@theMarket: It Is a Black Friday on Wall Street
Black Friday sales are in full swing. Normally, today is all about the retail trade. Consumers spend the day waiting in line, picking up heavily discounted "door buster" deals, and generally starting their holiday gift shopping. This year, it appears traders are also holding their own Black Friday sales.
The day after Thanksgiving, the stock and bond markets are open for a half day. Few turn up for work, so trading desks are usually manned by a skeleton crew, volumes are light and the indexes meander about the center line. As such, what happens on Black Friday has little consequence in the grand scheme of things.
The real action is before a holiday, especially one that coincides with a long weekend, like this one. In volatile markets, such as the one we have this year, few traders want to go "long" stocks through this long weekend. Their preference is to sell before the holiday and re-examine things when they come back on Monday.
This year, thanks to the Trump trade war fears, the concerns over raising interest rates, and a possible slowing of the economy next year, stocks continued their two-month, long decline on Friday. As I warned readers last week, if the S&P 500 Index failed to hold 2,720, the next stop would be somewhere around 2,600. That is exactly what happened.
So here we are testing the lows that we put in back in February. From a technical point of view, we have a classic case of a "double bottom." That's when stock indexes reach a low, bounce up, and then re-test that low once again. At times it only takes a few weeks or months. In this case, it took longer. Many times, a correction will not be over until a double bottom occurs. Are we at that point now?
I would like to say yes, so I will, but there are conflicting signals. Take sentiment indicators, for example. The number of bulls has dropped to a little less than 40 percent. That's a good sign if you are looking for a contrary indicator. But back in February, bullish sentiment hit a low of 24.7 percent. That would seem to indicate that investors will need to become even more bearish before this pullback is over.
We are also seeing some early signs of "divergence." Back in October, when the S&P 500 hit 2,600, the peak daily reading of new lows for individual stocks was just under 18 percent. But this week, those same stocks hitting new lows was a mere 4.16 percent. So, what?
When you have a situation where the broader market is making new lows (like Tuesday), while the percentage of stocks trading to new lows shrinks, it is considered a positive divergence. If we see this continue next week, it would be a signal that investors are being more selective in their sales rather than just committed to a wholesale selling of all equities. That would be another positive sign.
What would be a bad sign, is if the S&P 500 Index failed to hold this 2,600 level. That would indicate more pain in the near future and lower stock market averages across the board.
Against this backdrop, it is interesting to note that according to early reports, this year's holiday shopping season is starting off with a bang. Consumer confidence is fueling higher holiday spending, even while the stock market is selling off the retail stocks that will most benefit from this trend.
Hang in there, folks, this too shall pass.