A funny thing happened on the way to a lower low - we found one, and then another and then one more. The last series of lows from yesterday and today at least exhibited the price and emotional signatures that were absent from the early June low. You might have recalled I wrote in my notes in mid June that market bottoms are much easier to appraise then a market top.
"Recognizing a market low is a much clearer discipline than determining tops. From the geometry of price to the emotional response echoed within the market - they are typically a “you know it when you see it” event. Bear markets take that dynamic and slowly erode it away over the course of each successive low. It remains to be seen whether we are on that proportional course, but we should be approaching a low sooner rather than later." Short Term Scale - Part I
The S&P then discretely turned on a dime before putting in a lower low and ripped more than 90 points higher in a straight line. This was one of the primary reasons I held a short position that was trapped on the way up. It had all the signatures of a violent countertrend shakeout, then a rejuvenation of the primary trend. From my perspective it was actually less risky to maintain my position, then make a series of trades - each a step behind the market because I was chasing performance, rather than following my plan. Granted the data miners were presenting a picture of relative confidence that the rarity of strength and velocity personified in the move was a feather in the bulls quiver, rather than a sign of a market searching for its own moxie or at a disequilibrium with expectations (see Here & Here).
So was today the low?
Here is one chart that gives a bit more perspective to the large moves in treasury yields today and how it may dovetail into the low is being carved theory. I look at the current yield environment as the Great Reflation, and compare it to the initial experiment by our previous monetary handlers - the Baby Reflation. The dynamic and kinetic relationships with the markets are just the same, but the proportions of the moves are vastly greater today than they were in 2004. So with that said, take the large downdraft in treasury yields today with a grain of salt, because they are working off of a trend bottom that was so extreme. I don't think it was a coincidence that the equity markets capitulated in early August of 2004 just as yields broke their level of support from the 2003 bottom. The exact same occurrence (yields breaking support while stocks make new lows) is transpiring today as I write this. The equity markets in 2004 was digesting the uncertainty as the Fed began removing the historic monetary accommodations. The fear materialized with a skittish stock market and very strong demand for US treasuries. Sound familiar?
As a parting thought, at no point since the March 2009 low has there been more legitimacy in the bear camp as we head into the dreaded Fall trading season. But just remember that autumn's bark is typically worst than its bite, and if Europe finds a way through the month of August - fear becomes the variant behavioral tilt in the bulls favor as the herd chases performance into years end.
(Positions in UUP & GLL)
Disclaimer: This is not investment advice. Always do your own due diligence. Erik Swarts is not a registered investment advisor. Under no circumstances should any content from this website be used or interpreted as a recommendation for any investment or trading approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor