The first two weeks of April were erratic and interspersed with gains and losses.
For the last several weeks, I have written that the first two weeks of April are normally erratic and interspersed with gains and losses. That has definitely been the case only with more losses than gains.
The market decline over the last two days was due to geopolitical concerns ahead of the long holiday weekend. There is nothing worse than being long or short over a weekend and seeing the futures rocket 20 points in the wrong direction on Sunday night after some overseas event. It can be very painful both financially and emotionally.
After investors have suffered through a couple of those events, they are very reluctant to hold over future weekends if there is even a hint of risk. With the Syrian attack only a week old, a carrier battle group racing to take a position off the coast of South Korea and two Tomahawk armed destroyers taking up positions off the coast of North Korea along with a massive bomb being used against ISIS in Afghanistan, the weekend event risk was huge.
There was a genuine risk that North Korea would do something stupid to celebrate the 105th birthday of Little Kim's grandfather and the U.S. could have reacted with another missile barrage. However, in Korea the situation is a lot different than Syria. Seoul Korea sits just over the DMZ from North Korea and 11 million people live in Seoul. The North has more than 20,000 artillery pieces aimed at Seoul as a deterrent. A tit for tat exchange with NK could result in a massive artillery barrage and thousands of people being killed. There is no way for the U.S. to knock out all that artillery in a week, much less in a few hours. With a madman in control, there is extreme risk in making him angry.
Investors understood this risk on Thursday and they fled the market although the holiday volume was light at 6.1 billion shares. The most likely result will be a relief rally on short covering at the open on Monday, assuming there are no headlines over the weekend. Late Saturday South Korea tried to launch a ballistic missile as a show of force but it exploded almost immediately after the launch. That would not be good for Kim's ego and he has had a lot of failed missile launches recently.
A military spokesman said late Saturday the U.S. has no intentions of responding to another UN violation by attacking South Korea, the military was only there for war games with the South Korean military. That sounds like a cover your bases answer and I would not count on it.
The S&P closed at the low for the day and a two-month low after breaking below critical support at 2,350 and the 50-day average. Minimal support at 2,340 was also broken. In theory, this is a critical failure that should lead to lower lows. In reality, it was a headline news event that could be erased at the open on Monday. However, broken support is still broken support. It is never as strong on the next retest. That 2,350 level is now resistance and it would take a couple of strong days to successfully close back over that level. Just getting over 2,350 is only the first step. The 2350-2370 range has been congestion for the last two weeks and that 2,370 level is strong resistance.
The most likely path is for the S&P to rebound and give us a lower high and then roll over later in the week as we approach the budget battle starting on the 24th. The risk of a government shutdown is probably stronger than the risk of launching Tomahawks into North Korea.
The Dow chart is just as ugly as the S&P with the two-month low close and the complete failure of support. The 20,600 and 20,500 levels broke and the new downside target should be 19,750.
The MACD and RSI are in full decline and the chart is very bearish.
The Nasdaq Composite barely escaped a breakdown with a close just above support at 5,800. The 50-day average was broken for the first time since early December. If that 5,800 level were to break next week, it could be a long drop.
This is not a week to be spending a lot of time analyzing charts. The markets were reactionary to geopolitical events rather than earnings, economics and fundamentals. The charts are the equivalent of skid marks on pavement the day after a wreck. You can see how it happened but they give you no clue as to where those cars are today or where they are going. The charts this weekend are very bearish but the headlines rule.
Just getting past the event risk this weekend does not solve the market's problems. With the French election next Sunday and the potential for another Brexit event and the funding battle starting on the 24th, I suspect any early week relief rally could be short lived. We are going to have the same worries next Friday and there could be a new military confrontation by then.
I would recommend maintaining a high ratio of cash until after we get past the funding battle. If they go the government shutdown route again we could see a dramatic selloff and I would view that as a buying opportunity. The coming week could start well but finish badly.
I would continue to refrain from being overly long and look to add some positions late in the month when volatility is likely to spike.
Enter passively and exit aggressively!
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