Seventh Inning Stretch

Because Markets are future discounting mechanisms, news is mostly anti-climatic on Wall Street. Traders learn early on that the more successful bet is to buy on the rumor, and sell the news. By the time a “headline” makes the papers, its impact has already been mostly – if not fully – discounted.

In other words, news is already in the price.

Interest rate increases are the one exception to this dynamic. The mere rumor of a tightening by the Fed gives equities fits. We’ve been seeing that since earlier this year when it became apparent that 48 year lows in rates was a phenomena of finite duration. What may be somewhat surprising to some investors is that once rates actually rise, the markets tend to do pretty well over the next few quarters. Several studies, including a recent analysis by Ned Davis Research, confirm this. Unlike specific company news, when it comes to interest rates, its really more of a case of “selling the rumor, and buying the news.”

That said, we are still only somewhat through the sell off. We are near – but not quite – at the levels where we would consider being aggressive buyers. On the positive side of the ledger is the equity put/call ratio, which moved up to 95.29 last week – a fairly oversold reading. The NYSE Oversold reading (an exponential derivative of the cumulative advance/decline line) is also very oversold, and is now at 15-month lows.

Counter arguments include the Arms index, which as the nearby chart makes clear, is not yet very oversold; The VIX, has rallied 20% off its lows; Market internals, which have been weakening coincidentally with the overall market, firmed up somewhat. Internals are not at levels which provide any insight as a leading indicator.

These indicators present a developing picture. They suggest that the sell off is still in its 7th inning. We prefer to see more oversold levels, or in the alternative, a confirming event. That might include a resolution of the triangles forming on the major indices, or a rally on high volume.

Meanwhile, several potentially market moving data points are ahead this week: The Fed makes its next interest rate announcement Tuesday afternoon; Friday, the employment situation report for April comes out. All the while earnings season continues apace.

As the market digests these data new releases, watch the recent lows from March: 1901 on the Nasdaq, 10,007 on the Dow, and 1087 for the SPX. A violation of these levels would be a signal to exit long positions.

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