WASHINGTON, March 7, 2017 – Like Monday, March 6, Tuesday stock market trading action looks, on the surface at least, to be steadily though modestly off as the Trump Rally—or how much we have left of it—continues to blow off steam in the averages.
A peek beneath the market surface, however, shows a great deal of damage is being done to numerous sectors and individual stocks by determined bears and relentless short sellers who’ve been steadily playing their stealth sell game since at least mid-February.
A major victim of Tuesday’s Reverse Fat Tuesday action has been two-day Wonder IPO Snap, Inc. (symbol: SNAP). After skyrocketing last Wednesday when trading in this new issue commenced around 11:15 a.m., Thursday’s follow-on trade was even more dramatic (see our earlier article), to the point where it looked like this initially $17 per share IPO might actually double in price.
But SNAP was tackled Friday and again on Monday. Today the shares remain under attack. Incentivized by an extremely negative weekend article by Andrew Bary in widely-followed investor tabloid Barron’s (follow link, but subscription required for the full article), short sellers have erupted en masse this weekend, obliterating investors—many of them neophytes—who chased the stock on its early ride to the stratosphere.
Bary thinks the early run in the stock could be cut in half before the bloodbath tapers off. ZeroHedge’s “Tyler Durden” essentially agrees.
But the action in SNAP, such as it currently is, is not the dominant fear hovering over today’s markets. No, it’s the ongoing fear of that Federal Reserve rate hike that, contrary to last week, analysts and pundits are now certain will occur to the tune of over 80 likelihood. We’ll find out on the Ides of March just what the Fed is up to.
An actual 0.25 percent interest rate increase is already baked into stocks, we suspect. But what’s bothering analysts and investors now is an increasing fear that the Fed might actually hike rates in 2017, more than the 2-3 times they led investors to expect in most of their 2016 comments in the issue. For that reason, the Fed’s next comments/minutes will be carefully read for hints or declarations that might favor that more aggressive possibility.
As for the market averages themselves, we’ve felt, at least since February, that the Trump Rally/Party was starting to get a little ahead of itself, earnings-wise, and would almost certainly come back to earth with at least a modest thump.
We follow the unadjusted McClellan Oscillator (a measure of the stock market’s current direction) almost religiously in one of our subscriber services, Stockcharts.com, and once the direction line of this measure gets too far above or below the zero line, stocks almost inevitably correct up or down.
As you can see in the chart for Monday’s trading action, markets hit a peak on the plus side around mid-February and have actually been correcting ever since, before breaking decisively to the downside yesterday, closing at -127.49.
The good news is that with much more violence to the downside, this action should likely reverse back to the upside. That directional switch could occur as early as today. But more likely, we need a little more room to bottom out before this occurs and we hit what is known as an “extremely oversold” market.
Helping out on the upside will be the large number of firms and investors who are still very bullish on the market as well as on the Trump Administration’s pro-business stance and directives.
But as to the always possible downside, we have this weekend’s nasty political point-counterpoint, which has suddenly made the possibility of some kind of contemporary Watergate issue—Obamagate?—surfacing to roil the headlines and possibly some key Washington heads. That’s also the stuff that makes markets nervous, as traders and investors hate uncertainty even more than they do really bad stuff that’s actually out in the open.
Anyhow, the current McClellan Oscillator tells us we’re actually well into a correction of recent market excesses. What this generally means is that we take profits in issues that are still on the plus side but getting weak while holding back on buying into new investments until we see how low they will go before the bounceback begins.