All the major indexes sported an "outside reversal day" on Wednesday (see my blogpost at
http://equitymaven.blogspot.com/2013/05/key-reversal-day.html ) and reverberations from the Japanese stock market (the Nikkei) "limit down" session on Thursday drove volatility higher the last three days of the trading week. But in spite of the volatility and what I consider a serious problem developing in global financial markets everyone continues to "buy the dip". Here's a daily chart of the S&P 500 and I circled the last four days price action:
Here's the Russell 2000 small cap Index:
Here's a daily chart of the Tokyo Nikkei Average which took a 7.3% tumble on Thursday purportedly after China announced that for the first time in seven months their PMI (Purchasing Manager's Index) dropped to 49.6 from 50.4 in April, missing expectations:
The price behavior of all asset classes in the past few weeks has become skewed and the traditional inter market relationships that typically guide traders and investors have gone awry. The market has now focused on the Japanese Yen as the new dominating indicator of future stock market trends (and I believe there's an important warning in this fact):
Yen up = stocks down
Yen down = stocks up
I want to use the rest of the commentary to focus on the "whys" of this very dysfunctional market activity. But first let's recap two recent events that I believe are catalysts for the price action.
Ben Bernanke's testimony before Congress on Wednesday and the FOMC April minutes which were released later that same day were initially responsible for the abrupt mood swing in equities.
Stocks immediately reached all time new highs on Bernanke's prepared remarks before the Joint Economic Committee that morning but when the Q&A started equities started backtracking. In essence, Bernanke was non committal on when asset purchases (QE) might stop, stating such a change in Fed policy was data dependent.
About an hour before the FOMC minutes release the market started to roll over as though someone had privy to the contents of the minutes before the release? In any case, the minutes revealed several members of the committee pushing to curtail asset purchases starting next month (June) while others were concerned that "bubbles" were forming in equity and bond markets. Still others were apprehensive about disinflationary data that has recently come to the fore.
The market hates indecision (although it hates more the idea that asset purchases could be curtailed in June) and promptly sold off into the close and the price action signaled a "key reversal day". The price action on Thursday and Friday confirmed a short term reversal.
Earlier in the month, on Friday, May 10th, Bernanke, in a speech at a conference in Chicago, stated, "we are watching particularly closely for instances of 'reaching for yield' and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals."
The chart below is one example of what he was referring to. This is the Bank of America Merrill Lynch HY (high yield/junk) Index: