Thursday’s “Air Pocket”
Some traders dismiss Thursday’s big move down because the volume was low. Normally, that would be a good argument because the low volume would indicate that large funds were not dumping shares. But this time, I think the low-volume must be viewed as a negative.
The big funds didn’t have to dump stock on Thursday after the nasty unemployment-claims report because they had not bought into the rally off of the July 15th low. That rally was all short-covering. So on Thursday, bids were simply pulled and stocks went into free-fall - the air-pocket.
Air-pockets often appear as rallies lose steam, and are a warning sign that the big dogs are not interested in taking stock at the current level; that there is no bid under the market.
Some traders also dismiss last week’s action as mere sideways movement as the S&P 500 was barely changed. That is simply crazy.
After a three-day struggle, the March low was recaptured on Tuesday. On Wednesday morning, SPY registered an “exhaustion gap”. On Thursday, the market hit the air pocket and plunged right back through the March low. On Friday, the market could not re-capture the March low, even with an assist from falling oil.
That was not uneventful, inconsequential trading. Hopes were raised high, bulls were sucked into the trap, and then slaughtered.
SPY has now closed below the March intra-day low at $126 for two days in a row. One more day of that and the market will likely roll over again just as it did on July 14th, the last attempt to recapture the March low.
War is being waged over the March low because that is the line-in-the-sand between a banking crisis, and a banking crisis plus a main-street recession.
The rally that was birthed on March 17th was received as proof that the Fed had saved the financial system, and the all-clear had been sounded.
The loss of the March low in July, and the quick recapture, seemed to prove that it was the same old financial crises that our government had once again fixed. Many traders still don’t believe the economy is in trouble because of all the cooked economic data like the GDP numbers (which are not properly deflated.)
Thursday’s unemployment-claims number had nothing to do with the financial crisis. It came straight from Main Street. And it sent the market back under the psychologically crucial March low.
So, far from being inconsequential, last week’s trading may have seen the market’s final acceptance that there really is a serious recession going on underneath the tidal wave of election-year propaganda trying to mask the facts.
The market’s frantic reaction to Thursday morning’s unemployment claims number shows that the market may only be beginning to price in the Main Street recession.
I am 98% in cash now, and 2% short the SPX, but I will be looking to increase my short positions soon.
