Goodbye To The Quarter From Hell

Well that was some quarter! Call it the quarter from hell.

For as long as most traders and investors can remember, they are losing money so far this year. And they promised us such a rose garden!

The S&P 500 made a valiant, and so far successful effort to hold at the 200-day moving average at $256. We saw an unprecedented four consecutive days of 2% moves.

Yet, with all that tearing of hair, banging of heads against walls, and ulcers multiplying like rabbits, the (SPY) dropped only 5 points since January, off 1.8%, a mere pittance. It’s been a whole lot of work and stress for nothing.

So far, the SPY has been bracketed by the 50-day moving average on the upside at $272 and the 200-day moving average on the downside. It could continue like this for six more months, forming a very long triangle formation with a year-end upside breakout.

Is the market going to sleep pending the outcome of the November midterm congressional elections?

But here’s the catch. We now live in the world of false breakouts and breakdowns, thanks to algorithms. It happened twice in February and March to the upside.

What follows false upside breakouts? How about false downside breakdowns, which may be on the menu for us in April.

My bet is that we’ll see one of these soon, taking the SPY down as low as $246. Then we’ll rocket back up to the middle of the range in another one of those up 100-point days.

What will cause such a catharsis? An escalation of the trade war would certainly do it. Or maybe just a random presidential tweet about anything.

That why I have been holding fire so far on my volatility shorts and more aggressive longs in stocks.

What will I be buying? Amazon (AMZN), which has essentially an unlimited future. Thank the president for creating a rare 16% selloff and unique buying opportunity with his nonsensical talk about antitrust action.

What exactly does Amazon have a monopoly on? Brilliance?

I also will be taking a look at laggard legacy old tech companies such as Intel (INTC) and Cisco Systems (CSCO). And how can you not like Microsoft here (MSFT)?

Of course, the mystery of the week was the strength in bonds (TLT) taking yields for the 10-year Treasury down to 2.75%. This is in the face of a Treasury auction on Wednesday that went over like a lead balloon.

I think it’s all about quarter end positioning more than anything. Some hedge funds have big losses in stocks and volatility trading to cover, and what better way to do it than take profits on bond shorts through buying.

I already have started selling into the rally.

The scary thing about the bond action is that it has accelerated the flattening of the yield curve, with the two-year/10-year spread now only 50 basis points.

It also brings forward the inversion of the yield curve. And we all know what follows that with total certainty: a bear market in stocks and a recession.

The data flow for the coming week is all about jobs, jobs, jobs.

On Monday, April 2 at 9:45 AM we got the March PMI Manufacturing Index.

On Tuesday morning, we receive March Motor Vehicle Sales, which have recently been weak at 17.1 million units.

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Harry Goldstein 2 years ago Member's comment

Thanks John Thomas, good article. But your last 3 charts are too small for my old eyes to see.

Moon Kil Woong 2 years ago Contributor's comment

Amazon does have a bright future, however, the stock has been well ahead of current performance for quite some time. I think the pullback just brings its valuation to more reasonable levels. Look at other tech that got pulled down in the draft for now. With tech slammed, the market doesn't look too great because there is not many other places for growth that are big enough. There will be some growth in oil, some in medical bio-med although valuations are high here too, and some in robotics. However, these sectors aren't big enough to hold up a weakened tech market.

Basically the market would like to rotate but there isn't much to rotate into.

Peter Craig 2 years ago Member's comment

Flat is accurate since fluctuating between barely up and down.

Moon Kil Woong 2 years ago Contributor's comment

Flat recently, but it is has dropped significantly from January last year.