Droptober’s Wicked Bounce

Here we go again, just 2 weeks after the biggest correction of the year and what looked to be the worst October in a long time, with markets tanking almost 10% in a week, everyone is now suddenly bullish again, and charts and seasonality indicators like ‘Year 6 of presidential term Nov-Dec averages +7%’ are being tweeted furiously on StockTwits and Twitter. What changed in those 2 weeks? Ebola fears in the US, which were causing a lot of volatility, died down, as well as other worries such as ISIS beheadings and their invasion of key Iraq outposts. All of a sudden the bad news in the mainstream media went quiet. And no news apparently is good news for the markets. We appeared to be climbing the V-shaped ‘Wall of Worry’ out of the hole, and BTFD (Buy The F-ng Dip) was once again in vogue. Another event which also appeared to be causing an overhang in an otherwise bullish market was the much anticipated end of QE, which the Federal Reserve officially announced on Wednesday. R.I.P., Easy Money. On that day markets had a tepid reaction, dropping nearly 100 points before recovering most of that by day’s end, 2 hours after the FOMC announcement. The next day markets ripped higher, with the headline Dow Jones up triple digits due largely to strong results from Visa. By the end of the day the Dow was up over 200 points but sentiment was still cautious, and you could see many traders positioning some hedges and outright ‘Short The F-ing Rip’ positions to hold overnight before the last day of trade for the weekend.

Then came the absolutely unexpected move by the Bank Of Japan: expanding its QE program, which caused the Yen to plummet and the Nikkei 225 to rip almost 5%, a gain of over 700 points. Uh oh, bears. After the wild rip in the Japan overnight session, Wall Street opened strongly and never looked back.  The S&P 500 surged over 1%, and bears were gored by the stampede. It was comical to see a flurry of tweets from perennial permabears every time the SPY paused for a $0.10-0.20 pullback, predicting this to be a breakdown in a way overbought market (for an excellent brief primer on how to spot a permabear, click here). Well, the breakdown never came, and the major indices closed near the all-time highs once again. In the week ahead there are some key events to look forward to, including the US midterm elections on Tuesday, November 4, the ECB interest rate decision on Thursday, November 6, and the Jobs Report on Friday, November 7. If recent history is a guide, all of these have a bullish bias to them, and there could be further upside to the markets. Trade well and stay disciplined.

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