This past week boiled down to disappointment on Thursday followed by euphoria on Friday. Despite all of the excitement, stock prices logged a gain for the week of only about 0.5%. In the face of wild volatility, fear faded into the shadows. Stock prices have traversed three two-week cycles lately. If the trend holds, we should not be surprised by a correction of 4% this coming week.
Monday, the momentum from the previous week’s “risk-on” party powered stocks 1% higher in Asia and Europe. U.S. stocks went nowhere awaiting something concrete from the FOMC and/or the ECB blockheads. Tuesday the hope-train rolled on, driving stocks up about 0.5% in Asia. European and U.S. stocks again marked time breathlessly awaiting word from on high.
Tuesday, Asian stocks remained in la-la land gaining 0.5%, but as a new day dawned in the east, reality began to set in, taking Europe down 1% and later U.S. down 0.5%.
Wednesday, Asian stocks finally started to descend, trading about flat after a negative report on the economy in China. Stocks in Europe traded over 0.5% higher on hope against hope that central banks will deliver more heroin. Alas, the FOMC offered none. U.S. stocks traded about 0.5% lower as a result on moderate volume. That proved to be the installment before Thursday’s final disappointment. Facebook’s well-deserved price erosion continued—this week down another 12% plus in three days.
Thursday, stocks in Asia turned about 0.5% lower after the FOMC disappointed. Before the Draghi announcement, stocks in Europe and U.S. (futures) traded about 0.5% higher—holding out that one last hope. Here’s a link that shows the reaction to final withdrawal of hopium. On the news, the 10-Year Spanish Government Bond rate jumped up nearly 6.5% to move up back up over 7% again. The Italian bond rate climbed a similar amount to move it to a rate over 6.3%.
Stocks in Europe closed down about 2%. Stocks in the U.S. gave up about 1% on moderate volume. This took the S&P 500 Index part-way down (1365) to where it was before the infamous Draghi statement (1340). Facebook dropped another 4% plus to close at 20.04. Another point lower and it will have lost 50% from its bogus initial public offering price. Unbelievably, the VXO fear index dropped nearly 10%. AAII investor sentiment also moved to lower fear to just slightly bearish.
Friday, one might have expected a follow-through down another 1% to 2% given the bad news of the past two days. It didn’t happen. Before the ink had dried on the Fed announcement Wednesday, market news reignited the mantra of an imminent announcement of more easing or an announcement six weeks down the road at the next FOMC meeting. The drumbeat continues at every opportunity. This really feels like “pump and dump.” Stocks in Asia traded mixed, but in Europe and later in the U.S., they rocketed more than 2% higher on hope before the bad-news-is-good reported marginal rise in unemployment rate to 8.3%. The 10-Year U.S. Treasury Bond rate followed suit bolting nearly 7% higher to end the day at nearly 1.58%.
Jon Hilsenrath’s article in the Wall Street Journal offers the best explanation for the bizarre up-move seen Friday. Forget that failed Hilsenrath prediction a week earlier. His projection prowess rivals that of Harold Camping. Regardless, fear is nowhere to be found. VXO plummeted gapping down more than 12% to close below 15 on low moderate volume. The S&P 500 Index again challenged its upper Bollinger Band. At 1390, it also approaches the 1420 or so barrier hit this past March and May