Today the markets recovered from a turbulent session. The S&P500 broke below its 200 dma, which is extremely significant because that has only occurred twice in the past 2 ½ years.
Remarkably, stocks quickly recovered to close the day back at the midpoint between the 100-200 dma. Risk averse sectors like Utilities and Consumer Staples performed best.
The recovery had nothing to do with news from Greece. The gains occurred after a published report from the International Monetary Fund (IMF) advised against the Fed raising interest rates. The IMF is forecasting long-term US GPD growth of only 2% and global growth about as lackluster. This was not a new revelation, so I am somewhat surprised (cynical) that the market reacted favorably. However, it is important to note that although the S&P500 reversed higher, it hit firm resistance and did not exceed 2085.06 [which is the high point of the double bottom pattern that has formed over the past week]. This market will not be out of the danger zone until it’s decisively above the 100 dma.
Not surprising is that the market is up again on bad news and hopes of continued easy monetary policy from the Fed. Watch for continued volatility this week. Tomorrow the Fed’s FOMC meeting notes will be released, and they’re likely to suggest rising interest rates. BUT…then expect Fed Chair Janet Yellen to reassure the markets during her scheduled speech on Friday.
Also, be skeptical of the media exaggerating “better than expected” Q2 earnings announcements. Remember, estimates have been revised down too low, so what would have been disappointing 6 months ago will now be hailed with jubilance. Overall 2015 earnings should grow 6-7%, which is respectable BUT does not justify valuations of 16.5+. At the beginning of the year, 2015 earnings forecast was 11%. I think the market remains overvalued and sketchy as long as the 10 dma remains below the 100 dma.
My primary concern is the meltdown of Chinese stocks. They’re still struggling despite extreme intervention from the Chinese government. Their indexes are down 25-30% in the past month, wiping out over $3 trillion. If the slide continues, it’s hard to believe that it won’t spill over to other markets, including the US.
So is this pullback yet another opportunity to “buy the dip”? Maybe. Given this market’s personality, and the assurance of continued low interest rates the market is likely to bounce back to new highs. Nevertheless, be extremely nimble and watch to make sure the dip doesn’t turn into a DUMP.
I remain long the US Dollar and short Oil.
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