In a textbook case study of volatility working both ways, something we talk about a lot around here, the markets experienced their biggest up day of the year Wednesday. That’s all well and good except for the fact that it wasn’t joined by oil, and it still leaves the S&P500 south of its most recent high at 1,334. In order to negate the pattern of lower highs in place since the 1,422 year-to-date high, SPX must move above 1,334 in the coming days. On the support side, bulls need to see stabilization above 1,300, something that has eluded SPX the last couple of weeks, before we’ll likely see them start to dip their toes back into the marketplace.
We may seem like stickler’s doubting this rally after the best day of the year but there are reasons for that. Mainly, we’re not seeing the type of activity we are used to seeing mark broader market bottoms. For instance, if the bottom is indeed in, it would mean that oil did not bottom out before the S&P500 as oil actually put in a lower low Tuesday after the markets lower low on Monday. This is certainly a possibility, but until we see it prove itself, we are skeptical because of the most recent history we have to go by:
- In July 2008, just before the financial crisis, USO had its biggest weekly % decline in its history — SPX then declined significantly starting in September of that same year
- In February 2009, just before the broader stock market bottomed, USO bottomed out from its July decline — 2 weeks later in March, SPX bottomed out from the decline it started in September
- The market rally, both in oil and stocks, uninterrupted thru 2009, came to a halt the first week of 2010, that’s when USO made a meaningful pullback — SPX started to decline the following week
- USO bottomed out from its early 2010 decline in May of that same year — SPX spent the summer months of June-August forming a bottom before continuing to rally
- USO hit its 2011 high in the first week of April, and then touched it again the first week of May before declining steadily until it bottomed in September later that year — SPX hit a 3 year high the first week of May and didn’t bottom out until the first week of October that year
This rally in prices seems more like a product of the previous steep decline than it does about a bottom being in place. Said another way, prices fell so steadily the last month or so without any meaningful bounce that a day like this was bound to happen sooner or later.
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