Stock vacillate wildly on Wednesday, but finish higher

Wednesday, October 7, 2015 -

U.S. stocks ended higher after a volatile session on Wednesday, led by a rebound in biotech companies that pushed the S&P 500 to its highest level in three weeks, as we approach the earning season.

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Stocks fluctuated strongly up and down on Wednesday but largely managed to maintain a positive bias in a late day push to reclaim most of the day’s gains. With the upward move, the Dow ended the session at its best closing level in well over a month – not so for other indexes, leading us to speculate that the big boys are likely feathering their shares ahead of earnings season, which starts tomorrow.

The indexes finished the day firmly in the black, as the Dow climbed 122 points (+0.7%) to 16,912, the Nasdaq advanced 43 points (+0.9%) to 4,791 and the S&P 500 rose 16 points (+0.8%) to 1,996. The NYSE finished at +1.01% and the small cap Russell 2000 at +1.67%.

Overseas, most stock markets saw further upside as well on Wednesday. Japan’s Nikkei 225 Index advanced by 0.8 percent, while Hong Kong’s Hang Seng Index surged up by 3.1 percent. The European markets also close higher but well off their best levels of the day. While the German DAX Index climbed by 0.7 percent, the U.K.’s FTSE 100 Index and the French CAC 40 Index inched up by 0.2 percent and 0.1 percent, respectively.

The higher close on Wall Street was likely a reaction to strength in the overseas markets, though trading activity was still somewhat subdued, as traders appear a bit reluctant to make significant moves amid a lack of major U.S. economic data and ahead of a potentially shaky earnings season.


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Beat Up Shares Rebound
as Earnings Begin . . .

Biotech stocks which have been battered down sharply recently rebounded today, as we approach the beginning of earnings announcements, which helped to lift the stock market today in a short cycle advance.

Earnings season will grab an increased share of investors’ attention this week, with Alcoa Inc. unofficially kicking off the reporting season after markets’ close tomorrow. Companies reporting next week include Johnson & Johnson, Intel Corp. and JPMorgan Chase & Co.

Analysts’ projected earnings for S&P 500 members dropped 6.9 percent for the third quarter. There is always plenty of optimism going into the earnings season and likely ramped up by the financial powers to generate enthusiasm – but . . .

I think we are about to see another “buy the rumor, sell the facts” scenario, especially if earnings turn out to disappoint as they are likely to do.

Frankly, the S&P 500 index has no business trading at present levels, about 3% from its all-time high with report after economic report looking terrible and continuing to deteriorate. The energy sector alone within the S&P 500 makes the S&P 500 grossly overvalued.

Yet the market is being elevated by the primary dealers right now, hopeful to unload shares to some unsuspecting hand.

Quiet, but Dramatic Intervention

A good friend of mine tipped me to a very interesting report by Investment Research Dynamics titled “Liquidity crisis hit banking system in September” – a great article, making a key observation that around mid-September a massive short term injection was made with Treasury collateral in the Repo system.


The two-week spike in the second half of September is by far the largest reverse repo operation on record – we’ve never seen anything to match its magnitude.

Notice, that at the end of QE3 (near the end of 2014), the Fed turned to reverse repos to provide short-term liquidity to the financial system, including investment banks, mutual funds and hedge funds, etc., in order to meet their liquidity needs, especially at the end of the month and quarters for window dressing purposes.

What this chart illustrates is that spiking short term loans are occurring with greater and greater frequency to meet the short term needs of these financial institutions. It also means the Fed’s balance sheet is rapidly surging in order to provide the liquidity to meet the other side of the market when people want to exit stock and bond positions in such a shaky environment.

Understand that a short-term repo gives short-term liquidity, which banks can leverage for a week or two but they have to pay these loans back. They are only short-term.

This is why I fully expect to see a deep sell off once earnings begin to be announced – over the next few weeks.

Short-Term Overbought – at Resistance

They have pegged the crude oil market exactly to the middle Bollinger Band line today (at $49.68 a barrel). Immediately, crude oil prices sold off against this key intermediate-term resistance to close down 72 cents at $47.81 – at the lows of the day. Furthermore, short cycles for crude oil are overbought with %K at 90. So, I think oil prices could start to stall here just as earnings begin to raise doubts about what kind of quarter we’re looking at.

In the meantime, the major indexes are testing their 50-day moving averages.


The key point in my mind isn’t so much that the major indexes are testing their 50-day moving averages but that price is still trending below their 10-month averages and that the 50-day moving average is trending below the 200-day moving averages for all the indexes going into the earning season. If the stock market believed we were about to see a strong earnings quarter why then are we in bearish territory still after a historical spike in “reverse repos”?

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