Whenever any market experiences a daily price greater than the high of the previous period’s price and a low below the low of the previous period—you’ve got an outside day or reversal. But this ain’t your daddy’s stock market anymore my friend.
The reversal day was more significant since markets were severely extended and, in this case, complacency high. Several events occurred Wednesday to enhance this experience. First, Bernanke’s congressional testimony was critical to an early rally given his assertion to maintain QE at current levels. But, he also suggested concerns about how markets would react should QE be tapered or (gasp!) removed. Later in the day a terrorist action occurred in the UK which gave markets pause. And finally, Fed Minutes were released which noted various Fed governors wanting to halt QE in June and that certain “financial markets were becoming too buoyant”. BOOM! Stocks reversed. Is there a “Mutiny on the QE Bounty?
As for as economic data, Existing Home Sales were released today and came in slightly higher than prior release but still narrowly missed expectations--4.97M vs. 5M expected, and prior 4.94M.
Buried within the trading was some good news from the healthcare (XLV), and by extension biotech (IBB) sectors, regarding positive results from stage 3 clinical trials for cancer treatment. The primary companies were Bristol-Myers (BMY) and Roche (RHHBY). No matter what the markets do now, these types of stories, if validated, are the innovation we need for the future. Therefore, buying opportunities should exist on corrections. Leading sectors Wednesday were in pharma which would include XLV for example.
Lagging sectors were widespread and too numerous to list but included bonds (TLT), meaning potential difficulties for a QE exit. The dollar (UUP) was stronger while gold (GLD) continued to decline after an early rally. Oil (USO) prices declined on higher inventory data.
We’ve been selling small amounts of long positions in our active portfolio and raising stops for the balance. This is the only way to defend ourselves against any type of event that could trigger a correction of some magnitude.
Volume exploded higher on this reversal, which is typical of sell stop days after so many light volume melt-up days. Breadth per the WSJ was negative.
This is what can happen when markets persistently melt-up on light volume until they’re so overbought, they become accident prone. Wednesday’s mega-volume reflects how tenuous and shaky bulls are at this point in the rally/melt-up. The hint of a halt to QE from the Fed Minutes trumped Bernanke’s QEinity congressional testimony.
You can be sure all this will be walked back Thursday. After all, Jobless Claims may beat, PMI Flash Mfg Index, Home Price Index and New Home Sales could bring the bulls quickly back to the fore.
Let’s see what happens.
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