The tape has felt incredibly heavy to us over the past few weeks since we peaked at SPX ~1,475 on 9/14 – most gains are quickly puked and we’re now down ~170 bps from that post QE-infinity euphoric level.
There’s been a tangible feeling of stock getting distributed out of old hands into new ones for the past few weeks.
We wondered, is that bearish given the heaviness of the tape and ostensible distribution taking place?
We’re not convinced it is.
If we step back for context and look at the SPX chart below, it becomes more apparent how important the 1,440 level is to the SPX.
It represents THE swing high from the spring 2008 bear market retracement rally in front of the global financial panic.
What was going on in Spring 2008?
Prior to the collapse of global financial markets the Fed had begun a wave of an aggressive rate reduction scheme to calm things down, beginning in March.
In fact, the Fed cut the discount rate by 100 bps b/t March and April.
Unsurprisingly, from January through May, as such liquidity provisions were becoming more obvious to the market, the SPX rallied 15% until peaking intra-day on May 18 at precisely 1,440.
So we ask…
How many fund managers and/or retail investors top ticked the market into that swing high in May 2008 under the belief that the Fed had once again saved the day?
Our guess is a lot.
As such, with the market now clearing that level, how many positions that have been underwater for over four years and are now roughly break-even are likely getting cleared through the market?
Our guess is a lot.
Given the reality of this psychological “break-even” point, it makes sense conceptually that the tape has been as heavy as it has – the market just cleared what we would consider its most important technical milestone since the bull began in March 2009.
It’s also quite impressive how resilient the market has been in the face of this milestone and ostensible distribution.
We believe that if 1,440 can hold over the next week or two, the market could be coiling for another leg higher once such distribution comes to its end.