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The US Stock Market: Highway to the Danger Zone

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Is the S&P setting up for a quarter-end bender?

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Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

Revvin' up your engine, listen to her howlin' roar.
--Kenny Loggins

There was a scene in Top Gun when Cougar handed in his wings, giving Maverick and Goose their shot at glory. They performed admirably in the face of adversity but in a grisly twist of fate, Goose was killed.

It remains to be seen if the quarter-end goose will be cooked as well.

Following a spirited rally off of Monday's low print-more than 40 S&P (INDEXSP:.INX) handles in 2.5 sessions-the aforementioned "danger zone" is upon us. Following yesterday's anemic GDP-one so bad that investors posited that the Federal Reserve would continue to support US markets-the technical landscape is demanding the bulls put up or shut up.

The chart, in and of itself, speaks volumes; the uptrend that has been in place since November was shattered last week (a week ago today, actually). Add horizontal resistance at S&P 1600 and the downtrend from recent (all-time) highs at S&P 1687 on May 22 and you've got yourself a triple shot of resistance.

The fact that yesterday had the lowest put-call ratio since May 20-yes, two days before the top discussed above-and we've got ourselves a situation.



In the midst of the madness yesterday, we took a pop quiz that asked: Will This Stock Market Rally Last?

We offered that the rally was likely a combination of four factors:

1. China didn't blow up and Shibor is off its most elevated levels.

2. Less-than-stellar stateside economic news has investors dreaming of a tapered-taper.

3. Quarter-end is on tap and fund managers are fighting tooth and nail to defend their portfolios.

4. Traders are conditioned like Pavlov's dogs to buy dips, with or without a trend line.

I offered that we were likely seeing a combination of the above and reminded readers that on May 8, I wrote that the "directional certitude" in the stock market was as high as I had ever seen it (the S&P was trading at 1625 at the time).

The tape continued to rally for 10 sessions-and 60 S&P handles-before dropping 127 handles the following 23 sessions, which brought us down to the S&P 1560 low this past Monday.

I was reminded of September 8, 2011. Anyone who dared whisper a negative word about gold was taken out back and shot. No joke; I consider myself a pretty moderate guy and I got HATE mail; vicious, nasty, searing words for sharing a bubble comparison chart, with gold among the asset classes.

Gold, after that article, dropped 20% this quick, rallied 17%, dropped 15%, rallied 18%, dropped 14% -- went sideways for almost four months -- rallied 14%, and then began the journey lower with a drop of 30%.



My point -- and yes, there is one -- is that markets, be they gold markets, stock markets, or bond markets, tend to pave a path of maximum frustration. That's always been true but these days it's particularly true.

That's why we have to adhere to discipline over conviction as we together find our way; the destination we arrive at will pale in comparison to the path we take to get there.

Random Thoughts:
  • Goldman Sachs Group Inc (NYSE:GS), Morgan Stanley (NYSE:MS), and Apple Inc. (NASDAQ:AAPL) all acted funky yesterday. If Apple gets to $360, I'm a buyer for a trade.
  • It will be very thin next week given the Independence Day holiday, and the less liquid it is, the more volatility we'll see. Make sure you right-size your positions; the last thing you need on a holiday is a headache.
  • Gold took it in the teeth once more; one has to wonder where the other shoes are in an interconnected marketplace with mad counterparty risk.
  • In this environment, you stay humble or the market will do it for you. I learned that lesson the hard way and it's tattooed on my forehead after 23 years of hitting and taking, taking and hitting. One step at a time as we together find our way.
R.P.

Twitter: @todd_harrison

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Position in SPY.
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