Investors looked into the void on Wednesday. And it was scary. It was painted black by a combination of Ebola fears, global economic concerns, a weak U.S. retail sales report, sales guidance downgrade from Walmart (WMT), and a nagging sense that maybe, just maybe, the central banks are losing control of the situation.
The Dow Jones Industrial Average was down 460 points at the low, pushing the index below the 16,000 level for the first time since February. Bond traders were also feeling panicky, as the 10-year Treasury yield dropped below 2% for the first time since early 2013. And the CBOE Volatility Index (VIX) — Wall Street’s “fear gauge,” tapped the 31 level for the first time since 2011.
But then, when all hope seemed loss, the bulls managed a miraculous recovery into the close, trimming the Dow’s loss to just a 173 points. Is this the start of a long-awaited relief rebound? Or merely a dead-cat bounce ahead of further losses?
It’s probably too soon to call it one way or another just yet. Much depends on whether weak economic performance in Asia and Europe, as well as the strength of the U.S. dollar, weighs on U.S. GDP and job gains in the months to come. Today’s weak retail sales report wasn’t a good sign, but it’s hardly definitive.
Moreover, the situation with Ebola remains a wildcard nobody can predict. Will the second Dallas-area nurse with the disease, the one that flew with a fever, spread the virus faster than officials can contain it? If so, it couldn’t come at a worse time as we head into the holiday shopping season.
There is also a possibility that the Federal Reserve throws the market a curve ball by holding back on ending its QE3 bond purchase program later this month. While more symbolic than anything, it could resuscitate the cheap money junkies and get stocks moving higher again.
But reading the Fed’s tea leaves is getting harder and harder as the market focuses on it more and more. While some chatter has been dovish, some has been hawkish.
From a technical perspective, the market is severely oversold. So much so that a bounce, at least a short-term one lasting a couple of days, is justified here.
It’s for this reason that I recommended my Edge Pro subscribers pull up stakes and close their remaining October options positions. Examples include a 287% gain in Intel (INTC) October $35 puts initiated on September 23, a 268% gain in HP (HPQ) $36 puts initiated on September 24, and a whopping 551% gain in Short-term VIX (VXX) $30 calls initiated on September 15.
I’ve been waiting a month for stocks to collapse to the downside. Now, it’s time to get neutral and see what comes next.
Another leg lower is likely, given the weakness that’s starting to hit financial stocks, which have been an area of refuge for the bulls in recent weeks are collapsing amid disappointment with Q3 earnings results. Just look at the way Bank of America (BAC) was slammed down below its 200-day moving average on Wednesday — pushing up the ProShares UltraShort Financials (SKF) recommended to Edge subscribers on October 7 to a gain of nearly 7%.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
