Markets Way Oversold & Now Cramer Screams BUY, BUY, BUY! Try the Tuscan Soup

And the hurricane continued….as it swept across the south it also continued to slam the northeast – sending the mkts into a tailspin…..more carry over from Wednesday’s assault – as traders and algorithms sold the mkt off while sane, thoughtful long term investors refused to be shaken  by the hysteria of it all, in fact the stupidity of it all….Yes the mkts need to ‘adjust’ to the rising rate environment – and they will, but even with yesterday’s bond action – yields came in, bonds rose – stocks should have gotten a break, there should have been some relief – yet there wasn’t…and when the S&P index tested it long term support at 2765, bounced and tested again only to FAIL – the sell side programs lit up, the buy side pulled back and boom….. a void in prices allowed the mkts to go into another free fall…. The S&P sliced right thru 2765 and got as low as 2710 – just 10 pts off the 2700 level that I identified in yesterday’s blog post – here is the paragraph –

“Futures are pointing to a 22 pt loss right now and that puts us right there at 2765…. the question we must ask ourselves is – Will it hold, or will it fail?  If it holds that is a positive….and should help to stabilize the other indexes…. if she FAILS then look for the algo’s to force her to the June lows of 2700 and if that doesn’t hold then the algo’s will go into overdrive and plunge to the lows of March 2018 at 2600”

As they tried to rally the mkt into the bell – it was halfhearted….and while the indexes did manage to close off their lows – it still felt a bit heavy…. Look – let’s get this straight – trading is different today - ETF’s and levered ETF’s have forever changed the investing landscape….

Passive funds -ETF’s and Leveraged ETF’s have no real interest in a specific name per se – you ...but unlike an active manager that does his homework, that does his analysis, that understands the fundamentals etc…. ETF products are not designed that way at all.  You see – if you want a retail ETF then you are gonna buy the XRT – and in that ETF – you will find a range of names that ‘fit’ the ETF profile……because they are retail…but that does not mean that all retail is good or that all retail should be included in a fund – but if you are an ETF and that is your mandate – then you take what you get.  The ETF creator only knows that these X names need to be in the ETF – Period.  Good, bad or ugly……and so they go out and create this ETF by buying the names – via an automated execution…. with little regard for price. 

So here is where it goes off the rails for me…. when they want out – or when the ETF is sold – they need to unwind it and so what do they do?  They sell all the names in the ETF – via an automated execution with little regard to price………all they know is that they need to ‘get out’.
He hits his sell button and executes the trade – the sell orders get sprayed across the mkts and boom… – with no regard to price – he just needs to unwind it –

Are you seeing the picture?  Do you understand what is happening?  When the mkts are relatively calm – it isn’t so much an issue…but when the mkts are under pressure over real macro issues and then these bozo’s execute these mindless transactions we get increased volatility, which creates angst, the buy side algos’ see it and pull back causing a void in prices and BOOM the bottom falls out….And don’t  think this doesn’t’ happen on the way up as well…it does – except it’s the buyside algos that spray the multiple mkt centers with buy orders with little regard to price – which is when you see the mkt soar by triple digits because the sell side pulls back causing a void in prices once again.
I will go onto say that the action this week – the failure in the mkts is not being driven by any of the fundamentals that we have been discussing for months now  - the weakness that began  last week was begun over concerns about rates, and trade and macro data points….and as the mkts came under pressure it sent technical signals to mkt participants……and so selling begets more selling and once you start to get real failure then the stupidity kicks in – the new class of ‘traders’ don’t know any better – it looks like a big Nintendo game to them – and when they hit the sell button – they see the screens light up….and it is a vicious circle…..

And who is that new class of trader?  “HE’ just happens to be a computer, an algorithm that has zero understanding of the impact that this mindless execution has on the broader mkt and on investor psyche and so when you ask – how can the mkt drop by triple digits in mins or how can the S&P drop by high double digits in mins – all you have to do is look at the current mkt structure – look at the how we have given control to ‘artificial intelligence’ that runs roughshod over the mktplace….and if you think I’m kidding just look at the devastation that it has caused this week. 

Dow down 6%, S&P down 7.1%, Nasdaq down 9%, Russell down 7% - all this week….and that is on top of the weakness last week. 

Ok – let’s move on…It’s the official kickoff of earnings season and JPM hits it out of the park – handily beating the estimates…. the stock rockets higher trader up $1.50 at $109.50…. Sales and trading disappoints BUT business loans notched a record and higher rates helped the bottom line…. Did we not discuss this last week?  Next up C and WFC – both those names are up as well.

US futures surging this morning – of course they are – did you see how OVERSOLD we got?   And never mind that Donny had Kayne and the gang at the oval office to help him push his agenda while he also revealed that he is scheduled to meet Xi Xi at the upcoming G20 meeting to figure out how to play nice in the sandbox……

Either way – no matter why the bounce – because all of those issues from yesterday did not go away – (Trade, Interest Rates, Central Bank Policies, slowing housing mkt, rising $ vs weakening global currencies, bond mkt sell off, rising oil prices, falling commodity prices)  the pendulum swung way too far to the left  (way to far)  and now it is coming back and it will swing way too far to the right before it settles down…..….and don’t discount the hysteria that Jimmy Cramer is causing on CNBC  this morning….He is screaming that ‘We are Oversold’……Oh boy….Oh boy…Oh boy…..BUY, BUY BUY  before you miss out!  - Never a down day on the street again!!!!     And so, it goes….

European mkts are all up about ½ to ¾ of 1%....as mkts bounce back after the thrashing they also took this week.

The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O’Neil Securities, Incorporated or its affiliates.