Stocks - Understanding The Whipsaw On Monday

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Includes: DIA, FXI, GLD, IEV, IWM, OIL, QQQ, SPY, VTI
by: Markos Kaminis

Summary

U.S. equities opened higher Monday, probably due to an oversold status into an uncertain weekend last Friday.

The early green for stocks faded to red fast, as critical concerns including declining energy prices and China issues remained in place.

A late rally surprised many and seemed to have little cause, save for perhaps speculation on China news flow this evening.

Long-term investors should eye energy and China for turns in trend to shore up confidence in markets.

Stocks started Monday higher, but the green faded to red fast. Then a rally showed up in the last 45 minutes of trading. So are you wondering why the whipsaw? I'll try to answer that here and also point long-term investors toward what to keep an eye on for a meaningful change in trend.

The best reasoning for the false start Monday was probably the oversold position into Friday's close ahead of the weekend. Equities turned around in Europe Monday, but Asian shares were led by another steep China market decline. The decline contrasted against a stronger yuan fix, but a loss of confidence in China's financial markets along with the persistent overhang of locked up shares still weighed heavily. Furthermore, oil prices extended their decline today as we continue to wait for Iranian supply. Thus, the causes of crisis remained in place and confidence should have been expected to fade. Yet, at the close of trading, stocks rallied. I think that had to do with speculation about potential China stimulus Tuesday, like perhaps an interest rate cut. While that might soften the yuan, it serves China's economy and could help slow the capital outflow problem. We're also awaiting economic data from China Tuesday, so it is possible some were speculating on some bit of positive news that might help deeply discounted shares recover.

Sector Securities

Monday's Open

Monday's Close

SPDR S&P 500 (NYSE: SPY)

+0.6%

+0.1%

SPDR Dow Jones (NYSE: DIA)

+0.6%

+0.4%

PowerShares QQQ (NASDAQ: QQQ)

+0.7%

+0.3%

iShares Russell 2000 (NYSE: IWM)

+0.3%

-0.4%

Vanguard Total Stock Market (NYSE: VTI)

+0.6%

-0.1%

iShares Europe (NYSE: IEV)

+1.1%

+0.4%

iShares China Large-Cap (NYSE: FXI)

+0.2%

-0.5%

iPath S&P GSCI Crude Oil (NYSE: OIL)

-1.1%

-5.6%

SPDR Gold Trust (NYSE: GLD)

-0.2%

-0.9%

Click to enlarge

U.S. equities opened significantly higher this morning than they closed on Friday. As investors pondered things on Friday afternoon, they had little to look forward but much to worry about over the weekend. Equities were likely oversold Friday as a result, and capital wanted back in to bear risk near levels that had previously marked bottoms. But after the open, stocks sank deeply into the red before rallying to hide the volatility of the day from the table above.

In China, regulators set the daily mid-point currency fix rate higher and the yuan strengthened by 0.35%. It's the opposite of the central bank's recent destabilizing devaluations, but what China really needs is a constructive economic solution to stop capital flight. If that can happen, then perhaps the current tendency for the yuan to weaken might lessen. It would be great also if the communist country leaned a little further toward capitalism if it wants to shore up confidence in its markets.

The overhang of stock that large stakeholders are now able to unload, though in small portions and after proper notice is given to the authorities, probably scared average investors again like I said it would in recent reports. Recent volatility has not helped keep the average investor's bets in place either. China's CSI 300 fell 5.0% Monday and the outlook is not positive without a turn in data or a significant stimulant from the government. That may be exactly what is served up Tuesday or sometime soon, and it may be the reason for the late rally in U.S. shares.

I noted the surge in stocks where I anticipated there would be a further selloff began at approximately 3:15 PM ET. The wires held no answers, save perhaps for a report that fighters had killed an important military leader in Yemen. Energy market ETFs only edged higher at the close of equity trading possibly on that news. However, the market's sensitivity to the commodity is exaggerated now. That is something to bear in mind for the day a substantive positive news event occurs for oil. Earlier in the day, a comment from a non-voting Fed member helped stocks a bit as well but it was well before the late surge. Thus, I suspect speculation on China's news flow for this evening and the discounted value of equities simply combined to drive the late surge for stocks. Long-term investors will find their turn in trend when the news flow improves for energy or when China shores up.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.