The Major U.S. benchmark indexes closed lower on Friday. The Dow ended the session at 18132: down -81 points (0.45%). The Nasdaq Composite close at 4963: down -24 points (0.49%). The broad benchmark S&P 500 finished the session at 2104: down -6 points (0.30%).
On the NYSE declining issues (3687) outnumbered advancing issues (3028): 52% to 44%.
S&P futures pulled back 17 points below the current all-time record high at 2118, trading down to 2101 late in the day, before auctioning up modestly to 2106 atFriday’s close. On 02-18-15 S&P futures rallied up to 2100, before selling off from the high and pulling back to 2082. Since the 02-20-15 pull-back S&P futures have rallied 36 points up to the current all-time record high at 2118.
In the context of a break-out and a new all-time high, the re-test of the prior high (2100-2098) is an important event in determining the potential for continue of the underlying sentiment.
In simple terms, all market participants are aware that the S&P has broken out above it previous high and has rallied up to a new all-time record high. Hence, the expectation is that the buying interest that initialed the rally will set in and provide support on the initial pull-back. The idea is that market participants will be looking for the S&P to re-test the current record high and possibly go on to make a higher high.
If there is no buying interest and the initial pullback the likelihood is that the original initiating buying interest was misinformed, that potential all those who “thought” the S&P would trade higher have already bought. The lack of buying (support) on the pull-back indicates the last buyer (at that price level) has already allocated their funds. This increases the likelihood of a more substantive selling off.
We have been reminding our readers that it was just one month ago that the S&P was trading at 1970. The cause behind the current rally is unclear. Certainly, there is no fundamental catalyst supporting the rally.
The "decoupling" of the markets direction and US underlying economy continued this week with 38 key economic data falling below expectation and only 6 coming in above expectation; marking the worst economic performance in 12 months. February was the first month in which we showed that as a result of plunging revenue and EPS guidance and deteriorating sales and profitability, 2015 will be the first year since Lehman when there will be a full year decline in year-over-year sales.
However, corporate "buyback” announcements have surged with February ($98bn) posting the largest monthly tally on record. Perhaps the lack of gains in other traditional assets class has forced “capital” seeking gains into equities. Looking at the underlying fundamentals, buybacks and the lingering QE (zero interest rate) is the only rationale that can explain the current rally.
Regardless of the “underlying cause” markets are moved by buying interest and selling pressure. In the context of the current rally in the S&P, Friday’s late in the day sell-off was a part of what we would call normal market development.
As we had noted during the week, there was continued lack of buying interest at the high. After trading up at or near our maximum likelihood expectation estimate at 2120-2118, the rally stalled. There was no buying interest above 2112 after that. For this reason the normal average daily range discount (pull-back) may not be sufficient to attract new buyers.
The likelihood that Friday’s pull-back (relative discount) may not be sufficient to attract new buyers is further complicated by the “timing” of the pull-back.
For example, if during the overnight session, a market trades below the prior day’s close and at the open price auctions back up to “fill the gap”, what information does the overnight sell-off event and the reaction to, tell us about the market sentiment?
If, after auctioning back to the prior day’s close, there is no re-test of the previous day’s high, what information does the overnight sell-off event and the reaction to, tell us about the market sentiment?
If, after trading in a narrow range at the prior day’s close, the market sells off at the end of the day: what information does the overnight sell-off event and the reaction to, tell us about the market sentiment?
Now considers the situation in reverse.
The market sell-off below the prior day’s close during the overnight session. At the Open, the price trades down to re-test the overnight low. There is no selling below the overnight low.
The market auctions up and “fills the gap”. Following the filling or the gap, the market goes on to re-test the prior day’s high.
If price closes in the middle of the trading range; what information does the event tell us about the market sentiment?
If price closes at the high of the trading range; what information does the event tell us about the market sentiment?
Bayesian logic would “infer” that a lower low in the overnight session, as failure to auction back to the prior high, followed by a sell-off into the close implies a lack of buying interest and dominant selling pressure through the range.
If the selling pressure at the low is not addressed; i.e. re-test of the low, now lower low the only offsetting factor (event) would be a re-test of the high and a higher high, close at the high. In that case the market development, price stricture would indicate strong buying interest.
Based on Bayesian logic Friday’s price action suggest there increased likelihood of a re-test of the low and the potential for a lower low.
The previous high at 2098-2100 is now near term support. The prior daily range pull-back level at 2084-2080 is key support. Below the lower edge of the current trade cluster there is additional support at 2036 and 2020.
Minor resistance is located at 2112. Near term resistance is located at the current all-time high 2120-2118.