There's a Good Chance We'll See This Before Labor Day
Here we are the week before Labor Day and still digesting recent events in the stock market. Last time we outlined what it would take to generate a Dow Theory bear market signal. The recent rally, which fizzled yesterday, wasn't much of a confidence booster as far as the stock market and the economy is concerned. All we really saw was a bounce after a crash. Yes, what occurred on Friday August 21st and Monday the 24th, extending into Tuesday, the 25th should be characterized that way.
Our original reluctance to move beyond "correction" to "crash" was colored by an inherent conservative bent. We don't like to rush to judgment, sometimes to a fault. At first, we wondered whether the losses might have been magnified by the usual low trading volume that precedes Labor Day each year. But trading volume wasn't light. Then we remembered that HFTs now dominate market trading volume, wondering whether the algorithms that drive these trading programs perhaps exaggerated the losses in a fashion similar to the "portfolio insurance" trading programs that exacerbated the gigantic 22% October 1987 crash.
But after further consideration, the fact remains that volume spiked to a significant level and prices collapsed. You can't just write that off by claiming that programs kicked in with prices following in lock-step. In fact, the PPT (government's Plunge Protection Team) actively fought the drops and from Friday through Tuesday and lost all their battles. We then found some reasoned commentary tracing events from China's stock price collapses, passing through Europe, on to the U.S. It seems, given that sequence of China to Europe to the U.S., that the 1,000 point drop Monday morning was the result of selling pressure in Europe, in response to further collapse in China, being shifted to the U.S. market at the Monday open, after a lack of sufficient liquidity in Europe held selling in check. Sounds like that holding selling in check might be a good thing, except owners of shares wanted to sell by hook or by crook and the opening of the U.S. markets then took the brunt of the selling pressure. You simply can't prevent that kind of pressure once it builds. It seeks relief wherever it can be found.
As for the balance of this week, volume will likely finally lighten up, something we thought would happen last week. I guess that final summer vacation time was simply put off until this week. And if that's the case, then perhaps we could see some additional rallying. The thing to remember is, that light volume could also result in further losses. But our guess right now is that the Plunge Protection Team has a much better chance stemming losses facing off against the lower selling pressure that comes with light volume.
So that's what we'll likely see the rest of this week before Labor Day. Of course, we could be wrong. One thing we can say for certain though: Goodbye August, hello September.
Our original reluctance to move beyond "correction" to "crash" was colored by an inherent conservative bent. We don't like to rush to judgment, sometimes to a fault. At first, we wondered whether the losses might have been magnified by the usual low trading volume that precedes Labor Day each year. But trading volume wasn't light. Then we remembered that HFTs now dominate market trading volume, wondering whether the algorithms that drive these trading programs perhaps exaggerated the losses in a fashion similar to the "portfolio insurance" trading programs that exacerbated the gigantic 22% October 1987 crash.
But after further consideration, the fact remains that volume spiked to a significant level and prices collapsed. You can't just write that off by claiming that programs kicked in with prices following in lock-step. In fact, the PPT (government's Plunge Protection Team) actively fought the drops and from Friday through Tuesday and lost all their battles. We then found some reasoned commentary tracing events from China's stock price collapses, passing through Europe, on to the U.S. It seems, given that sequence of China to Europe to the U.S., that the 1,000 point drop Monday morning was the result of selling pressure in Europe, in response to further collapse in China, being shifted to the U.S. market at the Monday open, after a lack of sufficient liquidity in Europe held selling in check. Sounds like that holding selling in check might be a good thing, except owners of shares wanted to sell by hook or by crook and the opening of the U.S. markets then took the brunt of the selling pressure. You simply can't prevent that kind of pressure once it builds. It seeks relief wherever it can be found.
As for the balance of this week, volume will likely finally lighten up, something we thought would happen last week. I guess that final summer vacation time was simply put off until this week. And if that's the case, then perhaps we could see some additional rallying. The thing to remember is, that light volume could also result in further losses. But our guess right now is that the Plunge Protection Team has a much better chance stemming losses facing off against the lower selling pressure that comes with light volume.
So that's what we'll likely see the rest of this week before Labor Day. Of course, we could be wrong. One thing we can say for certain though: Goodbye August, hello September.
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