Sellers do finish. The sales do end. And when they do, you get what happened today: a rally of substantial proportions.
Ever since the disaster that was Facebook ( FB) there's been an existential crisis among FANG and friends. Ever since we started fighting back in the trade war against the Chinese there's been a wholesale revulsion of what I call the China stocks, the stocks of companies that get a lot of their incremental growth from the People's Republic.
Both have bred such a monumental amount of selling that they have colored the entire stock market.
Until today. Today the sellers took a break, they walked away, and we saw what happens in their absence. Stocks fly.
It didn't start that way today. At the start of the session, Facebook started its now daily swoon. We call it, by the way, "reloading" as in "the sellers have reloaded and are back again."
I can tell you that behind the scenes at the big institutional houses you get a call from your broker and that broker says, "the sellers' back. He's not done. He's reloaded."
When you get that crucial bit of guidance you say to yourself, I am not taking my life in my hands. I am walking away.
Today, though, the Facebook sellers walked away. Maybe they are done. Maybe they have just stepped away hoping that the "bids will build" another term of art for the possibility that buyers will at last surface around the last sale and will stand there buying stock as the seller reloads.
We will never know what the sellers see or don't see. But we do know if they are back or not back and today, at around 11:00 a.m. the picture cleared and in the vacuum you get a gap up just like you got a hideous gap down when Facebook reported.
Of course, the gap up is minuscule compared to the Grand Canyon of a selling chasm we experienced last week. Still, though, the absence of the pressure allowed buyers to surface. We call them bargain hunters and they can easily be obliterated by a downgrade tomorrow. There haven't been enough downgrades given the ugliness of that guidance that showed a dramatic slowing in Facebook's growth.
But one look at the stocks of FANG which were all getting killed in sympathy with Facebook shows you the power of one stock to really stink up the joint. It was like the rest of FANG got hit with a jolt of Febreze, how fitting given that Procter & Gamble ( PG) , the maker of the deodorizer, saw its stock reverse from a big decline on news of some big price increases.
How persuasive and pervasive was the rally? Suffice it to say for several days the cloud kings, the companies that help businesses on board and manage the cloud, finally reversed after being tarred with the Facebook brush. I get that. We had plenty of fear that the whole web must be slowing if Facebook's enduring a drastic decline in the rate of growth. The sellers didn't care that perhaps the most robust theme this quarter has been the growth of the cloud and its data center compadre. Alphabet's ( GOOGL) Google Cloud, Microsoft's ( MSFT) Azure and Amazon ( AMZN) Web Services are adding customers like mad. I think that the biggest issue is the amount of capacity they have to meet the demand. Now, that's a high quality problem.
How about the China stocks? Right about at the opening we heard that Treasury Secretary Steve Mnuchin is chatting privately with a high level Chinese official about restarting trade talks. Now, I have to say that this is 100% hearsay. We have no idea whether there's really anything going on. Nor do we know if talks will lead anywhere. However, last week's constructive talks with the Europeans has enabled the rumor of talks to gain credence.
The upshot? The stocks of companies like 3M ( MMM) , Cummins ( CMI) , Caterpillar ( CAT) , Boeing ( BA) , Emerson ( EMR) , Honeywell ( HON) and United Technologies ( UTX) , all beaten down despite excellent quarters on fears that they were peaking, came roaring back. Some, like Caterpillar, with a stock that wilted yesterday after a really good quarter, or 3M which has been beaten up, were simply coiled springs. Others, like Boeing are back in the bull camp after endless selling.
Now what's the staying power? I think both rallies are tenuous. The stock of Facebook has come down to a level that presumes shrinking rates of growth for the next year. That's the only way to explain how little its earnings are being valued. If I were an analyst who covered the stock I would contact my trading desk and ask whether there are at last enough buyers down "underneath" to be able to downgrade the stock from buy to hold-there are so many analysts who haven't committed to go to a hold-without crushing it and earning the lasting enmity of those still long it.
The China truce story's totally fraught. Every time, and I mean every time, that Steve Mnuchin's out there with a positive ying we get a seriously negative yang from the anti-China wing in the White House led by Peter Navarro. My contacts indicate that the president believes the Chinese are on the run. Their economy is slowing. So why not lay down the law and say that there's no peace treaty, just unconditional surrender.
All that said, I recognize that if the sellers are at last finished, if the weak hands have at last left the building, any sell-off could be much more shallow than it seems now for the collaterally damaged tech stocks and the industrials themselves given that the quarters were all pretty strong so far.
So, I am not saying enjoy it while it lasts. I am saying that you usually do not get an intraday reversal from the downside without it being meaningful in one way: there will be buyers who want badly to get in and they would love to see the levels we saw this very morning.
A great market never lets them back in. But a good one does, and that's the level to commit if you haven't bought before the next leg up begins.
