Stocks Ignore Bad News, Reverse Prior Losses

Stocks Ignore Bad News, Reverse Prior Losses

After losing more than two percent last week, the US stock markets gained back much of it in the first day of a week filled with economic reports. The big one, the March jobs report, will come out on Good Friday, when Wall Street will be closed.  



Stocks Ignore Bad News, Reverse Prior Losses
Stocks Ignore Bad News, Reverse Prior Losses

The media focused on the news or the notion that, as MarketWatch put it, "This bull is not used to this kind of abuse." But I disagree that last week's drop was exceptional abuse, for two reasons.

First, the end-of-quarter rebalancing is really happening. Funds and institutions are selling losers and locking in winners to shine up their quarterly reports. The clearest evidence is the daily MOC selling in both individual equities and the index futures used to hedge.

HEDGE AGAINST THE MACHINES

The other evidence is something you won't hear on the news, but traders watch it as they try to gauge the overall order flow. On Friday short sellers were enjoying the continuation of the week's downtrend. But retail traders don't hold positions over the weekend, so to limit risk, they placed buy stops above the market.

As those buy stops built up, algorithmic trading programs "ran" them, selling into those orders and driving prices up. That computer-driven buying continued in the stock futures overnight and dominated today's rally. The power of the algorithmic trading programs is how the markets can erase much of a week's losses in one day. As S&P veteran Danny Riley of MrTopStep.com explains, "the bargain hunters show up and the S&P starts to short cover, forcing the premium levels between the S&P cash and the S&P futures to widen out to buy program levels."

The Dow briefly topped 18,000 and is on track for its best gain since Feb. 3. The S&P 500 Index got as high as 2088 by 3 PM CT. The S&P is up 1.3 percent in the first quarter, "maintaining its longest streak of quarterly gains since 1998." The Nasdaq and Russell are also rallying and reversing last week's losses. 

But the key to this is that quarterly gain, which is not really an accident. Last week's drop stopped without breaking the previous low from February; in fact, the drop was quite orderly. And it fits the narrative of funds and institutions executing a multi-stage planning of selling and, in the next week, fresh buying, to ensure their first quarter returns are as good as possible and their portfolios get some fresh blood in them for the second quarter. 

It certainly seems more plausible than the notion that traders were boosted by Sunday's comments from China's central bank head that he was prepared to continue their stimulus program. 

THE BEST IS MAY BE YET TO COME

The poet T.S. Eliot began his masterpiece, "The Wasteland," with "April is the cruelest month." But for stocks, the opposite is true. (How's that for a literary reference?) 

If you pay attention to historical patterns, then April is by far the best performing month of the best six months of the year for stocks. This is according to the Stock Trader’s Almanac, which has kept records since 1950. Even with the financial crisis years, April has hammered out nine up years in a row since 2006. So there has been more to April, especially in the last decade, than just Tax Day.

It's not as though the market was hit with a series of encouraging headlines. Pending home sales were surprisingly bullish at the market open. But then  a Commerce Dept. update said that the US economy did not grow as quickly as expected in the fourth quarter. To which the market said, "Fourth quarter? That was so last Daily Show host," and kept rallying. 

At 10:30, the Dallas Fed manufacturing survey for March showed a sharp decline in Texas factory activity. Whether traders associated it with the already acknowledged decline in the energy services sector, or they simply shrugged it off, the news did little to slow the advance. 

The final hour of trading saw some low volume selling, which suggests profit-taking after the first rally in over a week. 

It may well be that the only news of this newsy week that could have any impact will be the jobs report. However, that report comes out on Good Friday, when the stock market will be closed. 


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