Daily State Of The Markets: Never Fear, The Next 'V' May Be Here

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Includes: DIA, IWM, QQQ, SPY
by: David Moenning

The primary purpose of this daily missive is to identify the current drivers of the stock market action. The idea is that if we can understand why stocks are doing what they are doing in the near-term, we are unlikely to be fooled by a really big, really important move.

It is important to recognize though that there is no editorializing allowed in this space. We will leave the commentary as to whether Ms. Market is right or wrong in her actions and what she will do next to others. No, ours is merely to ask the reason why things are happening.

Sometimes this task is easily accomplished. Simply open your favorite news site and the headlines will tell the whole story. This was especially true during the European Debt Crisis period. All one needed to know was the latest news out of Greece, Germany, or the ECB.

However, the most recent action is a bit more difficult to get one's arms around. Three times in the last four months (and twice in the 30 days), stocks have moved down hard - in a straight line - on fears about oil, Russia, Greece, and/or global growth. The fears appeared to be real. There were problems cropping up that the market had not dealt with. And in a bull market that is getting long in the tooth, surprises and/or new fears tend to bring out the sellers.

So, in September/October the S&P 500 fell nearly -10% in 19 days. In December, the index dropped almost -5% in 7 days. And over the past week, the market dove -4.2% over a span of just 5 days.

The bears suggest that with pullbacks becoming more frequent, the primary trend may be about to change. Our furry friends go on (and on) about global macro risk, the Russian currency crisis, the slowdown in Europe, the crash in oil, current valuations, where rates are headed next, etc.

And yet, each time, the market has reversed higher within a single session and proceeded to dance merrily higher as if the worries that were behind the dive had suddenly abated.

Among market technicians, such a move is referred to as a "V Bottom." There is no waffling around the lows, no "testing" of support, and no second guessing about the validity of the worry. Nope, a "V Bottom" is simply a risk-on/risk-off type of situation.

And the key point is that this type of action has dominated the stock market environment since the end of 2012.

S&P 500 - Daily

According to Dana Lyons of J Lyons Fund Management, the S&P 500 had produced just under 40 "V Bottoms" during the 62-year span between 1950 and 2012. This means that about once every year and a half, the market would fool everyone and put in a "V Bottom." As such, one can easily argue that this type of action had been fairly rare.

But apparently, this is no longer the case. Since the beginning of 2012, there have been a total of 9 "V Bottoms" - and we could be seeing the start of #10. So instead of the market "V-ing" a couple times a year at most, it is now reversing on a dime every three months or so on average.

Why is this happening? Why is the market full of worry one minute and then dancing a jig the next? Why are moves one-directional now? And more importantly, is this the "new normal" for the way the stock market works?"

Frankly it is hard to tell.

Here's What We Know

But we do know a couple things for sure. First, we understand that above all else, any mention of QE or expectations thereof, seems to drive stock prices higher - regardless of what else may be happening in the world. Apparently there is just something too alluring about the idea of money printing that keeps the bears at bay over and over again.

Next, it is important to note that something we call "millisecond trend-following" is a driving force in the market on a daily basis. Remember, there are 1,000 milliseconds in a single second. This means that there are 60,000 data points on a millisecond chart in a single minute, 3.6 million data points in an hour, and so on. The key here is to understand that for the boys with the really fast computers tend to push the market farther and farther on an intraday basis as they fall all over each other chasing the trends in one direction - and then the next.

And finally, we can't forget that the carry trades are a key driver here. While most investors don't follow the dollar/yen relationship in their daily lives, it has proved to be a factor in the movement of the U.S. stock market. And today there is all kinds of talk/excitement about the dollar/euro relationship.

To be honest, the vast majority of investors won't ever play the "carry trade" game as they can't borrow from the Fed at 0% and invest in other currencies/bond markets to capture the spread, which, in turn, creates cash to be put to use in a stock or bond market. But apparently this is a VERY big deal to the biggest of the big hedge funds and banks.

The Latest V Bottom Is Due To...

So, as we go into today's trade, it looks like the next "V Bottom" has arrived. And of course, the bottom has come without the benefit of any real news. Oil has not rallied to any degree, Greece has not been decided, and there is no word that QE will indeed be launched at the 1/22 ECB meeting.

Thus, the question still remains, what is driving the big boyz and their fancy computer toys to suddenly "go the other way?" Perhaps traders have realized that there is no imminent risk to the U.S. economy. Or maybe traders are merely using the dip to implement the traditional January play book. However, as always, the key is to understand what IS happening right here and now.

Turning To This Morning

While there hasn't been any real change to the market's big issues, the worry/fear appears to be softening again this morning. Oil is moving a little higher. There seems to be less worry about a "Grexit" leading to rate contagion and a collapse of the EU banks. And we haven't heard anything about Russia's currency crisis in days. As such, investors and the big asset allocators appear to be using the recent dip to put any and all money available to work. So, while there is no news to speak of, U.S. stock futures are following Europe higher and point to another green open on Wall Street.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:

Japan: +1.67%

Hong Kong: +0.65%

Shanghai: -2.40%

London: +1.76%

Germany: +1.78%

France: +2.32%

Italy: +2.39%

Spain: +2.17%

Crude Oil Futures: +0.16 to $48.81

Gold: -$6.20 at $1213.20

Dollar: higher against the yen and pound, lower against the euro

10-Year Bond Yield: Currently trading at 2.003%

Stock Indices in U.S. (relative to fair value):

S&P 500: +17.25

Dow Jones Industrial Average: +161

NASDAQ Composite: +34.45

Thought For The Day:

"To be conscious that you are ignorant of the facts is a great step to knowledge." -Benjamin Disraeli