The market speaks

●The S&P’s Wednesday surge and Thursday snooze followed a familiar pattern

●Similar events in the past have been followed by weak price action

●Weekend G20 trade summit approaches


Federal Reserve Chairman Jerome Powell’s speech on Wednesday did something few things have been able to do in recent months: Energize bulls—at least for a day.

Pundits and analysts can debate the implications of Powell’s comments until they are blue in the face, and if the past 48 hours are any indication, many of them are starting to resemble Concord grapes. Some argue the speech was a clear signal of a more “dovish” Fed, one that may slow its rate-hike pace. Others claim the speech wasn’t really that dovish and the stock market’s reaction was overdone, citing the fact that (among other things) US Treasury yields barely budged.1

Then there’s what the market itself said about the speech. Wednesday’s price action amounted to an immediate thumbs up and apparent endorsement of the dove thesis, with the S&P 500 (SPX) notching its third-straight up day and gaining 2.3%—its biggest up day since March 26. Yesterday stocks walked back some of their gains in early trading—the market deciding it may have overreacted?  

S&P 500 (SPX), 10/29/18–11/29/18. S&P 500 (SPX) price chart. Up 2.3% on Powell speech.

Source: OptionsHouse

What every bull wants to know is whether the market can build on the move. In terms of the odds for near-term follow-through, here’s a fun fact about what the SPX has done after the 652 other 1.5%–3.5% up days it’s enjoyed since 1963:

●After five days, the index’s average gain/loss was 0.25%—better than its overall average five-day return of 0.16%.

That would seem to lend support to a bullish outlook. But one day is just one day. A big up day that follows a downswing, for example, may represent something different than a big up day that has already been preceded by an upswing. In this case, Wednesday’s 2%-plus gain was the SPX’s third consecutive up day (see chart above). Here’s what the SPX did after the 158 times it made three straight up days when the last day was also a 1.5%–3.5% gain:

●After five days, the index’s average gain/loss was -0.04%.

In fact, the SPX underperformed its historical averages in the first eight days after these three-day moves. The takeaway: In many cases, the market will take a breather or reverse course after this type of surge.

The chart also shows the SPX made a similar move earlier in November, peaking at the swing high on November 7. And while the chart reflects only the market action as of 3 p.m. ET, yesterday was on track to be a relatively narrow-range day, although the SPX rallied to a higher high after the release of the FOMC minutes.

S&P 500 (SPX), 8/21/18–11/29/18. S&P 500 (SPX) price chart. An emerging trading range?

Source: OptionsHouse

Stepping back a little more, the following chart above shows the SPX is a little above the halfway point of what some traders may be seeing as a possible broad trading range, with resistance around the October-November swing highs and support at the swing lows.

The outcome of this weekend’s US–China trade pow-wow may go a long way toward determining which level it tests first.

Market Mover Update: Yesterday crude oil futures dropped below $50/barrel for the first time since early October 2017 before rebounding. January WTI crude oil futures (CLF9) traded as low as $49.41, but reversed to go up more than 3% on the day and push back above $52.

Today’s numbers (all times ET): Chicago PMI (9:45 a.m.), European Union Unemployment Rate.

Today’s earnings include: Big Lots (BIG).


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1 MarketWatch. Why economists insist Powell wasn’t as dovish as market thinks. 11/29/18.