Good morning. As we've been discussing lately, the recent "tape action" seen in the market hasn't exactly been stellar. In fact, it's been pretty crummy overall and downright ugly at times. Over the past 12sessions, the bulls can to point to exactly one decent day while our friends in the bear camp are quick to point out that there has been at least one bout of intense intraday selling in 12 of the 13 days in question. And once again yesterday, the sell programs seemed to dominate the majority of the intraday action.
For a while Tuesday morning, it appeared that the algo's designed to sell stocks were being run on the half-hours. Every 30 minutes, the market would succumb to a big batch of sell programs and take another hit. As such, once again the early bounce higher was quickly erased as program after program took the indices to new lows for much of the day.
The standard answer to the question of why the quants continued to favor the sell side was that Spain's PM Rajoy had said that a formal request for aid from the EU/ECB "was not imminent." This came after an earlier report stated that Madrid was getting closer to asking for aid and that such a request could come as soon as this weekend. So, as one might have expected, the programs took the Rajoy headline and pounded the indices lower.
However, if one had been paying attention, the ongoing selling didn't seem to make a lot of sense. You see, the initial Reuters report talked about the idea that Spain was getting close to asking for help. The report did not state that the request was expected over the weekend - no, it stated that Rajoy could make the move as soon as this weekend. So, while a knee-jerk reaction to the headline made sense (computers are good at recognizing headlines, not thinking), the ensuing sell programs did not.
Given that the programs have not exactly been programmed to receive lately, I'm wondering if there might be something more at work here. While the algo's can and often do change their tune in a matter of minutes (stocks did in fact finish with a nice little run to the upside yesterday over the last hour), I'm guessing that the prevailing negative attitude might be tied to the idea of traders preparing for the worst.
Front and center here is the upcoming earnings season. It is no secret that earnings growth in Q3 is expected to be weaker than anything we've seen recently. Given that analyst expectations have been coming down over the past couple of months and that the U.S. economy clearly hit another summer speed bump, it doesn't take a rocket scientist to see that there could be some downside risk to the reports. As such, the hedgies (who have largely missed this year's joyride to the upside in stocks) may be cutting back exposure in front of the earnings parade.
Traders may also be preparing for the worst on the Europe front. Don't look now fans but Greece is back in the news. And if you've been paying attention at all over the past three years, you will agree that Greece has had a tendency to (a) miss its budget targets and (b) create market volatility in response to whatever deadline is on the table at the time. So, with the Troika currently going over Greece's books and a deadline on aid decisions due next week, well, traders may be looking to sidestep the next chapter in the ongoing Greek tragedy.
And finally, there is China. While logic would dictate that the once-a-decade change in Communist leadership (slated to occur on November 8) would lead to a pickup in stimulus activity once the new group takes over, there is a lot of talk these days about China coming up short on the stimulus front. The thinking is that China may decide to under stimulate their economy, which, given the mess in Europe and the flagging growth in the U.S., would leave the global economy without an engine. I'm not suggesting this will be the case, mind you, I'm simply pointing to another area where traders could be preparing for the worst.
Yet, despite all the crummy "action" and the seemingly relentless sell programs, it is important to note that (a) our market environment models continue to suggest that the bulls be given the benefit of the doubt here and (b) the bears haven't been able to get much going to the downside. In fact, the S&P 500 is just -1.37% below its recent high, which was put in on September 14th. So, while the intraday action has been lousy lately and traders may indeed be preparing for the worst, so far at least, the current phase looks more like a run-of-the-mill consolidation phase than a precursor to a big dive. Here's hoping it stays that way.
Turning to this morning ... Stock futures once again are pointing to a higher open for Wall Street in response to the ADP Employment report. However, the key question is if recent trend of intraday selling will continue today. Stay tuned.
Major Foreign Markets:
- Shanghai: closed
- Hong Kong: +0.23%
- Japan: -0.44%
- France: -0.30%
- Germany: +0.04%
- Italy: +0.13%
- Spain: -0.62%
- London: +0.08%
- Crude Oil Futures: -$0.72 to $91.17
- Gold: +$4.50 to $1780.10
- Dollar: higher against the yen, lower vs. euro, and pound
- 10-Year Bond Yield: Currently trading at 1.614%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +7.26
- Dow Jones Industrial Average: +12
- NASDAQ Composite: +7.46