On Wednesday with the world crashing down upon our heads I wrote:
For those of you who question God, the Plunge Protection Team or both I offer once again the full day chart:
40 S&P handles in 3 hours Wednesday afternoon. At the highs yesterday near 1890 the S&P500’s market cap had increased a cool $700 billion in 24-hours, give or take (100 S&P500 points is roughly equal to $890b). The consensus explanation (mocked in real time here) was ECB Capo Mario Draghi muttering something about Europe being open to the idea of additional stimulus.
In case I haven’t been clear on this point it’s ok to go ahead and assume every Central Bank on earth is going to do everything they can to keep their personal empires from crumbling. You can call it a conspiracy. I tend to think the explanation is far more simple. No one wants to go down in history as Nero or even Herbert Hoover*. Spending more of other people’s money to avoid such a fate is a small price to pay.
The idea of some Ayn Rand world where the government allows crashes to unfold “naturally” is crap. It’s the expression of a dream where everyone is John Galt and we all make our own roads, deliver our own mail and fight to the death for the natural spoils of earth.
Governments always intervene. If you expect them to stop because it doesn’t work you’re either insane or selling a newsletter.
Stocks already knew Draghi was ready to spend money he doesn’t have. Keep it simple. The market rallied because Bear markets are hard and the bears over-reached. Don’t dwell. Set targets.
Special Guest: Leonardo Fibonacci!
Fibonacci was the greatest mathematician of the Dark Ages. Dead for nearly 800 years, his theory of natural patterns is still used on a daily basis in trading pits. That wasn’t Fibonacci’s original intent but he’s been dead far too long to get a vote.
Per Leo as understood by traders, bear market rallies tend to retrace specific percentages of recent losses. Most notable among these levels for our purposes are .62 and .38. In this case I used the peak of 2080 on December 29th and the lows of 1812 for a total drop of 268pts. 38% retracement works out to about 1915-1920 (also the “official correction” level). 62% works to 1980.
You can read about the details elsewhere.
For our purposes know this:
- Not even Leo sets this stuff in stone. He was just a mathematician with odd taste in hats, not Moses. 1920 makes sense as a target but any idea that’s 800 years old is to be considered at least as much art as science.
- Unless or until the above levels are recovered this rally is to be considered more a bounce than bottom.
- We are still reliant on crude and China but going into the meat of US earnings season will be a useful distraction. Things just aren’t that bad in the US. If you want to add “yet” to that observation go ahead but it’s not a great trade.
- 1850 is a great stop but it won’t save you on a gap lower. Just know a close below that level is still toxic to bulls.
- Finally, and this is absolutely the last time I’ll reference myself this morning, I promise, screaming rallies are perfectly normal in literally every bear market in history. One last time consider the list of biggest intraday moves in history and note the Fall 2008 rallies. Citi was up 24% the day the SEC banned short-selling banks. To this day C is still down 90% from pre-crash peaks.
- Nothing is over until Leo decides it is..
* Both Nero and Hoover got a bum rap. We can discuss another time.If you enjoy the content at iBankCoin, please follow us on Twitter