The last few days of the calendar year always produce some unusual movement in various stocks as market players make moves for tax reasons and position themselves for the New Year. It isn't unusual to have a bout of selling as some fund managers raise cash or for some stocks to bounce off lows as stock pickers take advantage of tax-loss selling.
This year the drama in the market is at historic levels. The very steep and persistent downtrend that started at the end of September produced extreme oversold technical conditions and very high levels of negative sentiment. That combination created great conditions for an oversold bounce. The bounce was well-anticipated, but when it was delayed it made it even more intense when it finally occurred on Dec. 26.
A big oversold bounce in a down-trending market is no surprise, but this bounce had the added benefit of what appears to be some massive repositioning by pension plays. At 2:30 p.m. ET on Wednesday giant programs started to operate and took the Dow Jones Industrial Average (DJIA) up about 500 points.
That program came to an end at the closing bell and stocks then went dead. At the open on Thursday, Dec. 27, stocks showed no energy and they struggled most of the day and eventually broke technical support in the afternoon.
However, once again, a massive buying program hit at almost exactly 2:30 p.m. ET, and this time it drove the DJIA up more than 700 points. The indices went from day lows to positive and many market players were stunned by the intensity of the buying.
On both days there was no major news event to trigger the huge moves. It was simply a combination of technical conditions and buy programs that drove the action. Fundamentals didn't change one bit and many pundits and market players were expressing their feeling about the irrationality of such action that made the market feel like a giant casino.
So now what? Action of this sort doesn't lend itself to extrapolation. It is very possible that there will be more big buy or sell programs as allocations continue, but it is pure guess when they might hit and how they may manifest themselves.
The indices have bounced around from oversold to overbought several times and there are no clear technical signals to indicate what may occur next. Nothing had changed as far as news and fundamentals and, as I have been writing, individual stock picking is meaningless as everything is moving in tandem with the giant moves in the indices.
Trading is much like gambling quite often, but usually there is some rationale that can help influence the odds of speculation. In the current environment the action is more like a slot machine with little clue as to what will happen next. We can place our bets and hope we get lucky, but just keep in mind that this isn't about skill or insight.
One thing I will predict will occur in the last two trading days of 2018 is more volatility. The reverberations of the last two days will continue and create more movement before we close the books on 2018 on Monday. Program trades can erupt again at any time, but they will only last a few hours and the action will go dead again.
It appears that we have a positive open on the way, but Asian markets struggled overnight, which is a good illustration of how the big moves in this market have nothing to do with fundamentals or news.
