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Selloff & Market Rally

Daily Insights: Expert Opinion – Doo Prime News

US stock markets closed higher on Friday – making it a higher close for the week as well. 

There was much volatility during the week and, at times, it looked like we were headed for another leg lower. 

We saw the Federal Reserve indicating that they will be tapering soon, worries from the fallout of China Evergrande Group, along with the latest crackdown on cryptocurrencies from China. 

As shared in Bloomberg, Bank of America Corp and EPFR Global data reported that $25.8 Billion worth of funds left the US stock market in the week through September 23. This was the 3rd biggest outflow ever. Most of the money is noted to come out of tech funds – its biggest draw since June 2019. 

The report also added that investors pulled money out of equities, as well as cash, and switched to Bond funds ($1.3 billion) and precious metals ($1.4 billion). This indicates a flight to safety. 

Here are the closing levels on Friday: – 

 Last               Change        %Change 
Dow Jones   34,798.00+33.18+0.10%
S&P 500  4455.48 +6.5    +0.15%
Nasdaq Comp 15047.70 -4.55 -0.03%
US 10Y 1.453%  
VIX  17.75 -0.88+4.72%

We have to ask ourselves: why did the market rally in the last 3 days of the week, after the selloff on Monday and Tuesday? 

The talking points – of The Fed, China Evergrande and Crypto – were supposedly negative for the markets. 

While I do not claim to be an expert in technical analysis, we may have to consider that the rally was purely technical.  

The S&P started the week below its 50-day moving average, a technical level that was pointed out by various news services. On Monday, it even traded below the 100-day moving average (MA) intraday, but closed above that level.  

Failure to sustain below the 100-day MA may have invited dip buyers, which forced the shorts to cover. Once the momentum was up, the bulls took control and pushed the market to recover the 50-day MA, and closed above it for the week. 

The question, now, is this: does the market continue its upward trend, or is this a dead cat bounce? 

It would not take much selling for us to trade below the 50-day MA again, maybe even the 100-day MA. But, for now, it looks like the odds are in favor of the bulls. 

Last week, I mentioned taking a wait-and-see approach. If you did that, you might have avoided getting caught in the selling, and would have been slightly up for the week. 

Perhaps it is still a good idea to wait and see if this is really a resumption of the uptrend, or a setup for more downside. 

Source: CBOE, Reuters, Bloomberg  

This commentary was written by James Gomes
James has been in the finance industry for over 30 years and most recently worked for a large US bank for more than 20 years.


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