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A bounce or major market rally? Parsing Tuesday’s weird bull move

Written By | Jan 28, 2020

WASHINGTON – As longtime readers know, I sometimes have to resort to well-worn clichés* to describe Mr Market’s weird gyrations. Taking a look at yesterday’s (Monday’s ) vs today’s (Tuesday’s) just completed trading action, once again I recall the lyrics of a song that was old back in the days of my Greatest Generation parental units. “What a difference a day makes…” Following Monday’s market swan dive, was Tuesday’s massive but weird bull move the next leg of a major market rally? Or just a dead cat bounce?

Dead cat bounce or major market rally?

After Monday’s horrific, coronavirus-driven crash, Mr Market woke up happy this morning and repaired a great deal of the damage, as CNBC duly notes in describing today’s weird bull move

“Stocks rose on Tuesday following the market’s biggest sell-off in more than three months as investors grapple with lingering fears over a possible coronavirus outbreak.

“The Dow Jones Industrial Average jumped 187.05 points, or 0.7%, to 28,722.85, snapping a five-day losing streak. The S&P 500 climbed 1% to 3,276.24 while the Nasdaq Composite advanced 1.4% to 9,269.68. At its high of the day, the Dow was up more than 280 points….




“The Dow and S&P 500 had their biggest drop since October on Monday. The Dow plunged more than 450 points while the S&P 500 logged in its first pullback of at least 1% in 74 sessions. The Nasdaq also had its biggest one-day decline since August amid fears the spreading coronavirus could hurt the global economy.”

But again, was this a major market rally, or merely a dead cat bounce?

Anyone notice that selling wave just minutes before Tuesday’s closing bell?

Interestingly enough, while this post 4 p.m. ET CNBC report celebrated the Dow’s 187.05 point rise Tuesday, the report neglects to highlight one interesting fact. As usual, I was on my computer working my portfolio in the last moments of trading. And during roughly the last five minutes of frantic trading action, the Dow got hit – hard – with a strong wave of selling.

Order imbalances for all my large cap holdings, every single one of them, were imbalanced on the SELL side. And the Dow, which just minute prior to this, dove from + 225 points to close at that aforementioned 187.05 points. Which, to me, means that this was a quick, snapback rally from Monday’s extreme oversold situation.

Let’s go to the charts

We can easily spot that oversold condition by looking at Monday’s post-closing McClellan Oscillator chart, my favorite indicator of extreme overbought-oversold conditions. It tends to predict either snapback rallies or drops, depending on whether the chart is significantly above or significantly below the zero line.  So let’s take a quick look at that Monday chart.

dead cat bounce, major market rally

McClellan Oscillator, Jan. 27, 2020, COB. Stocks in massive retreat.

At the same time, on Friday and again on Monday, we can see the VIX – a stock market volatility measure, spike sharply up to the first of my personal danger zones, which happens at around +16 or so. While the VIX is supposed to measure volatility, or the “frantic-ness” of trading action up or down, it seems far better at measuring the power and extent of selling panics. So I watch it most carefully on the sell side. And it sure looked nasty after Monday’s close, as you can see in the next chart.

dead cat bounce, major market rally

VIX volatility index gets very wild as of COB Jan. 27, 2020. Chart courtesy Stockcharts.com

Charts can tell us a story

Pairing these two charts, we can easily see the extent of that Monday bloodbath. When something like this happens, the market has reached an “extreme oversold” condition. In my experience, when the McClellan Oscillator shows us a negative situation this clearly, we’re within 1-3 days of at least a snapback rally. Which could either turn into a lasting bull move. Or, in more pessimistic terms, we might discover the snapback rally is merely a “dead cat bounce.”

Which brings us back to that sudden wave of selling that hit the market so close to the closing bell. Somebody – or some high-speed computer – cranked into big-time dump-a-thon mode. Which could be telling us that we just had a wondrous dead cat bounce, not a major market rally. Which might mean that more selling could hit us again tomorrow.

Shrewder analysts than I might have a more definitive answer, but this is the best I can do at the moment.

Reality may intrude on Tuesday’s apparently major market rally

The Tylers at ZeroHedge would seem to agree with my wariness here, citing the worsening coronavirus situation in China and some poor numbers on this side of the Pacific.



“The death toll in China has soared past 100 while the number of confirmed cases doubled overnight. Health officials around the world have confirmed more than 4,500 cases, more than triple the number from Friday.

“And domestically, while ‘soft’ data improved – headline consumer confidence ticked up and Richmond Fed saw its 2nd biggest rebound in its 27 year history – ‘hard’ data collapsed as Durable Goods orders were a disaster…”

There was some chatter that headlines about a vaccine being produced in Hong Kong were the catalyst – who knows, anything is possible in this machine-driven malarkey – but one thing is for sure, waiting at least four months for any vaccine will not stop a collapse in global supply chains if this virus continues to spread like it is.”

Gloom and Doom “dead” ahead?

And at least one analyst quoted in our CNBC excerpt would seem to agree, albeit in a more general way.

“The wall of worry is back under construction with concerns over the coronavirus and the pace of global growth and valuation,” said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management. “Stocks are rallying following yesterday’s sell-off, however, the unknowns remain unknown.”

Dead cat bounce or major market rally? The lady or the tiger? Wednesday’s mystery market move is anyone’s best guess.

I made a couple of tiny moves today in our portfolios, picking up a token number of shares in IBM (trading symbol, also IBM) and taking a small initial gamble on British Petroleum, aka, BP, which is also its trading symbol.

Oil has been clobbered for the better part of January, more lately due to the coronavirus scare, which is causing direct damage to travel and mobility oriented shares. But the 6+% yield of BP and the 4.7% yield of 2020 Dow Dog IBM, are intriguing enough to experiment with, even in a treacherous market like this one.

So let’s just see what kind of excitement we get on Wednesday.

*****

*Free grammar lesson

* A self-indulgent side note here on the weirdness of contemporary language. “Cliché,” of course, is an expression, derived from the French (the accent mark is your first clue). Its noun form describes a hackneyed or overused word, expression or idea. As in, “That’s such a cliché.” Or, used as an adjective, “Why use a clichéd expression like that.” Except that for some reason, today’s legion of undereducated millennials have created this bizarre usage: “Oh, that expression is so cliché!” The correct expression is “clichéd,” as in my second example. The decline of the West continues apace. Another cliché that seems apropos here. Just sayin’.

*****

– Headline image: This cat has apparently bounced for the last time. It is deceased. It IS NO MORE. (Via Wikimedia Commons)
Hat tip to Monty Python.

 

Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17