After an 8% drop in the S&P 500 in the first two and a half weeks of the year, Wednesday started with an ugly sell-off. U.S. equity futures were a sea of red in the pre-market. Oil, as usual, was leading the downward press, and European stocks again followed.
At my usual 4:30 a.m. wakeup call, I was greeted with a few emails from London and Switzerland-based fund managers telling me the markets were about to fall into the abyss and laying out a variety of reasons for the malaise. By the time the U.S. markets opened, I had received at least five phone calls and numerous emails of a similar nature. Thus, from a sentiment perspective the day had all the potential of a good wash-out day.
Indeed, shortly after noon, stocks stopped falling and executed a strong bullish reversal. After being down nearly 4% intraday, the S&P 500 finished “only” 1.2% lower. The Russell 2000 saw an equally sharp loss in the morning, but by the day’s close actually managed to squeak out a 0.5% gain.
Small-cap stocks leading an oversold bounce is usually a promising sign. However, until we see follow-through confirmation buying in coming days we certainly do not have an all-clear buy signal.
Looked at through the lens of investor psychology, sellers simply exhausted themselves early Wednesday as negativity peaked.
Despite its bullish reversal, the Russell 2000 remains 16% below its 200-day moving average, which is high by historical standards and, therefore, begs for a mean-reversion move higher.
From a momentum perspective, the MACD oscillator reached readings last seen in August.
Advancing stocks minus declining stocks on the New York Stock Exchange reached the lowest levels since 2004, which is a major oversold reading as well.
The S&P 500 pushed well below its August and September lows on Wednesday. And while the index closed the day below those lows, the strong bullish reversal is a promising and visually obvious first sign that the selling pressure we have seen thus far in 2016 may be coming to a halt for now.
To be sure, the price action from a multi-year perspective looks lousy at best. A retest of the 1,600 area, which would satisfy a retest of the 2013 breakout level, remains one of my base cases for 2016.
Conclusion
Risk averse investors should wait for a follow-through/confirmation buying day after Wednesday’s strong bullish reversal. But more aggressive traders could look to nibble on the long side using liquid index ETFs and Wednesday’s intraday lows as their stop-loss on a daily closing basis. The first upside target for the S&P 500 is 1,940 to 1,950.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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As of this writing, Serge did not hold a position in any of the aforementioned securities.
