From my perch, there are three ways to look at Wednesday's action in the stock market.
On one hand, there is the technical take. Technicians will say that a "key reversal" occurred on the daily charts of the Dow and S&P 500 (but not so much on the NASDAQ, Russell or Mid-Cap indices). Such events occur when (a) both the high and low of the day in question exceed the prior day's high/low points and (b) the index closes either at or near the high or low of the session. In terms of predictive power, we're told that key reversal days tend to initiate a new trend, which is this case would be down. Ughh.
On the other hand, the fundamental crowd could be heard telling anyone willing to listen yesterday that rates really do matter - yes, right here, right now.
This group, which also appears to be leaning bearish at the present time, contends that stocks reacted to the spike in bond yields that followed the release of the minutes from the latest Fed meeting.
For those of you keeping score at home, the yield on the 10-year spiked to a four-year high, closing at 2.943% Wednesday afternoon. Which, is just another bad day at the office away from 3%.
The minutes of the January 30-31 meeting of the FOMC, which was Janet Yellen's last hurrah as Fed Chair, showed that members believe the economy is set to grow at a faster rate and that the recently enacted Tax bill would provide an additional boost. Specifically, the minutes said, "information suggesting that the effects of recently enacted tax changes — while still uncertain — might be somewhat larger in the near term than previously thought.
Looking ahead, members appeared to be downright upbeat. "A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate," the minutes noted.
It was the "further gradual policy firming" verbiage that seemed to attract attention. While initially viewed as "dovish," traders and their computers quickly realized that the Fedheads might be talking about additional rate hikes in 2018. Uh oh.
Bam. Just like that, yields spiked higher and stocks dove lower with the DJIA dropping 450 points along the way.
From high to low, the Dow traveled 475 points yesterday. And this quickly brought back memories of the hysterics seen earlier in the month. As such, no one can be blamed for being a little nervous about that close, which can only be described as U-G-L-Y!
Which brings me to a third take on the action here. There can be little argument that the algos took control and the millisecond trend-followers had their way with the market in the last 90 minutes of the session. However, if I've learned anything in the last decade about high-speed trading, it is that the algos have little to no memory from one day to the next.
So, with everyone in the game looking for a "retest" to occur (with many believing the sooner the better) and a bearish gift suddenly falling from the sky, it wasn't surprising to see the algos create a flush into the close.
The question, of course, is if the song will remain the same this morning. So far at least, it looks like the bulls are trying to hold the line in the early going. It will be interesting to see if the early rally holds or gives way to a new narrative.
Thought For The Day:
For every minute you are angry you lose sixty seconds of happiness. -Ralph Waldo Emerson
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research
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At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.
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