10Aug10:39 amEST

Korean Barbecued Momentum...Or Did It?

(North and South Korea border, pictured above)

The easiest excuse for this selloff would be the geopolitical headlines we saw earlier in the week, coinciding with the downside reversal in stocks on Tuesday. Since then, talk of North Korea has largely dominated headlines, and stocks have seen meek bounce attempts. 

Indeed, this morning's weak open has seen very little in the way of inspired dip-buying, despite the background of noise from traders that it is only a matter of time before buyers step in for their usual ramp. 

But even as small caps are now clearly oversold, with the IWM ETF puncturing its lower daily chart Bollinger Band, seen below, traders seem more inclined to watch-and-see, that is if they are still in front of their monitors during the dog days of summer.

Moreover, the North Korea headlines may be a red herring in terms of assigning a proximate cause for this market dip. Recall that the market has been building up a plethora of negative divergences in recent weeks, as we noted here and for Members. Thus, the selloff may simply be all of those underlying concerns coming to fruition. 

Clearly, a summer respite after such a strong bull run for equites over the last several quarters is part and parcel of just about any bull market. However, it will be interesting to see if the usual, knee-jerk trades which speculators have enjoyed putting on into any bout of weakness continues to work--Namely shorting volatility into any and all pops. If that changes, and suddenly the volatility faders find themselves trapped and the VIX spikes and holds over 30, I would view it as a sign of a looming, deeper correction in equities than anything we have seen in quite some time. 

Stock Market Recap 08/09/17 ... Great Expectations


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