August arrives with a little heat under the Bulls’ collar

The last couple trading days were proof to me that there may be a slight bit of sanity returning to the markets.  Thursday was the best sell off we have seen since February, and hoping against all hope, the start of something good for the bears.  The sell off was blamed on the hawkish descent of Philadelphia Fed President Charles Plosser, who voted against the dovish Fed statement of Janet Yellen.  He objected to holding the interest rates at near zero, which we all would be happy to see interest rates up.

You may think that with the GDP number coming out on Wednesday (the same day as the Fed statement) at 4.0% growth for Q2 would be a good thing for the markets.  Isn’t that what everyone wanted?  Real growth in the economy?  Well, you got it.  And what did it produce?  An actual sell off (thank you God!).

It always surprises me the type of things that set a market off that had been evident for a LONG TIME!  I mean, they can’t blame the sell off on the issues in Israel/Gaza.  That has been in the news for weeks.   They can’t blame it on the Ukraine or Russia and the downed airliner (MH17).  That has been in the news for weeks.  They can’t blame it on a growing financial crisis in Europe.  That has been going on for weeks.  Nope, none of those things mattered, until Thursday when people in the markets finally woke up and said…”hey…the market may be a bit risky”.

Thursday’s big sell off, which any other time this year would have been met with equal of more buying of the dips, did not do so on Friday.  There is a definite change to the tone being emitted by the markets.  Volatility is finally moving in the good direction for traders (that would be up for you perma-bulls).  Thursday we saw a 20% rise in volatility and a continued rise on Friday.  This gives me a glimmer of hope that we may see some normalcy return to the markets.

We are still only a couple percent off of all time highs in the index.  A reasonable pull back in the markets over the next couple weeks would be 10%.  That is about 190 S&P500 points, nearly 400 Nasdaq points, and 1700 Dow points.  With the way the market has been treating the bears lately, you would think those numbers are incomprehensible.  But that could be the start of something good.  My wish would be a 20% correction.  It would be extremely healthy for the market, remove the huge amount of air the Fed has pumped into the equity markets, and give the market more solid footing to advance from that point.

Currently NO ONE IS SHORT THE MARKETS!  We could see this downdraft really accelerate when the bulls, who have been in total control, think about taking some profits.  What fund manager in their right minds would take their remaining cash position and buy at near all time highs when they haven’t booked any profits?

I like this tone change, and there are no bears in the market that want to save the bulls after the beating they have received for the last 5+ years.

Last week’s economic news should also provide a bit of reality to the bulls.  While things looked good on Wednesday with the GDP numbers and the Fed speak, Thursday and Friday told a different picture.  Employment costs rose more than expected.  Chicago PMI was much lower than expected.  Non Farm payrolls were 13% off of their estimate.  Unemployment rose 0.2% to 6.2%.  Consumer spending did not rise as much as was forecast.  Markit PMI was lower than the previous month.  Construction spending was negative.  And motor vehicle sales came in 200K less than the forecast.

I’m hoping this is the tipping point.

Coming up this week, we have a light economic calendar.  Nothing is scheduled on Monday, and earnings season is starting to wind down.

Tuesday we have the ISM non manufacturing numbers and Factory orders.

Wednesday we have the trade deficit.  Not likely to be market moving.

Thursday we have our weekly jobless claims and the consumer credit numbers.  Consumers have been levering up their credit lately, let that keep going and it should scare the bulls more with too much leverage hanging out in the credit markets.

Friday we have the productivity numbers to round us off.

I cracked a smile for the first time in months from Thursday’s sell off.  I’m a much more fun person when I’m happy.  Please market, make me happy!!!

Happy Trading!

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