Posted | by David Moenning |

After the roller coaster rebound seen on Friday, February 9 and then the best week in more than 5 years for the S&P 500, I guess one of the easiest stock market calls was that it was probably time to "go the other way" for a while. And "go the other way" they did on Tuesday.

Call it what you will. A "break in the action." "Bumping into overhead resistance." The beginning of a "retest" phase. Or just a reaction to Walmart (NYSE: WMT) stinking up the joint with its earnings report. But the bottom line is the dip-buyers took the day off yesterday as the DJIA tumbled 254 points or 1.01%.

The good news is that the meaningful damage was limited to the Dow due to the outsized impact of WMT's 10% dance to the downside. For example, the S&P dropped 0.58% while the NASDAQ Composite fell just 0.07% and the NASDAQ 100 actually gained 0.13%.

So, from my seat, you may want to simply ignore anybody who is calling for the a return to the market's recent insanity based on yesterday's action.

A Day Filled With "Calls"

Speaking of "calls," one of the highlights to the first session of the week was the abundance of market calls made by some of the big boys on Wall Street. On what could easily have been a sleepy, post-holiday start to the week, we heard from BlackRock (NYSE: BLK), Morgan Stanley (NYSE: MS), JPMorgan (NYSE: JPM), and Goldman Sachs (NYSE: GS).

Cutting to the chase, most of the calls were fairly upbeat. For example, J. P. Morga's Monica DiCenso said that while we shouldn't expect 2017-style returns, stocks should do well this year. "It's hard to imagine that you'll see a repeat of 2017," DiCenso said in a CNBC interview. "But it doesn't mean that we can't see very strong returns."

DiCenso suggested that investors stay more grounded in their expectations for 2018. "Think 11% to 13% from here, which of course in the context of history is very strong," she said.

To put these numbers in perspective, let's remember that stocks have averaged 8.9% since 1980 (Source: Ned Davis Research) and 8% per year over the last decade.

Goldman: Looking for Positive Months Ahead

Next up was Goldman Sachs. The firm's strategist opined first that what we're seeing is just a correction. And then that most corrections don't involve recessions or bear markets. The bottom line is that Goldman is looking for positive returns in the months ahead.

BlackRock Upgrades U.S. Stocks

Although stocks opened lower, word that BlackRock had upgraded U.S. stocks to a "buy" gave the major averages a mid-morning lift. The largest money manager on the planet suggested that the Washington's fiscal stimulus is going to "supercharge profit growth."

And since BLK doesn't make a lot of "calls," it looks like this one was good for about 30 S&P points.

But Morgan Stanley Says...

But just when it looked like the buyers had returned and that every dip was going to be bought again, a guy named Andrew Sheets got people's attention by saying that the recent correction was, "just an appetizer, not the main course."

Sheets, who is chief cross-asset strategist at Morgan Stanley, said in a note, "Our cycle models suggest that [developed markets] remain in the late stages of a late-cycle environment... Rising equities, rising inflation, tightening policy, higher commodity prices and higher volatility are (in our view) a pretty normal pattern if that view is correct."

Sheets went on to note that while the current strong data appears to be offsetting inflation concerns, this could change as we progress into spring. "Things get trickier, however, after Q1. Past March, markets will need to digest rising... core inflation and declining [purchase manager indexes], economic surprises and (quite possibly) earnings revisions."

And while we can never know for sure what triggers the computerized algos, the market did go into a bit of a funk yesterday afternoon, with the S&P losing about 30 points from top to bottom. As such, one could argue that the less than optimistic call from Morgan was enough to cause traders to rediscover their sell algos.

My Turn

Now it's my turn. My take/call here is that after the type of waterfall decline seen February 2 through 9, traders are likely to expect a "retest" phase. Especially with the market following the panic decline script so nicely.

To review, first is the emotional dive (check). Then there is the "flush," where babies get thrown out with the bath water (check). Then the sensational reversal occurs, which leads to a sigh-of-relief bounce (check). This is then followed by the "retest," which is followed by a period of "base building" (aka a "sloppy" phase).

In my humble opinion, it was expectations for the retest phase that caused traders to curb their enthusiasm for buying the dip. After all, the dip had already occurred. Remember, as of Friday's close, the S&P was already 200 points - or 7.8% - off the low. As such, it is logical that anyone looking to put cash to work might want to take a breath here to see if the "retest" has legs.

Game On

So, in sum, it's game on here. And how the action unfolds over the remainder of this week and next should tell us a lot about what to expect going forward. For example, if the selling accelerates, traders will likely want to see a meaningful test of the lows (this won't be fun). Whereas if the pullback is shallow and mild, the retest phase could end quickly as traders return their focus to the fundamentals. The question from there, of course, is whether the focus will be positive or negative!

Thought For The Day:

We are what we repeatedly do. Excellence, then, is not an act, but a habit. -Aristotle

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: JPM, MS - Note that positions may change at any time.


The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

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