Picks of the Day August 21,2017

Trump Rally to Death Valley?!

August finally showed its true colors! It did take time, though. A leopard can’t change its spots and by the same token, August’s disrepute for being a weak month for the market, finally found ample expression last week. For one reason or another, August is a time of sharp selloffs, and jagged, sudden movement that often gets left unexplained.

After a wild week on the stock market – and after the technical environment worsened significantly – traders hope to get past the yearly Jackson Hole symposium taking place this coming weekend without any surprises on the downside.

This coming week is comprised of but a meager number of macro figures, with home sales numbers coming out on Wednesday and Thursday and durable goods order on Friday. The Q2 earnings season is behind us. Even though it was an excellent season in so far as both stellar numbers and stellar guidance, one of the worrisome things was that stocks responded negatively to the reports firms released. The focus will now remain on Donald Trump and the likely outgrowth of the Federal Reserve’s annual policy conference. Fed Chairwoman, Janet Yellen and European Central Bank President, Mario Draghi, will be speaking on Friday.

Investors are now worried that Trump’s sights are trained on things other than their own best interest, i.e. not on the execution of his campaign trail’s economic agenda. A full 8 months have passed since Trump was elected. Trump’s agenda has not borne fruit, the concern being that the market’s quick surge after the elections – which was even called, the “Trump Rally,” driven by outsized optimism about the president-elect’s vision – could now lead the market far lower, going from rally to Death Valley.

The negative surprises from Washington are likely to not abate this week. The White House unnerved the stock market – if not rattling it to its core – after a number of key cabinet members left their roles after having lost face in the eyes of CEOs who decided to cease serving as the president’s consultants. Last week, two senior advisory CEO forums disbanded in protest over Trump’s comportment, and more specifically, in angst over a number of statements Trump had made in response to the violence in the white nationalist supremacist demonstration in Charlottesville, Virginia. That only led the week to cap off with another drama, the dismissal of Stephen Bannon – the architect of Trump’s electoral campaign and his closest advisor.

Stocks ended the week down, making it the first time that the market fell for two consecutive weeks, since May. The S&P 500 ended the week off 0.6% at the 2,425 point level; despite the fact that this wasn’t a sharp weekly loss, the index did close beneath its 50-period EMA which crosses through the 2,449 point level. After Thursday’s sharp sell-off, the market tried to rally on Friday; that failed, though, as the market closed in the vicinity of its daily low. The Dow Jones ended more sharply off, shedding 0.8%. The fact that on Friday the market relinquished its gains from earlier in the day awakens doubt as to whether the market has found the support it needs.

It seems that the market is “losing its grip,” and that doesn’t bode well as the market enters its most challenging period of the year, i.e. the second half of August and the month of September, historically the worst month-and-a-half of the trading year. The technical picture is now on its shakiest ground this year, seasonality playing against the market. The headlines, too, are not in the market’s favor. The geopolitical state of affairs, and the political machinations in the White House, likewise serve to hinder the market. There’s a long list of reasons the market could go through an air pocket, leading it to lose the gains accrued this year. The transportation index and the Russell 2000, each thought of as leading indexes, recorded significant losses over the last few weeks, each having fallen to their 200-period EMA.

It’s important to remember one thing: the market has already been in this situation in the past, bulls coming out on top each and every time. Despite the long list of negative factors, the bears have not succeeded in closing the deal! Correction buyers have appeared very quickly and are ready to brush off any claims bears may have up their sleeves. The problem for bears is computerized algorithms pre-programmed to buy into movement of this very type. Time in and time out, those investing using this strategy were rewarded, their trading platform, for example, buying into the very clear technical breakdown that developed on Thursday. Many a time, these rebounds have turned into a V-shaped movement, at the minimum catching bears entirely off-guard. The negative momentum simply hasn’t succeeded in picking up and going into higher gear in the current market.

The most important thing for us is to assess the form a rebound would take, in the event that it develops. Usually, one cannot place his or her faith in a sharp rebound from an oversold point. At the same time, the term “usually” seems to have little relevance in this market, and so many times what was once thought of as typical, if history were to be any guide, failed to materialize – and so it’s hard to believe that this time what we just saw was a normative technical response.

Will things be different this time?! We ourselves have no choice but to be primed and ready, with our finger on the pulse. Don’t place your hopes too quickly in a recovery pattern, though; things, are not always what they seem.

Have a great trading week!

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