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