Testing the Limits!

Testing the limits!  Adorning the fronts of theaters and playbills are the highly recognized drama masks depicting one frowning and one smiling mask.  This symbol, in fact, goes back to ancient Greece and is still relevant today not only for theater but also on the stage of international politics, trade, and financial markets.  Equity markets, despite Tuesday’s optimism, settled back into emerging market fears causing a fairly aggressive selloff testing many technical limits.  The S&P500 bounced off of its really important support at 2800 rallying into the close but still closing down for the session.  The S&P is now in the middle of its range and will encounter some strong resistance above at 2850 and yesterday’s trade action, though it ended on a positive note, demonstrated that a downside move cannot be discounted (see chart 4 in my daily chartbook).  The VIX Index, while it did trade up early in the session, never reached the magic 18 level, which is perhaps a sign that the market indigestion was not as bad as it appeared on the surface.  The VIX closed the session below 15 and starts today’s session at around 14.  The VIX is perhaps a better indicator of complacency rather than fear (I will write more on that in future notes, but please refer to yesterday’s note on Minsky and the effects of complacency).  The Dow Jones Industrial index took a ride down to its critical backstop at 25000 but also rallied into the close still closing down on the session. The Dow was down over 300 points at one point during the day leaving traders saying “it could have been much worse”.  The Dow, though its is still constructive, remains in a very weak position and another test of the 25000 level could result in a risk-off signal (see chart 6 in my daily chartbook). The small cap Russell 2000 index remained under constant pressure yesterday with traders having quickly forgotten the positive small business outlook of the prior session.  Though the index closed off its lows of the day, it did not experience the same bounce as its larger cap cohorts.  Though moves of this sort are not uncommon for the R2K, the close does represent a lower-low close which warrants careful scrutiny in the sessions ahead (see chart 7 in my daily chartbook).  The tech heavy NASDAQ 100 played the whole field yesterday closing down on the session.  The NASDAQ’s trade action was closely tied to the selloff in Chinese tech/media sector, which sold off in response to weak growth combined with the Chinese government’s refusal to grant certain gaming licenses.  Of course the index was not helped by the ongoing Tesla drama with the probable SEC subpoena of Elon Musk (it must be August).  All indices limped their way though the close but remain constructive.

Yesterday’s chaos was not limited to equities.  Gold slid further into a funk underscoring its inverse correlation to the US dollar and reminding investors that owning gold is only fun about one day every five years (see charts 12 and 13 in my daily chartbook).  The Chinese Yuan bounced off of a new low yesterday, which was one of the key factors in the late session rally by US equities (see chart 14 in my daily chartbook).  Finally treasuries rallied as stocks fell closing off their highs but ultimately with lower yields.  The 10 year treasury yield ended the session with a 2.86% yield and the yield curve flattened further touching 23.5 basis points at one time during the session (see charts 18, 19, and 20 in my daily chartbook).  So the last 3 sessions saw a shift from frown to smile and back to frown.  The session ahead has the potential for another shift back to smile because WHILE YOU SLEPT, China and Turkey have both indicated a willingness to “talk” again.  This should give traders a reason to, perhaps, switch a smile on… if they have any strength left.  It is, after all, August and the potential beach days left in the summer are ticking down.

daily chartbook 2018-08-16