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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Tuesday, May 12, 2020

1. Stocks sell off late in the session

2. The COVID-19 rebound is unique

3. Much more to come

Market Moves

While gold and oil prices remained comparatively steady today, bond prices rose. Stocks, by contrast, sold off and closed the day nearly two percent lower. Though prices began to weaken midway through today's session, prices really started to head south around the last half hour of trading. At that time news broke that U.S. Democrat lawmakers in the House were readying a three-trillion-dollar follow-up stimulus bill.

It is interesting to contemplate that this news correlated with a significant sell off. All other such news has spurred investors and traders to buy up shares. There are two possible interpretations of the sentiment behind the late sell off: (1) that House Democrats are asking for too much and the bill, and therefore any additional market help, will likely not become effective in a timely manner, or (2) that traders are simply taking profit after the S&P 500 index (SPX) reached its recent highs along with a 62% Fibonacci retracement level from the market's lows. Of course, both points could be influential at this point in time.

As the chart below shows, however, volatility remains subdued with State Street's Gold price index ETF (GLD) and iShares 20-year Treasury bond ETF (TLT) showing mild moves. It is also worth pointing out that the CBOE Volatility Index (VIX) made a new low two days previously, even before the S&P 500 managed a new high. This divergence is interpreted as option sellers forecasting that stocks will soon make new highs. With that in mind, it seems that traders were more likely taking profits and that investors will yet be patient.

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The COVID-19 Rebound is Unique

The current market price action is quite different from other market maladies of the past. The charts below display the S&P 500 index (SPX) in four different time frames. These charts are worth a close look. The only rebounds that played out as rapidly as the current market rebound took place at the bottom of the market's price action during the Great Depression (see last chart in the series).

Smart Money Selling Big Box Retailers

Consumer Discretionary Stocks Appear Set for Move Lower

Much More to Come

The most important takeaway from the previously shown charts is that the current market rebound likely will have a lot of action along the way. Investors need to be prepared for significant volatility, and traders should certainly sharpen their skills because many opportunities for quick profits will be coming along.

The Bottom Line

Stocks sold off late as traders appeared to take profits from the past few days. Considering how all other markets reacted, it appears as though investors did not respond with panic selling. The current action in the markets is much different from past market circumstances. Though signals seem to say that the market is likely to continue to rally in the long run, in the short run there will be plenty of volatile moves.