This piece is not going to be too fancy or involved but we think it is worth looking at the market action on Tuesday, 8/21.
Why? Cause much of the business press and major financial websites have called it a potential “Key Reversal Day”.
For example, FuturesMag.com had the following observations:
-Major indexes rallied early Tuesday with S&P 500 bettering April 2 resistance high (1422.38) with quick move to 1426.68 before reversing to downside mid-morning.
-Initial upside action was mimicked by Dow 30, NASDAQ Composite, Value Line index, and Russell 2000, but none of those majors bettered resistance highs.
-In fact, action in S&P 500 and Dow 30 looked much like “Key Reversal Day” with only exception being that S&P Open merely equaled previous day’s close. But S&P 500 did reach new high and closed below Monday’s low. Dow 30 met all of criteria for KRD including Open above Monday’s close.
-NYSE trading volume increased nearly 17% on market negativity.
But what exactly happened Tuesday to create a turnaround in the indices which saw the S&P drop 16 points from highs to lows?
-First there was AAPL, which hit new all-time highs at $674.88 before leading the market move down, first affecting the NQ-100 futures , which then bled over into the other indices. AAPL hit lows at $650.33 before finding some footing and a bounce.
Several theories at work regarding AAPL: 1) a relatively unknown shop called Oracle Investment Research downgraded the stock, calling for an intermediate-term lid at $650. 2) stories going around that a major holding was being liquidated in AAPL, whether it be for profit-taking or other reasons 3) some speculation on the outcome of the Apple/Samsung litigation 4) Kim Kardashian tweeted “Wow. Apple is the most valuable company of all-time.” (Seriously.)
-Second, there are any number of technical reasons cited, far too numerous to outline here but the simplest being the technical take-out of yearly highs was the goal of the algo’s and once done at the target, there was nothing left to push it higher. And what can’t go up will go down. There have been definitely three and arguably four failures at the 1400-1440 area on the SPX going back to 2008.
(One of my favorite indicators remains the good old-fashioned RSI, Relative Strength Index, which hit extreme overbought readings over the past few days).
-Third, comments were out by Atlanta Fed Pres. Lockhart in the morning which, when digested, gave the market some pause regarding QE prospects. Lockhart said, “There is a risk to monetary policy being employed too aggressively and without effect to address economic problems that can be resolved only by fiscal reforms that involve making tough choices about the allocation of public resources.Monetary policy can exert a powerful positive influence on an economy, but as [U.S. Federal Reserve] Chairman Bernanke has pointed out, monetary policy is not a panacea.”
-Fourth. There two analyst macro reports floating around the past couple of days, although when they were specifically released to clients is a bit unclear.
Goldman Sachs David Kostin, one of the most bearish of major house equity strategists, has been getting media play again for a recent note to clients. According to CNBC on Monday:
“You can sense almost an air of desperation from David Kostin, Goldman Sachs chief U.S. equity strategist, in his latest note to clients as he pleads with them to take money out of stocks before they fall off the fiscal cliff. In the note, Kostin vehemently defends his year-end S&P 500 target of 1250 despite the benchmark’s recent rise to above 1400. The strategist still sees a 12 percent drop ahead, believing that Congress will fail to address the fiscal cliff before the election, and maybe even before the end of the year.”
And Nomura Securities jumped into the act, with reports out Tuesday on an even more bearish call, again from CNBC:
The S&P 500 is likely to fall by 20-25% over the next three months according to Nomura strategist Bob Janjuah. In a research note published on Tuesday, the long-term bear who called the recent rally for U.S. stocks said he expects investors to be back in risk-off mode until the U.S. election is over. "I now think the correct thing to do -- as I also said in April and June -- is to prepare for a serious risk-off phase between August and November…over the August to November period I am looking for the S&P 500 to trade off down from around 1400…by 20 to 25 percent...to trade at or below the lows of 2011."
-Fifth, the simple explanation of a round of profit-taking which snowballed into a “mild decline”, with uncertainty over Europe heating up again and a “getting out when the getting is good” mentality.
Whatever the real reasons, the technicians were all over it. But for now, maybe we’ll just say we saw “The Kardashian Top”. (oops)
Be sure to follow David on His New Forbes Blog.