It was all just a bad dream. Waking up this morning, following weeks of ominous headlines about a stock market crash in China, the end of the EuroZone as we knew it, the first quarterly year over year decline in U.S. profits in three years, all feels right again in the investment world. After declining 35% from its June high, the Shanghai Composite has now risen 17% in the last week. The German Dax, after declining nearly 15% from its April highs, has bounced 10% in the last week, and the S&P 500, the relative strength leader of the group is up 4% in the last week, making up nearly all of its losses from its all time highs made in late May.
What’s interesting to me about this price action is that all of the major equity indices found support just where technicians would have guessed them to. For instance, the Shanghai Comp stopped its declines last week at the prior breakout level from February, which also corresponded with the index’s 200 day moving average:
And the German Dax finding support at a prior consolidation (then breakout level) from February that also corresponded with the index’s 200 day moving average:
And then the S&P 500 (SPX). This one has been range-bound all year, with no huge run-ups like the two above, but it found a whole lot of love right where it was supposed to, 2050, the bottom of the range and also the index’s 200 day moving average:
So this was all pretty easy in hindsight. During those dark days, all you had to do was have your buy orders ready when the largest major equity markets in the world were all at obvious technical support levels. Of course it’s not that easy. But now any re-test of those levels will have more significance on sell offs in the future.
Moving on to volatility. If the Shanghai makes another run at the June highs, the DAX consolidates at current levels, and the SPX finally breaks out then we may finally see the VIX with a 10 handle again. That’s low considering October futures are currently at 16. But the reason for that steep curve is October is the expiration that will catch the Fed’s expected first rate increase of Fed Funds since 2004. And here’s an amazing stat. According to Bloomberg, the five day decline of almost 40% is the largest on record since the VIX was constructed in 1990.
So for now roll over and go back to sleep. It was all just a bad dream. But when we do wake from our slumber we now have some hard targets to recall. 3400, 10,700 and 2050.