By Tyler Durden
While there has been a plethora of calls by “fully invested” pundits and analysts, urging clients to do likewise, and stay invested in stocks or, better yet, BTFD, following the Friday selloff and the Monday rebound, we have also seen some more cautious recommendations, such as this one by FBN’s JC O’hara, warning clients “Buy the ‘Dead Cat’ Bounce at Your Own Risk.”
Accrdoing to O’Hara, there is simply not “enough convincing evidence to ‘buy the dip,” which follows his August 2 call, in which O’Hara warned not to take the bull market ‘bait’ as narrow ranges tend to end with negative volatility.
O’Hara also looks at the technicals and says that S&P 500’s longer-term momentum, as measured by weekly MACD, has “started to roll over, turning any counter attack by the Bulls into an uphill battle.”
He also writes that the percentage of of stocks making 4-week new lows, at 55%, is short of the +70% level that has been a good buy zone historically, and adds that “a heavy selling day near the start of each month sets the tone for the month.”
He concludes by saying that yesterday’s sharp rebound “makes us believe that Monday’s move was not real, rather it is more likely to be dead cat in nature” and adds that positioning is still extremely optimistic (judging by net e-minis position data), warning that “negative returns are expected over the next few weeks as traders are overexposed and any sign of weakness will cause selling to accelerate.”
Maybe this is the one time when not BTFD will work: to be sure, the S&P’s performance since central banks took over capital markets in 2009 has been one long, tragic history of “fundamental” contrarians who have cautioned not to buy dips just because of “self-fulfilling prophecies”, only to see either actions or words uttered by central bankers, promptly crushing any skepticism even as growth in the global economy has ground to a halt. Furthermore, where we are skeptical is that – at least as of this moment – Dennis Gartman remains bearish. To wit:
The weekly and monthly “reversals” to the downside noted here and discussed at length yesterday still remain intact and we shall be looking for opportunities and reasons to sell into the strength rather than for reasons and opportunities to buy weakness. We are, in our retirement account here at TGL slightly net short of the market, remaining long of shares in the US’ largest aluminium miner/refiner (with nearby, out-of-the-money calls sold against those shares) and long of the shares of a fertiliser company while “short” of the market via derivatives positions in sufficient size, put in place early Friday morning, to leave us net short.
The best course of action here may be to wait for the inevitable momentum-ignition algo burst higher, at which point traders can decide if the market finally makes some sense, or if – thanks to one or more central banks – new all time highs are again inevitable.