With news that the U.S. economy grew faster than expected at a 3.7 percent annualized rate, today King World News is featuring a piece from one of the greats in the business discussing the wild trading in global stock markets, the Dow Theory “sell signal” and what to expect next. Art Cashin also weighs in with some key comments.
“Jeff, after reading your comments over the past few days, I am confused. Was there a Dow Theory ‘sell signal’ registered on Monday and should we be raising cash?” — A concerned financial advisor
August 27 (King World News) – Well, maybe it’s because I write them, but I thought my message this week has been clear. Yes, there was a Dow Theory “sell signal” registered in Monday’s Mauling as the Industrials and Trannies closed below their respective mid-October lows of last year (see chart). In the short term I have chosen to ignore that “sell signal” because the S&P 500 (SPX/1940.51) was more oversold/compressed at the Monday lows than it was at the October 19, 1987 crash lows.
Monday was also a 90% Downside Day, meaning 90% of total volume, and 90% of total points traded, came in on the downside. Following such days, what you tend to get is a 2 – 7 session “throwback rally” and then a retest of the recent lows. If that retest is successful, what you see in the charts is a double bottom formation (a “W” formation), and it is off to the races on the upside. That’s what I think is going to happen here.
The reason I am temporarily ignoring Monday’s “sell signal” is because of the extreme oversold reading and the fact that the last time the D-J Industrials (INDU/16285.51) were down 1000 points on an intraday basis was in the “flash crash” of May 6, 2010. On that day there was another Dow Theory “sell signal,” which proved to be a false signal and was subsequently reversed in June of 2010.
That’s what I am hoping happens here, except in the current case to reverse Monday’s “sell signal” is going to require the Industrials and Transports to rally a few thousand points, not a few hundred points like in 2010. Quite frankly, I can’t wait that long for the “all-clear” bell to be sounded. What I DON’T want to see is for the Industrials to close decisively below last Monday’s lows. If that were to occur, I would have to honor the Dow Theory “sell signal” and say we have tipped over into a bear market. Until then, I continue to believe we are in a secular bull market that has years left to run.
As for yesterday’s stock market action, I hate to say this, but it was pretty predictable for anyone who has been at this game for as long as I have; and, I said so on numerous TV appearances on Monday and Tuesday. As my friend Arthur Cashin would say:
“When the markets go down on rumors that missiles are headed for the U.S., you buy ’em, not sell ’em, because if the bombs fall it makes no difference . . . it’s all over. But if the worst does not materialize, you make a lot of money.”
Accordingly, I have actually bought stocks during the recent conflagration that left stocks at “fire sale” levels last Monday/Tuesday. So the SPX has rallied back to overhead resistance (1940); it could even move higher into the zone I thought would contain the downside (1970 -2000). However, I would not be looking for much more than that on the upside, consistent with the 2 – 7 session reflex rally off a 90% Downside Day combined with an extreme oversold condition.
This morning, Chinese markets surged overnight (+5%), the Ukraine reaches a bailout deal, crude oil popped (+4.5%), and the preopening futures are higher (+22 points) as investors embrace Fed officials’ comments that interest rates are not going to be raised in September. As a sidebar, my model has always opted for a November rate ratchet even though there is no FOMC meeting that month. Today sees multiple economic reports: revised 2Q15 GDP (+3.3%e), Jobless Claims (270Ke), and Pending Home Sales (1.0%e). And, that’s the way it is as I tip a cup of coffee looking out over the transom of my boat at 5:00 a.m.
Art Cashin also weighed in with these key comments this morning:
“Overnight And Overseas – Shanghai soared 5.3% on aggressive government buying of large caps very late in the afternoon session. Hong Kong gained a little over 3% and most other Asian markets rose slightly. Yen is falling, probably on Kuroda remarks.
Many assets shift to “all clear” mode. Emerging market currencies are finally firming as are most commodities. Crude is mixed.
European markets are higher but don’t appear to be enthusiastic about it. U.S. futures are unexcitedly higher. Yields inch up while gold and the Euro are lower.
Consensus – In the majority of similar plunge/snapback patterns, we would usually shift into a series of volatile base building days. We’ll assume that’s our next phase. Market’s may go back to concentrating on crude. Also watch yields, which are inching higher in line with the approach of Jackson Hole. Stick with the drill – stay wary, alert and very, very nimble.”
***ALSO RELEASED: Man Who Predicted Monday’s Massive Surge Off Panic Lows And Today’s Monster Rally Looks At What To Expect Next CLICK HERE.
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