Now the Real Reversal
Like a drunken bum, the stock market stumbled and fell this past Friday, stumbled some more, then passed out on Monday, and after getting up on Tuesday, tripped and fell one more time. With the alcohol finally out of its system, Wednesday saw a definitive reversal, and Thursday followed suit. The question remains, though: Is this stock market still a drunk ready to fall again at the first whiff of trouble?
We likely won't find out until after Labor Day. In fact, the six day fall that ended last Tuesday surprised many of us with its intensity. August has seen its share of swoons, but usually the real action awaits the fall. This time, though, the action was quite dramatic - enough such that many will now think we've just seen a long-awaited correction, which will now energize the bull market that began in 2009.
Of note in this last drop was the high volume of trading. At this time of year, August drops usually occur on reduced volume, as many traders take their end-of-summer vacations. And when volume is low, prices can be jerked around (the more technical term would be "manipulated") by the hearty few remaining at their desks. But the high volume this time around doesn't fit that picture.
Then again, such high volume may be explained by the simple fact that more and more of the volume of trading that takes place is no longer generated by human beings. It's the result of software programs concocted by HFT (High Frequency Trading) firms. All you need is a few smarty-pants math whizzes with at least a few functioning fingers to punch in the code that will take over the decisions to buy and sell. Once unleashed, the HFTs go on without the benefit of flesh and blood. Maybe that explains the high volume. The point here is that we shouldn't assume that the anomaly of high volume in late August proves that this drop was THE DROP. Thusly, we await September and October for the real test.
That test, if it were to occur, would consist of a "re-test" of the lows hit on Tuesday. If exceeded, we could be in for a rather unpleasant super-correction, possibly even the beginning of a true bear market.
For now, though, expect headlines such as this in the Wall Street Journal on Thursday:
Or even this in Bloomberg:
Sounds rather impressive, but we suggest you reserve judgment on these matters. A "rebound" - a/k/a "bounce" - would be expected after the severe drop. "Gains steam" means nothing more than the fact that the rebound or bounce lasts more than a day. Stronger GDP data shouldn't surprise anyone, especially in light of the stock market declines. One might more logically imagine the government massaging the figures to "stronger than" rather than "weaker than." A weaker number could have put the kibosh on the bounce. A government would naturally do everything in its power to see that doesn't happen. And it's not like they can't, haven't, and won't skew GDP figures to suit their purposes.
As for global rebound, all that tells us is that there's an international stock market bounce - again, to be expected. What especially calls into question how sincere this rebound will prove to be in the coming months are the attempts to lighten up on China's problems. If we can't face the fact that China''s got major problems, centered on its ongoing credit crisis, then we won't face the fact that right now we're witnessing - until further evidence indicates otherwise - a bounce after a hard fall.
Getting back to the our initial comments, think of it this way: Drunks eventually get up. But that doesn't mean they're sober.
We likely won't find out until after Labor Day. In fact, the six day fall that ended last Tuesday surprised many of us with its intensity. August has seen its share of swoons, but usually the real action awaits the fall. This time, though, the action was quite dramatic - enough such that many will now think we've just seen a long-awaited correction, which will now energize the bull market that began in 2009.
Of note in this last drop was the high volume of trading. At this time of year, August drops usually occur on reduced volume, as many traders take their end-of-summer vacations. And when volume is low, prices can be jerked around (the more technical term would be "manipulated") by the hearty few remaining at their desks. But the high volume this time around doesn't fit that picture.
Then again, such high volume may be explained by the simple fact that more and more of the volume of trading that takes place is no longer generated by human beings. It's the result of software programs concocted by HFT (High Frequency Trading) firms. All you need is a few smarty-pants math whizzes with at least a few functioning fingers to punch in the code that will take over the decisions to buy and sell. Once unleashed, the HFTs go on without the benefit of flesh and blood. Maybe that explains the high volume. The point here is that we shouldn't assume that the anomaly of high volume in late August proves that this drop was THE DROP. Thusly, we await September and October for the real test.
That test, if it were to occur, would consist of a "re-test" of the lows hit on Tuesday. If exceeded, we could be in for a rather unpleasant super-correction, possibly even the beginning of a true bear market.
For now, though, expect headlines such as this in the Wall Street Journal on Thursday:
Market Recovery Gains Steam
Or even this in Bloomberg:
U.S. Stocks Advance After Stronger GDP Data Amid Global Rebound
Sounds rather impressive, but we suggest you reserve judgment on these matters. A "rebound" - a/k/a "bounce" - would be expected after the severe drop. "Gains steam" means nothing more than the fact that the rebound or bounce lasts more than a day. Stronger GDP data shouldn't surprise anyone, especially in light of the stock market declines. One might more logically imagine the government massaging the figures to "stronger than" rather than "weaker than." A weaker number could have put the kibosh on the bounce. A government would naturally do everything in its power to see that doesn't happen. And it's not like they can't, haven't, and won't skew GDP figures to suit their purposes.
As for global rebound, all that tells us is that there's an international stock market bounce - again, to be expected. What especially calls into question how sincere this rebound will prove to be in the coming months are the attempts to lighten up on China's problems. If we can't face the fact that China''s got major problems, centered on its ongoing credit crisis, then we won't face the fact that right now we're witnessing - until further evidence indicates otherwise - a bounce after a hard fall.
Getting back to the our initial comments, think of it this way: Drunks eventually get up. But that doesn't mean they're sober.
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