Typically, trading around the holidays is a pleasant task. Volume is light but the mood is positive and traders are actively looking for some small-cap, speculative action for short-term trades. It is extremely unusual for any major drama to develop.
The setup for our half-day of Christmas Eve trading is one of the most unusual that I have ever seen. First, we are immersed in a vicious downtrend with the Nasdaq surpassing the levels necessary to declare a bear market and many individual stocks in free fall as they fail to find support.
Sentiment is the worst it has been in years. The Fed has complicated matters with a surprisingly hawkish tone that it is trying to play down and the government is shut down due to a petty political battle over a wall that involves an insignificant amount of money.
To add to the drama, Treasury Secretary Steven Mnuchin tweeted late Sunday afternoon that he had been in touch with the CEOs of the nation's six largest banks to assure them there were no issues with liquidity, margin or anything that would impact regular market operations.
In addition, Mnuchin stated that he will hold a meeting of the president's working group on financial matters here on Monday. This group, which includes the board of the Fed, the Securities and Exchange Commission and several other regulatory groups, is commonly referred to as the Plunge Protection Team (PPT).
The PPT often is referred to jokingly by traders as the reason for the market to suddenly spring back up after a bout of selling. Usually it is just ordinary market volatility that creates the bounce, but there is no question there have been times when the market activities of the PPT have been used to stop a market slide.
The market reaction to Mnuchin has not been very positive; indeed, index futures are way down ahead of Monday's open. The problem is that the market was never really concerned about the sort of structural issues that he is addressing. That was the big problem in 2008-2009 when subprime lending was a huge issue, banks were falling apart and there were even issues with the safety of money market funds. None of these issues have been driving the latest rout, but Mnuchin has made many market players wonder if they should be concerned.
It is a mistake to read too much into what Mnuchin is doing. He is taking the action you'd expect of a Treasury secretary and is making sure that markets are operating as they should. It normally would be reassuring, but in the current situation there is still great uncertainty about what is driving the selling, and that is why futures are indicated down once again.
The good news is that there are a slew of statistics, indicators and studies that show very high odds a bounce will occur soon. That has been the case for a while now, and all those stats, indicators and studies have been wrong so far. If you tried to catch a bounce last week, you have been buried
There is no doubt that some sort of bounce is likely to occur soon. We all know the biggest bounces occur in the context of the weakest markets, and this market is stretched to extreme levels to the downside.
The trillion-dollar question is whether those bounce buyers really want to go to work on Christmas Eve. Do they have the time and conviction to put that capital to work before they toddle off for the holiday celebrations?
The bounce is coming, but if you want to play it stay patient and wait for strength. This is one holiday party where it's better to show up late.